Still believe that BPH is currently good value at this stage of...

Still believe that BPH is currently good value at this stage of the game if good news flows soon. Gotta love that last paragraph if all the stars line up over the next few years. OW

Gas prospect hot or not as well as all that?

September 10, 2010 SMH by Ian McIlwraith

.A series of share deals relating to Advent Energy's plan to drill for gas off the NSW coast raises a few questions.

ADVENT Energy's controversial plan to drill for gas just 55 kilometres off the coast of Newcastle in NSW 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 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 a well with the potential to turn up a major natural gas reservoir on the doorstep of about 5 million people between 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.

Advertisement: Story continues below 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. Now-deceased mining entrepreneur Ken Talbot's Talbot Group pumped $7 million in last April for a 10 per cent stake. 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. It aimed to raise $8 million from 103 million shares at 8, but received subscriptions for only 32 million - 11 million of those from MEC, which also adopted 27.5 million of the shortfall shares. This week MEC announced a $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 that 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 is a departure from BPH's original shift in emphasis a year ago, when it was known as BioPharmica and its business was a suite of anti-cancer research projects, but decided to diversify into Advent. Back then it was offered, it said, 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 already 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. Around the same time MEC converted a loan it had given Advent into 3 million shares - the stock that it is now passing on to BPH in exchange for another 18.75 million BPH shares.

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 to Advent. While BPH shareholders are getting the opportunity to vote on the less-than-arm's-length deal with MEC, 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 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, that raises the question of why MEC was happy to offload stock worth $3.3 million for shares in BPH that are worth less than half.

Does MEC think the gas prospect is not as hot as previously? Or is it just that it is hoping to recoup the discount when the market 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.