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Financial Services Guide and Independent Expert's Report

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Financial Services Guide and Independent Expert's Report 15 September 2008 Manager Companies ASX Limited 20 Bridge Street SYDNEY NSW 200 Dear Sir INDEPENDENT EXPERT'S REPORT Attached herewith for immediate release to the market is the Independent Expert’s Report of Grant Samuel dated 15 September 2008. The report will be available today on the Origin Energy website on: www.originenergy.com.au/media/newsroom. Printed copies of the report may be requested by contacting our shareholder information line 1800 647 819. Yours faithfully Bill Hundy Company Secretary 02 8345 5467 - [email protected] For personal use only Origin Energy Limited ABN 30 000 051 696 • Level 45, Australia Square, 264-278 George Street Sydney NSW 2000 GPO Box 5376, Sydney NSW 2001 • Telephone (02) 8345 5000 • Facsimile (02) 9252 9244 • www.originenergy.com.au GRANT SAMUEL & ASSOCIATES LEVEL 19 GOVERNOR MACQUARIE TOWER 1 FARRER PLACE SYDNEY NSW 2000 GPO BOX 4301 SYDNEY NSW 2001 15 September 2008 T: +61 2 9324 4211 / F: +61 2 9324 4301 www.grantsamuel.com.au The Directors Origin Energy Limited Level 45, Australia Square 264-278 George Street Sydney NSW 2000 Dear Directors ConocoPhillips Proposal 1 Introduction On 8 September 2008, Origin Energy Limited (“Origin”) announced that it had entered conditional agreements with a wholly owned subsidiary of ConocoPhillips (“ConocoPhillips”) to create an incorporated 50/50 joint venture (“JV”) to develop Origin’s coal seam gas (“CSG”) assets and a gas liquefaction facility (“the ConocoPhillips Proposal”). The key features of the ConocoPhillips Proposal are: ConocoPhillips will subscribe for new partly paid shares in Origin Energy CSG Limited (“OECSG”) which will comprise 50% of the enlarged share capital. OECSG will be the owner of all of Origin’s CSG related assets and liabilities including contracts for gas supply to Origin and third parties (“the CSG Assets”); the development of a four “train” liquefied natural gas (“LNG”) facility. The next two years will be spent proving up reserves, developing further gas production capability, site selection, front end engineering and design and undertaking the necessary feasibility studies with a view to making a Final Investment Decision (“FID”) to proceed with the first LNG train in the last quarter of calendar 2010; ConocoPhillips will make a series of payments to obtain its 50% interest in OECSG: • an upfront payment of US$5.0 billion payable upon the subscription agreement becoming unconditional (“the Initial Contribution”); • additional contributions to the JV totalling A$1.15 billion to carry Origin’s share of the budgeted development costs and operating costs up to FID for Train 1 (“Development Cost Contribution”). The approved expenditure budgets form part of the transaction documents; and • additional contingent payments of US$0.5 billion, payable upon FID for each of the planned four LNG trains (“Contingent Contributions”), to partly carry Origin’s share of the construction costs. The Initial Contribution will be repatriated to Origin through a combination of a return of capital, repayment of intercompany loans and new interest free loans to Origin. Origin will not have to make any payments in relation to its 50% interest in the JV except to the extent additional capital is required (e.g. pre FID cost overruns, LNG train construction costs above US$1 billion each) but both parties will contribute to these on a 50/50 basis (with Origin’s contribution by way of loan repayment); and For personal use only each party will have two directors on the board of OECSG (with no casting votes). The steering committee will have an equal number of representatives from Origin and ConocoPhillips. Origin will be the “operator” of the upstream assets while ConocoPhillips will be the “operator” of the downstream assets (i.e. the LNG plant), all on a cost recovery basis. There are restrictions on transfer and pre emptive rights. A change of control event at Origin either through another entity acquiring more than 50.1% of Origin shares or through a change of management would give the right to ConocoPhillips to assume operatorship of the upstream assets and the CSG marketing but does not give a right to acquire Origin’s equity interest in OECSG. GRANT SAMUEL & ASSOCIATES PTY LIMITED ABN 28 050 036 372 AFS LICENCE NO 240985 The ConocoPhillips Proposal is the culmination of a process commenced by Origin in June 2008 when it invited expressions of interest from a wide range of potential parties to participate in the monetisation of Origin’s CSG Assets including, but not limited to, the associated potential development of an LNG plant (“the CSG Monetisation Process”). A CSG Monetisation Process in some form had been contemplated by Origin to enable it to optimally finance and manage the development of the CSG Assets. However, the process was accelerated as a result of the approach by BG Group plc (“BG Group”) in late April 2008. Following a breakdown in negotiations in late May, Origin rejected BG Group’s approach. Subsequently, BG Group announced on 24 June 2008 that it intended making a takeover offer for Origin. BG Group’s offer of $15.371 cash per Origin share was made to Origin shareholders on 4 August 2008 and remains open for acceptance until 26 September 2008 (“the BG Offer”). The directors of Origin have rejected the BG Offer as inadequate. BG Group announced on 9 September 2008 that, in view of the ConocoPhillips Proposal, it now intends to let its offer lapse on the closing date. The directors of Origin have engaged Grant Samuel & Associates Pty Limited (“Grant Samuel”) to prepare an independent expert’s report setting out its opinion as to whether the ConocoPhillips Proposal is in the best interests of Origin’s shareholders and whether the BG Offer is fair and reasonable. A copy of the report is to accompany either an Explanatory Memorandum or a Supplementary Target’s Statement to be sent to Origin shareholders. 2 Summary of Opinion In Grant Samuel’s opinion, the ConocoPhillips Proposal is in the best interests of shareholders. Origin’s CSG Assets have emerged as its most valuable set of assets and development of these assets is central to Origin’s long term strategy. The scale of the CSG development, at least if Origin was also to participate in an LNG plant, would have been beyond the financial resources of Origin without substantial equity raisings. Realistically, it was always going to need a partner (or partners) to extract the maximum value from these assets. The ConocoPhillips Proposal: crystallises a very substantial value for 50% of the CSG Assets; allows Origin to participate in both the exploitation of the CSG Assets and the LNG production opportunity through its retained 50% interest; provides Origin with approximately $6 billion in cash immediately and has a structure where Origin is not likely to need to subscribe any material amount of capital to cover development costs for some years; brings in a partner with outstanding credentials and the: • financial capacity to fund its share of the JV’s development costs; and • technical skills and marketing capability to make a very material contribution towards the substantive task of developing and operating the proposed LNG plant. The terms of ConocoPhillips’ 50% investment in the CSG Assets establishes a benchmark value for the CSG Assets. Having regard to the process undertaken, the structure and terms of the transaction and the implied values per GJ of reserve or resource, Grant Samuel is satisfied that the terms represent a fair arm’s length value of a 50% interest in the CSG Assets. Grant Samuel has valued the aggregate consideration to be subscribed by ConocoPhillips for its 50% interest at $8.36- 8.69 billion. It is reasonable to attribute the same value to Origin’s 50%. There is nothing in the terms of the agreements that would diminish the value of Origin’s 50% relative to ConocoPhillips’ interest. For personal use only Grant Samuel has estimated the full underlying value of Origin’s other assets, namely its retail and generation businesses, the conventional oil and gas assets and its 51.3% interest in Contact Energy Limited (“Contact Energy”). These businesses were primarily valued on the basis of discounted cash flow (“DCF”) analysis and multiples of earnings. However, in the case of Contact Energy, only publicly available information was available. 1 The offer was originally $15.50 but has been adjusted to reflect the payment of Origin’s final dividend of 13 cents on 3 October 2008. Page 2 On the basis of this analysis, Grant Samuel has estimated the full underlying value of Origin, including a premium for control, to be in the range $28.55-30.71 per share. This value is substantially above the BG Offer of $15.37 per share. The ConocoPhillips Proposal therefore provides superior value to Origin shareholders. Accordingly, the BG Offer is neither fair nor reasonable. The value range of $28.55-30.71 represents the full underlying value of Origin including a control premium. It is not an estimate of the market trading price of Origin shares. Grant Samuel expects that Origin shares would trade on the Australian Securities Exchange (“ASX”) at prices below this level in the absence of a takeover offer or takeover speculation. While the value of 50% of the CSG Assets has been crystallised, the ConocoPhillips Proposal means that shareholders will have an ongoing exposure to 50% of the CSG Assets, providing both upside potential and downside risk. The ConocoPhillips Proposal substantially enhances the prospects of successful development but there is, nevertheless, a risk that the ultimate development of CSG is less successful than currently expected. Origin will have net cash of approximately $2.5 billion (excluding net borrowings of Contact Energy) after the repatriation of the Initial Contribution.
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