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Asian investors circle undervalued Aussie players

More undervalued Australian energy companies with Asian assets could be snapped up as investors prepare to swoop

Australian company Roc Oil looks set to be gobbled up by a private Chinese investment group. But the A$474 million ($441m) bid from Fosun International, which likens itself to Warren Buffet's investment vehicle Berkshire Hathaway, is not the only example of moves by Asian buyers on Australian-listed producers operating in their space.

And Philippines-focused Nido Petroleum is set to be taken over by Thai refiner Bangchak Petroleum. 

Industry players say both bids are the result of a clear undervaluing of Australian-listed companies with good projects in Asia, a situation that does not affect Australian-focused companies to the same extent. 

Peter Strachan, an independent analyst at Perth-based StockAnalysis told Petroleum Economist that the loss of Roc Oil and Nido to overseas buyers could represent the thin edge of the wedge. "As Australasia increases its relative attractiveness to explorers, more action on the merger and acquisition front seems assured," he said.

There has been a noticeable deterioration in social and fiscal conditions faced by energy companies around the world, which begins to make places like Australia and New Zealand increasingly attractive destinations for investments. 

Fosun is seeking to sink a rival deal announced in April that would merge Roc with its compatriot Horizon Oil. Buying Roc, which is Fosun's first foray into hydrocarbon exploration and production, would give it producing assets in China's offshore Bohai and Beibu Gulf, as well as in Malaysia and Australia. 

If the deal goes through, Fosun will gain steady upstream income, as well as  further exploration potential as China moves more into offshore production. Still, Fosun could experience some culture shocks as it comes to terms with the industry's high capital costs, lengthy investment horizons and management needs. "But good luck to Fosun, it's picked up an excellent starter-pack of assets from which to grow into the energy business," says Strachan.

But this might not be the last bid, as Roc has a value that is arguably higher than the A$0.69/share that is on the table and there are other players in the mix, he adds. The bid is 52% more than Roc's closing price on 23 April before the Horizon deal was announced. Roc earned a net profit of $45.2m last year.

Roc's transition to Hong Kong leaves erstwhile merger partner Horizon Oil in a strong position as an independent oil producer with continuing funding support for its developing Papua New Guinea gas and condensate business from Osaka Gas. It has a strong presence in New Zealand's Taranaki basin, along with exploration and solid cash flow from oil flows of 4,000 barrels a day to its account from the Beibu Gulf oil fields.

Horizon chief executive, Brent Emmett, said his company might attract takeover interest based on the price Fosun agreed to pay for Roc. The company, which has strong prospects in Papua New Guinea, also holds about 27% of the Beibu Gulf project in China, a bigger stake than Roc, possibly implying a very significant valuation for Horizon, noted Emmett.

Certainly, its Japanese partners - Mitsubishi and Osaka Gas - in the emerging gas province of Papua New Guinea, coupled with its pre-emptive rights over stakes in gas fields owned by Canada's Talisman Energy in the country, which is hoping to exit non-core assets, may play in its favour too. Talisman has not confirmed plans to shed its $4 billion Asia Pacific portfolio but there is rising speculation that if it does, it will sell the Papua New Guinea assets separately. 

Some analysts believe a play for Talisman's Papua New Guinea assets, reportedly worth less than A$500 million, could draw a bigger bid for Horizon. Other Papua New Guinea-focused players that could be interested in Horizon include Australian companies Oil Search and Santos, as well as US-listed InterOil. And if Talisman offloads its assets, then Horizon's Japanese partners could be tempted to deepen their investment too. 

StockAnalysis says that the long-term interests of Roc's shareholders will be dealt a blow by Fosun's takeover and that more value would have been created over time through a merger with Horizon Oil. Strachan recommends Roc shareholders take the cash and buy into Horizon.

Meanwhile, smaller Australian-listed explorers, such as Nido, are struggling to generate investor interest in offshore exploration and production."If you're sub A$150m (market value) on the Australian Stock Exchange, it's not a good place to be at the moment," Nido chief executive, Phil Byrne, told The Australian.

The A$113m bid or A$0.55/share offer for Nido from Bangchak marks an 85% premium over the one-month volume weighted average.  

There are no obvious synergies for the Thai refiner that make Nido particularly attractive compared to other buyers - Bangchak proposed the deal to make its first move into oil production. 

Johan Hedstrom, a senior Sydney-based oil & gas analyst at investment firm Canaccord Genuity, doubts there have ever been so many oil and gas stocks below A$100m on the Australian Stock Exchange. "Many are pure explorers, and that is not an easy place to get market recognition, and there is more scepticism about the shale-gas potential," he told Petroleum Economist. 

Otto Energy, Nido's partner in the producing Galoc oilfield offshore the Philippines, is one clear opportunity, says Hedstrom. But there are others, including Cue Energy, AWE, Buru Energy, Kina Petroleum, Tap Oil, Sino Gas, and any of the Cooper basin players, especially those with gas, such as Beach Energy or Senex Energy. 

The Cooper basin, which will be connected to Asian markets via three liquefied natural gas export schemes under development, is thought to be prospective for shale-gas and tight gas too. Elsewhere, majors and independents, are under pressure to shed assets in Australia and the wider Asia-Pacific region, which is weighing on valuations. 

The increased deal liquidity from numerous asset-sales means there are a range of opportunities out there to grow an upstream portfolio, says Matt Howell, an upstream specialist at energy research firm Wood Mackenzie

Shell and US independent Apache, as well as Thailand's PTT Exploration & Production and French player GDF Suez are all considering offloading their Australian assets, while US major Chevron is selling its Vietnamese interests and Murphy Oil is seeking to do the same in Malaysia. Talisman is contemplating offloading its Australian and Papua New Guinea interests, while US independent Hess has already sold its Southeast Asian assets. 

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