Small fry try to hold on to NSW coast gas punt
By Ian McIlwraith
September 10, 2010 — 3.00amAdvent Energy's controversial plan to drill for gas just 55 kilometres off the coast of Newcastle might produce a resource worth $12 billion, yet a series of share deals between the unlisted group's major investors do not seem to reflect values anywhere near that.
Advent is actually earning an 85 per cent stake in the permit, known as PEP 11 in the Sydney Basin geological structure, by funding the drilling of the first ever well there; assuming, of course, the state and federal governments clear it to do so.
The hard part for Advent (or more accurately three of its four largest shareholders) is that the well is estimated as likely to cost about $20 million, which means some serious capital raising. Advent has a breeze behind it in one sense, with day traders trying to find the best way to punt on the well because if it does turn up a significant natural gas reservoir it is on the doorstep of Australia's largest domestic gas market: about 5 million people spread from Sydney to Newcastle.
In another sense, having a Breeze behind it - David Breeze, who is an executive director of Advent and the three previously mentioned shareholders - is also potentially a negative for Advent. Not that Breeze himself is the problem. The difficulty is how the nested loop of companies under his control can raise enough money to pay their share of the well, without yielding too much control of either themselves or the potential gas/gold mine.
At the moment MEC has 51 per cent of Advent, BPH owns 19 per cent and Grandbridge 8.75 per cent (10 per cent is also held by Talbot Group Investments, which pumped $7 million in last April before its founder, the mining entrepreneur Ken Talbot's untimely death).
MEC is also the largest investor in BPH, while Grandbridge has significant stakes in both of the others.
MEC and BPH have both gone to market in recent weeks to tap investors. The BPH offer was underwritten by Grandbridge, and sub-underwritten by MEC - although the latter said it would not take any more than 40 million shares.
BPH's issue aimed to raise $8 million, issuing 103 million shares at 8¢ each. It received subscriptions for only 32 million, and 11 million of those were MEC, which also adopted 27.5 million shares of the shortfall. MEC's capacity to pay was dependent on it doing its own placement. This week it announced its own $6 million rights issue, a chunk of which is going towards Advent where it aims to lift its stake back to about 54 per cent.
The other deal which emerged in detail this week, even though the contract was signed in July, was BPH calling a shareholder meeting to approve it buying 3 million more shares in Advent from MEC.
That deal is a departure from BPH's original shift in emphasis a year ago when it decided to buy stock in the energy explorer. This time last year BPH was known as BioPharmica and its business was a suite of anti-cancer research projects. Then it announced it had been offered the ''exclusive right'' to subscribe for anywhere between 9.7 per cent and 19.4 per cent of Advent. It is unclear what exactly is exclusive about putting money into a capital-hungry petroleum explorer which is a corporate cousin but, nevertheless, by January BPH had put $7 million into Advent, and parked its cancer projects in a separate company.
In April, it put another $5.8 million into Advent, paying 50¢ a share each time. Also in April, MEC converted a loan it had given Advent into 3 million shares. Those shares are the ones it is now on-passing to BPH, which will in turn give MEC another 18.75 million shares in itself. MEC, by the way, got most of its Advent shares at 5¢, so is sitting on a tenfold book gain.
So BPH has moved from subscribing for new stock, to buying ''old'' shares from an associate, in turn giving that associate a total 28 per cent holding in itself - not quite enough to discourage a takeover, but close. BPH has also agreed to loan $3.75 million of its own folding stuff to Advent, which is most likely to become shares down the track given what has happened previously.
While BPH shareholders are getting the opportunity to vote on the less-than-arm's-length deal with MEC, and have been given much more information than usual about the inter-relationship, there are some issues with the independent expert's report. The main problem is that the expert, MGI Perth Corporate, has valued Advent shares solely on the basis of MEC's market capitalisation and only in respect of whether their worth ought to be written down. It also used only a current price for MEC, rather than a weighted average.
Given its conclusion was that MEC's market worth meant Advent is notionally worth almost $150 million, or about $1.10 a share, small wonder that it did not think an impairment charge was necessary.
What MGI never really turned its mind to is why MEC was happy to offload stock worth $3.3 million for shares in BPH which are worth less than half that value. Does MEC think the gas prospect is not as hot as previously thought? Or is it just that it is hoping the discount handed to BPH will be more than made up by a market which recognises that BPH shares are trading at well below their worth, thereby giving MEC's holding a nice uplift?
If MGI's valuation of Advent is right, the BPH stake in the putative gas producer is worth more than $30 million - which is about 50 per cent more than BPH's total market worth at the moment. Of course, if the gas is there in the quantities being touted, at the net present value of $12 billion spoken of by MEC and Breeze, Advent shares are worth more than $80 each and BPH's stake is is worth more than $2 billion. That's one heck of a gas bubble.
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