In a move that didn’t surprise anyone, AGL Energy has declined to exercise options to acquire gas fields and a power station in Queensland from Britain’s BG Group.
There had been market rumours that the energy giant was not going to pursue the near $1 billion deal.
However on a day when the market flitted with being down and up after the Tuesday night weakness on Wall Street, investors sold down AGL shares by around 3.3% or 50c to $14.63. The overall market was slightly weaker on the day.
Some investors took the opportunity to take profits on the news, which is actually a sign of the discipline in AGL management about the cost of future expansion.
AGL bought Sydney Gas and assets from Molopo Australia in the Gloucester Basin of NSW for close to $500 million in 2008.
The latest options were for coal-seam gas fields called Polaris and Lacerta that were previously owned by the Queensland Gas Company (QGC), acquired by AGL when it took a 29% stake in QGC several years ago when Santos tried to buy the Queensland company.
AGL agreed to sell its 22% stake to BG in last year’s $5.5 billion takeover deal of QGC and retained the option to buy the fields.
The company also knocked back the chance to buy the Condamine Power station in Queensland because it already has enough capacity in the state.
"AGL Energy Limited (AGL) has today advised BG Group plc (BG) that it will not exercise either of the Lacerta/Polaris Coal Seam Gas or Condamine Power Station call options acquired by AGL on 28 October 2008, the date AGL announced its intention to sell all its shares in Queensland Gas Company Limited (QGC) into the BG bid for QGC.
"Both options have now lapsed. Accordingly, AGL will not incur any interest charges associated with the options.
"AGL has concluded that anticipated future reserve upgrades from its recently acquired interests in the Galilee Basin, Gloucester Basin, Innamincka and Sydney Gas Limited, coupled with gas purchases under long-term gas supply contracts, would deliver a superior economic outcome supporting AGL’s domestic gas strategy than would be obtained from exercising the Lacerta/Polaris option.
"AGL Managing Director, Michael Fraser, said “We are comfortable that our medium term strategic target of securing 2,000 PJ of equity gas can be achieved from recent acquisitions without the need for Lacerta/Polaris in our portfolio”.
"AGL has also concluded that its existing 400MW of despatch rights over the Yabulu and Oakey Power stations in Queensland together with rights held over various Queensland sites to develop up to a further 1,870MW of gas fired generation, delivered a superior economic and strategic outcome than exercise of the Condamine Power Station option.
"AGL’s decision not to exercise either option has no impact on previous financial guidance provided in conjunction with AGL’s interim FY09 result announced on 25 February 2009.
"We are comfortable that our medium-term strategic target of securing 2000 petajoules of equity gas can be achieved from recent acquisitions without the need for Lacerta/Polaris in our portfolio,” AGL’s managing director, Michael Fraser, said in a statement to the ASX.
Market analysts say a higher priority for AGL may be the pending NSW power privatisation, which puts on sale the state’s retailers, development sites, and the right to buy power output.
Sydney is the company’s oldest market. With the sale expected to fetch around $6 billion, AGL and Origin Energy are considered front-runners.
Origin has already expanded deeply into coal seam gas and last year did a lucrative joint venture with Conoco Phillips of the US over its Queensland acreage and LNG export plans.
AGL said its decision had no impact on its latest 2009 guidance issued in February, when it projected between $370 million to $400 million in profit.
AGL forecasts a profit of between A$370 million and A$400 million in the year ending June 30, 2009.
Still in the coal seam gas sector and Arrow Energy, now an associate of Shell and the under-bidder for Pure Energy (which was won by BG), says it’s encouraged by latest results from drilling.
Arrow said yesterday that a run of successes at coal seam gas exploration and appraisal wells in the Bowen Basin of Queensland supported its goal of providing a large, long-term gas source for the project, a joint venture with energy giant Shell.
The companies are examining the development of a coal seam gas- to-LNG processing plant on Gladstone’s Curtis Island, drawing on Arrow’s large reserves.
Arrow told the ASX that it was encouraged by initial results from pilot wells testing the Fort Cooper Coal Measures.
"Separately, within the Bowen Basin, Arrow has recently achieved some excellent flow rates from coals with permeability previously thought too low for gas production," it said.
Arrow managing director Nick Davies said the results "open up the potential for substantial new coal seam gas resources in the Bowen Basin for extensive further development".
Shares in Arrow were up 21c, or 7.2%, at $3.12.
