Peak-time fight for Fletcher Energy

The Fletcher Energy takeover battle has had more twists and turns than the New Zealand-Pakistan one-day cricket series.

Shell looked home and hosed until Mark Dunphy made his last-minute offer on Monday night. The new bidder had huge momentum until late Thursday, when Shell tossed its higher offer on the table.

Then, last night, Mr Dunphy came back with a higher offer.

Shell is an industry giant that should hold most of the trump cards against its smaller rival. But Mr Dunphy has not thrown in the towel and Tuesday's meeting to approve Shell's offer could still go either way.

Mr Dunphy, originally from Lower Hutt, was one of Fay, Richwhite's five principal partners. He ran their Australian operations and was chairman of Cultus Petroleum, the Fay, Richwhite-controlled oil exploration group.

Cultus and Shell had several joint-venture partnerships in Australia.

As Fay, Richwhite's traditional business declined, Mr Dunphy spent more time with Cultus. When the oil exploration group was taken over in late 1999, he moved to Ireland.

But the oil industry can be addictive and Mr Dunphy has caught the bug.

Last year, he formed Greymouth Petroleum; a New Plymouth-based company that operates a small production well on the city's foreshore.

Mr Dunphy's interest in New Zealand was heightened when Fletcher Challenge announced that it was selling its Energy division to Shell.

He believed that the Commerce Commission would force the new owners to sell several New Zealand assets because Shell already had a big presence in the country's oil sector.

He thought he had a head start over other potential buyers because of his earlier association with Shell through Cultus. But the commission gave Shell a relatively long lead-time to sell these assets and Mr Dunphy's approaches to Shell were unsuccessful.

In late November-early December, he changed tack and started to put together a deal that would outbid Shell. He believed that its offer was far too low and that the oil giant was effectively stealing Fletcher Energy.

Shell's original offer was:

$US3.34 cash for each Energy share.

One Capstone share for every 70 Energy shares.

One share in Rubicon for each Energy share.

Shell was also required to make a payment to Fletcher Challenge that would be used to repay Fletcher Energy's debt.

The key part of the transaction was the $US3.34 cash payment. This would effectively pay for Energy's core oil and gas activities in New Zealand, Brunei, Canada and Argentina.

After the offer was completed, Shell would sell the Canadian and Argentine operations to Apache for $US600 million ($1.38 billion).

Shell would be left with the Brunei and New Zealand operations, excluding those it had to sell by order of the commission.

Mr Dunphy's first success was to convince Penn West to buy the Canadian and Argentine operations for $US725 million, $125 million more than Apache agreed to pay for the same assets. Penn West has now raised its offer to $US737.5 million.

Penn West is a successful exploration and production company based in Calgary with a sharemarket value of $C2.1 billion ($3.13 billion). Apache has a market value of $US7.3 billion.

The next task for Peak Petroleum - Mr Dunphy's consortium is named after a former brand of New Zealand petrol - was to arrange the equity and debt to finance the proposal.

Mr Dunphy says he has a firm commitment, subject to due diligence, from National Australia Bank and Bank of New Zealand for US$650 million of borrowings. He also has a firm commitment for $US250 million of equity, with the biggest lump provided by FR Partners and GPG.

According to Mr Dunphy, Sir Michael Fay and David Richwhite no longer have any interest in FR Partners nor are they contributing any equity to Peak.

Three New Zealand institutions have a combined equity commitment of $20 million, far less than the current value of their Fletcher Energy holdings.

In December and January, Mr Dunphy and Fletcher Challenge played cat and mouse. Mr Dunphy tried to obtain more information on the contractual arrangements with Shell, but Fletcher Challenge claimed that this was price-sensitive information, not for an outside party.

On February 9, Greymouth Petroleum, on behalf of the Peak consortium, wrote to Fletcher Challenge asking it to adjourn the March 6 meeting and to allow Peak to do due diligence. A February 12 meeting failed to advance its cause.

On Monday, Mr Dunphy met Michael Andrews of Fletcher Challenge and presented him with Peak's proposal. He again asked for the adjournment of next week's meeting and the opportunity to do due diligence.

Another meeting was held on Tuesday morning but the parties remained far apart. Mr Dunphy claimed that his funding was in place but it was subject to due diligence. That would be a formality and be completed quickly.

Fletcher Challenge claimed that the finance was not firm because it was conditional.

At 2.55 pm on Tuesday, Fletcher Challenge told the stock exchange that it had received a proposal from Greymouth Petroleum but that it was subject to finance and due diligence.

The offer was similar to the Shell proposal, except the cash component had been raised from $US3.34 a share to a minimum of $US3.70 - since raised to $US3.85 - and Fletcher Energy shareholders could accept Peak Petroleum shares instead of cash.

The tone of the Fletcher Challenge release was clear - the Peak offer lacked credibility and the company did not want to disrupt its separation timetable and the sale of Energy.

The momentum then swung towards Peak. But Shell stuck its nose ahead again on Thursday evening when it raised its cash bid from $US3.34 to $US3.55.

Although 30USc below the latest Peak offer, it is more attractive to many shareholders because Shell will pay earlier and its offer is more certain.

At the centre of the issue is the value of Fletcher Energy's 353 million barrels of reserves in New Zealand and Brunei.

Peak and other experts argue that Grant Samuel's valuation range of $US3.25 to $US3.84 a share is too conservative. It is based on a post-July 2002 oil price forecast of $US18 to $US22 a barrel, but many forecasters predict higher prices.

There is some validity to this argument, but the problem is that Fletcher Energy shareholders are being asked to vote on the sale of the energy assets and the separation from Forests and Building.

If the motion is defeated next Tuesday, then the separation will not proceed and Energy will remain entwined in Fletcher Challenge's labyrinthine structure.

Many shareholders will vote in favour of the Shell proposal because they want to split up the cumbersome Fletcher group, not because the Shell offer represents full and fair value.

At the end of the week Mr Dunphy looked rather weary. To date he has forced Shell to raise its offer by $US74 million. At least this will benefit Peak's consortium members if Shell's proposal is successful because they hold more than 5 per cent of Fletcher Energy.

But Mr Dunphy's biggest battle lies ahead. He has the capacity to raise his offer but to win the war he will have to convince shareholders to vote against the Shell proposal next Tuesday.

The meeting is at 2 pm at the Ellerslie Convention Centre. Get there early - it should be an eventful occasion.

* bgaynor@xtra.co.nz