L&M Energy merger sold on gas find prospect

L&M Energy's merger with private sister company L&M Coal Seam Gas is being sold to shareholders on the value of one potential gas reserve, described as "nibble on the end of a fishing line".

An independent report valued L&M Coal Seam Gas (LMCSG) at about $118m, solely on the basis of one 173-petajoule 3P coal gas reserve at Ohai in Southland.

The 3P classification means there is an estimated 10 percent chance of recovering the 173 petajoules of gas.

The report says while some tests show the reserve could support commercial production, rigorous economic analysis was difficult.

The report supported the merger.

The chief executives of both companies were in Christchurch yesterday, selling the merger to about 30 L&M Energy (LME) shareholders.

The cashless merger will make LME, formerly L&M Petroleum, New Zealand's biggest coal seam gas explorer, with 12 exploration permits and market capital value of more than $100 million.

However, it also means LMCSG's three big private shareholders will become the dominant players in the newly merged LME, acquiring 440 million newly created shares, giving them nearly 83 percent of the company compared with 42.8 percent they already own.

LME chief executive John Bay said if the merger was approved the company would aimed to expand 3P reserves and certify its first 2P reserve in Southland this year.

He described 3P as a nibble on the end of fishing line while 2P was like reeling the fish in.

The 2P classification, meaning there is estimated 50 percent chance of recovery, is the basis on which LME can start signing supply contractors, with Bay indicating that Fonterra and Rio Tinto's aluminium smelter in Bluff could be potential customers.

"People have said there is no gas market in the South Island, that is not correct. There is a gas import market ... a domestic supplier of gas could replace that."

Cheaper gas could also replace lignite, coal and wood being used as industrial fuel as well as being used for transport fuel.

But how much gas LME will recover and how it will get to market is unknown, with both Bay and LMCSG chief executive Kent Anson saying the right options were dependent on 2P certification and the market at the time.

Options could include bottling gas, building a pipeline or a power plant at the reserve and hooking into the nearby powergrid.

Anson said if the merger went ahead, it was hoped LME would be producing gas commercially in 2012 but any revenue would be reinvested rather than paid in shareholder dividends for the foreseeable future.

A merged LME would also burn through its remaining $6m cash this year and would require additional capital. Bay confirmed more capital would need to be raised this year, but deflected shareholders' questions about whether this would be obtained by offering additional shares. Shareholders will vote on the merger on February 22.

L&M ENERGY MERGER

PRE MERGER: L&M Energy (formerly L&M Petroleum) has: 175.3 million shares with a market capital value of $28m Six gas, oil and coal seam gas exploration permits in New Zealand. 42.8 percent is owned by Swiss company Tangent International, Hong Kong company Campania Holdings and Geoffrey Loudon. The rest is owned by 1960 small shareholders.

L&M Coal Seam Gas: Is privately owned, but based on the 500 million L&M Energy shares being offered for the company, has a market capital value of $80m. Has six permits, mostly focused on coal seam gas exploration, including a recently announced 173 PJ (10 percent probability) certified gas reserve in Southland. Is wholly owned by Tangent International, Campania Holdings and Geoffrey Loudon.

POST-MERGER L&M Energy would have: 675.3 million shares at market capital value of $108m. Twelve gas, oil and coal seam gas exploration permits. and 82.8 percent owned by Tangent, Campania and Geoffrey Loudon and 16.2 percent by smaller shareholders.

- © Fairfax NZ News