Delay in ruling on Shell bid seen as positive

By GEOFF SENESCALL

Analysts are treating as positive delays in the Commerce Commission ruling on Royal Dutch Shell's application to buy Fletcher Energy .

This is despite the Fletcher Energy share price tumbling a further 27c to 790c yesterday as the stock reels from its highs of 911c 10 days ago.

The drop follows the move last week by the commission to push its ruling date out to October 13 - its third such extension. This has created nervousness in the market.

But the energy analyst for UBS Warburg, Paul Richardson, put the delay down to the fact that it was a complicated decision.

"In some respects I would have thought the longer it takes them to try and sort it out, given the various other things they are trying to do ... the more likely it was they would say 'yes'," he said. This view is shared by other energy analysts.

Mr Richardson said that in his experience of the process, rejection came quickly.

"But in this case they have to do quite a lot of work to effectively define what the gas market is going to be in 10 years' time."

Few would be brave enough to complete the exercise. "You can get consultants to do that but it generally is not worth paying them too much for it. It really is a problem.

"My own belief about the Commerce Commission is that three of the four sorts of issues relating to the Shell bid for Fletcher Energy are easily dealt with.

"Maui I don't think is an issue. It is regulated completely already. The Government takes the gas and sells it on to three other players. Refining and retailing are not issues because Shell has said they are going to sell them.

"The main issue is over Pohukura, and does it give you dominance over the longer term? One way of resolving that, generally speaking, is just negotiate with the Commerce Commission. You just come up and say if that level of ownership gives us dominance, in your perspective what level of ownership will give us a tick mark?

"That means not going to, say, 66 per cent of Pohukura but just going to 50 per cent and allowing the other owners to sell the gas independently on the domestic market. Or else you can submit to price regulation.

"There is a situation in New Zealand where you can just go back and barter over it, as was the case with Waste Management and as is the case with the skifield bids - so far unsuccessfully - but you can actually negotiate.

"First time they might say 'no' but that is not the end of the game."

Mr Richardson did not believe anyone had inside knowledge of the workings of the Commerce Commission, and rejected speculation that "insiders" knew that the commission had decided to reject the Shell proposal.

He put the share price weakness down to institutional sellers exiting in the belief that the New Zealand dollar would weaken further.

From a view of its fundamentals, Mr Richardson thought that the business was going well.

He did not believe a huge fallout would follow if the business was not sold and was simply separated from the Fletcher Challenge group.

"People have confidence in the management of Fletcher Energy," he said.

"A separate, spun-out energy business is probably a business they want to hold.

"It is probably a buy opportunity at these prices. The business is running well, cashflows are looking pretty good, there is reasonable confidence in managements and there still seems to be a fair bit of upside to valuation from today."

Even using a conservative valuation method, Mr Richardson could see a price in the $10 range.