Sep 08 - Origin Selects ConocoPhillips to Acquire a 50% Share in a CSG to LNG Joint Venture for Up to A$9.6 Billion

Source Press Release
Company Origin Energy LimitedConocoPhillips 
Tags Deals, Upstream Activities
Date September 08, 2008

Origin Energy Limited (“Origin”) today announced it has selected  ConocoPhillips to invest in the joint development of a four train CSG to LNG project using Origin’s world-class CSG reserves and resources in Queensland.  ConocoPhillips is a US listed company with a market capitalisation of US$125 billion and a world-leader in developing and operating Liquefied Natural Gas (“LNG”) and Coal Seam Gas (“CSG”) projects.

  • Transaction provides immediate benefit to Origin’s shareholders: substantial earnings uplift; balance sheet strengthened; and $1.5 billion capital management initiative
  • Independent Expert, Grant Samuel & Associates Pty Limited, values Origin’s shares at A$28.55 to $30.71
  • ConocoPhillips is a leading developer and operator of LNG plants, a leader in LNG technology and the leading developer and operator of CSG in the United States

Origin’s Chairman, Mr Kevin McCann AM said “Origin is delighted to welcome ConocoPhillips, one of the world’s largest integrated energy companies, as its partner in monetising our extensive CSG reserves and resources. This outcome represents an outstanding result for Origin shareholders, with ConocoPhillips paying up to A$9.6 billion for a 50% share in a CSG to LNG joint venture.”

The transaction with ConocoPhillips is conditional on FIRB approval and any approvals necessary because of BG’s Offer.

Outstanding CSG to LNG Joint Venture

ConocoPhillips to invest up to A$9.6 billion1 for a 50% share of a CSG to LNG Joint Venture comprising:

  • An up-front payment of US$5.0 billion (A$6.0 billion);

  • Additional fixed contribution of A$1.15 billion to carry Origin’s share of costs to Final Investment Decision (FID) expected end 2010; and

  • Additional payments of US$500 million (A$600 million) at the point that each of the four LNG trains is approved, to partly carry Origin’s share of costs.

On this basis the CSG 3P reserves benchmark is up to A$1.88/GJ.

ConocoPhillips will become a 50% shareholder in the company that owns all of Origin’s CSG interests. This company will develop these interests into a CSG to LNG project, providing a fully aligned partnership across the LNG value chain.

Origin will be the upstream CSG operator and ConocoPhillips will be the downstream LNG operator, with the joint-venture company to market the LNG.

The budget to FID includes expenditure necessary to complete current and planned field development and reserves maturation activities, site selection and FEED for a two-train CSG to LNG project. The first two LNG trains are planned for 3.5 mtpa each, with first LNG production by 2014.

The existing gas supply agreements in Origin’s CSG business will be part of the joint venture, including contracts to Origin Energy on their existing contractual terms. Origin will also provide a market for ramp-up gas that may be produced in the development phase of the project.

Origin’s Managing Director, Mr Grant King said “ConocoPhillips’ investment gives confidence in the delivery of a CSG to LNG project. The joint venture combines Origin’s extensive CSG reserves and resources and operational capabilities, with ConocoPhillips’ proven LNG and CSG development and operating capabilities. We believe the Joint Venture will deliver both companies with a strong and competitive position in a rapidly growing market for LNG.”

Financial Benefits and Capital Management

The CSG to LNG transaction with ConocoPhillips will transform Origin’s financial position. Following completion of the transaction, Origin will have no net interest bearing debt and a significant cash balance. This will result in an immediate and substantial increase in earnings for Origin from the interest benefit. Origin estimates the transaction will provide accretion to the average consensus underlying EPS for the 2009 financial year of over 35% assuming completion on 31 October 2008, and if the earnings impact were to be annualised, the accretion to average consensus underlying EPS is estimated at over 55%2.

This strengthened financial position will enable Origin to fund both its future growth and undertake capital management initiatives for the benefit of shareholders.

Following completion of the transaction, Origin intends to undertake a A$1.5 billion capital management program:

  • An immediate payment of an additional dividend of 25 cents per share fully franked (~A $225 million) to double the 2008 dividend, providing a new base for future dividends. Origin will now target an increased dividend payout ratio of at least 60% of underlying earnings; and
  • Commence an on-market buy-back of shares of up to A$1.275 billion.

Further capital management initiatives will be considered following a review of additional near term investment opportunities available to Origin.

Independent Valuation of Origin at $28.55 to $30.71 per share

The Independent Expert, Grant Samuel & Associates Pty Limited (“Grant Samuel”), has valued Origin’s shares at A$28.55 to A$30.71 per share.

Grant Samuel’s value range for the CSG assets of Origin is A$18.70 to A$19.49 per share, assuming completion of the transaction with ConocoPhillips, and the value range for the remainder of the Origin businesses (less net debt and other items) is A$9.85 to A$11.22 per share.

A letter from Grant Samuel advising its valuation conclusion is provided as Attachment 1. Grant Samuel’s independent expert’s report is in the process of being finalised and will be provided to Origin shareholders prior to the close of BG’s Offer.

ConocoPhillips is a world leading developer and operator of LNG and CSG

ConocoPhillips is the third largest US-listed company with a market capitalisation of approximately US$125 billion. In the year-ended 2007, crude oil production averaged 854,000 barrels per day, natural gas liquids production averaged 155,000 barrels per day, and natural gas production averaging 5.1 billion cubic feet per day (or over 1,950 petajoules per annum).

ConocoPhillips is an experienced developer and operator of LNG projects around the world and has strong relationships with key LNG market participants throughout Asia. It is one of only two companies to successfully develop and operate an LNG plant in Australia. The 3.5 mtpa Darwin LNG plant, developed and operated by  ConocoPhillips was completed on time and under budget and commenced operations in 2006. It is the most recently commissioned LNG project in Australia and utilises  ConocoPhillips’ Optimized CascadeSM Process. This same technology is planned to be utilised by the Joint Venture for its CSG to LNG project.

ConocoPhillips is also a leading developer of LNG projects using lean (low energy content) gas, similar to CSG, having built the world’s first lean gas LNG project at Kenai, Alaska in 1969. The plant has continuously produced LNG for the Japanese market.

ConocoPhillips is known worldwide for its technological expertise. Through the Global LNG Collaboration with Bechtel,  ConocoPhillips has proved that it is able to provide both the technical capability and operational experience to deliver an on time, on budget LNG plant. Over the past 12 years, the  ConocoPhillips-Bechtel collaboration has built eight LNG facilities all of which have been delivered on time, on budget and have exceeded design capacity.

Additionally, ConocoPhillips has over 25 years of working experience with CSG and is the largest producer of CSG in the United States. This expertise, together with its extensive LNG experience, makes  ConocoPhillips the partner of choice for delivering and operating a CSG to LNG project.

ConocoPhillips’ chairman and chief executive officer, Jim Mulva said “With this investment, ConocoPhillips has gained access to the leading coal bed methane3 resource in Australia, comprising 8.1 million net acres. Moreover, the Company has enhanced its LNG position with the creation of an additional Australian LNG hub serving Asia-Pacific markets. The joint venture leverages  ConocoPhillips’ strengths and experience in project management, coal bed methane, and LNG technology, operations and marketing.

“This joint venture better balances ConocoPhillips’ oil and gas resource mix. In addition, the company’s long-term production growth is expected to benefit from a steady, secure source of resource additions. We look forward to working closely with Origin in delivering this valuable energy resource to customers” said Mr Mulva.

ConocoPhillips’ market release in relation to the CSG transaction is provided in Attachment 2 at the end of this release.

Recommendation, Process and Arrangements

Origin Directors maintain and reiterate their unanimous recommendation that Origin shareholders reject BG’s inadequate takeover offer of $15.37 per share.

Origin’s Chairman, Mr Kevin McCann AM, said “Origin’s Directors commenced the CSG monetisation process shortly after rejecting BG’s approaches in late May. ConocoPhillips’ investment clearly demonstrates the value of Origin’s CSG assets. The Independent Expert’s valuation of $28.55 to $30.71 per share, which the Origin Directors support, highlights the inadequacy of BG’s offer. Accordingly, the Directors continue to unanimously recommend that shareholders reject BG’s demonstrably inadequate offer.” Mr Grant King said “Completion of this transaction will transform Origin. We will have the financial strength to fund a decade of growth.”

Origin shareholders will be receiving full documentation, including the Independent Expert’s Report, from Origin prior to the close of BG’s offer.

The transaction with ConocoPhillips is conditional on FIRB approval and any approvals necessary because of BG’s Offer. The conditions precedent are set out further in Attachment 3. Attachment 3 also outlines relevant arrangements between Origin and  ConocoPhillips in relation to break fees, exclusivity and change of control. For further information, Origin shareholders should call the Origin shareholder information line on 1800 647 819 (from within Australia) or +61 2 8256 3384 (from outside Australia) between 9.00am and 5.00pm (Sydney time), Monday to Friday.

SUMMARY OF CSG TO LNG TRANSACTION

Partner: ConocoPhillips  A leading developer and operator of LNG plants 
  A leader in LNG technology 
  The leading developer and operator of CSG in the United States 
  Operator of Darwin LNG, and Kenai LNG in Alaska 
  2007 Revenue of US$187 billion and net cash from
 operations of US$25 billion; and 
  2007 production of 2.3 million barrels of oil equivalent
 per day (includes LUKOIL and  Syncrude). 
Joint Venture participation  50/50 joint alignment in CSG upstream and LNG downstream 
  4 Train CSG to LNG Project using 24 TCF over 30 years 
  Origin to be the upstream CSG operator and domestic gas marketer 
  ConocoPhillips to be the downstream LNG operator 
  Joint Venture to market LNG led by ConocoPhillips personnel 
Consideration  ConocoPhillips to invest up to A$9.6 billion for a 50% share of a CSG to LNG Joint Venture comprising: 
  Up-front payment of US$5.0 billion (A$6.0 billion) 
  Additional fixed contribution of A$1.15 billion to carry Origin’s share of costs to Final Investment Decision, expected at end 2010 for Train 1 
  Additional payments of US$500 million (A$600 million) at the point that each of the 4 LNG trains is approved, to partly carry Origin’s share of costs 
Implied Transaction Metrics  A$4.00/GJ for 2P reserves; or 
  A$1.88/GJ for 3P reserves 
Conditions Precedent  Foreign Investment Review Board approval 
  Any approvals necessary as a result of BG’s offer 
Effective Date  1 July 2008. 
Completion Date  Expected by late October 2008 
Ownership structure  Incorporated joint venture 

Macquarie Capital Advisers acted as financial adviser and Clayton Utz acted as the legal adviser to Origin for this transaction.

Credit Suisse acted as financial advisor and Allens Arthur Robinson and Wachtell, Lipton, Rosen & Katz acted as legal counsel for ConocoPhillips on this transaction.


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