The merger gives AWE and Arc a 57.5% stake in the Cliff Head oil project off Western Australia, enough to take operatorship from Roc Oil if the merged entity wishes, as well as 42.5% of the BassGas gas and condensate project venture in Bass Strait.
"The merger of the two companies makes compelling strategic sense, bringing together two highly complementary asset portfolios and cultures to create a clear leader in the Australian mid-tier oil and gas sector," Arc managing director Eric Streitberg said.
Arc's Canning Basin holdings will be spun-off into a new exploration vehicle, Buru Energy, which will be listed on the Australian Stock Exchange.
Arc shareholders will receive 0.3 AWE shares, 19c in cash and 0.425 Buru shares for each Arc share, representing a premium of about 27.8% on Arc shares on April 11 prior to the media reports of a possible merger.
Each Arc shareholder will also receive 1 Buru option for every 3 Buru shares retained by them one month following listing of Buru shares. The options have an exercise price of 94c.
Buru is expected to have $75 million on listing and will retain Arc's delivery obligations under the Alcoa gas sales contract.
AWE will retain a 15% stake in Buru.
Streitberg will be the chairman of Buru while Arc chief financial officer Adrian Cook will be the company's managing director. Neil Thompson, currently Arc's Canning Basin exploration manager, will become Buru's exploration manager.
In October, Arc agreed to buy larger company Anzon Australia for about $A694 million before being outbid by Nexus Energy.
Based on closing prices last Wednesday, just before AWE and Arc went into a trading halt, the new company has a market capitalisation of about $A2.1 billion, considerably higher than the $A1.35 billion combined value of Nexus Energy and Anzon Australia.
AWE and Arc have also agreed to a mutual break fee of $4.5 million, payable in certain circumstances if the merger does not proceed.
Founded in 1997, Arc has had a few tough times, but has grown to become a leading Australian midcap and the dominant player in onshore Western Australia.
AWE is even more of a success story. Founded in 1997, it has held stakes in a variety of project, juggling and reshaping its portfolio frequently in its early years, before finally buying into its "cornerstone projects" - two gas and condensate projects, BassGas and Casino gas projects in Bass Strait; and two oil projects, Cliff Head in Western Australia and Tui in New Zealand.
BassGas, Casino and Cliff Head came into production in 2006, and Tui came online last year. And the last two years have been very good to AWE, which as of last week was a $1.5 billion company.
PNN had romantically hoped that AWE would retain the Canning assets, but realistically frontier exploration doesn't fit into AWE's business plan.
AWE has a strong and simple story - "cornerstone" assets in reasonably well understood basins close to markets. Most of these assets (barring Cliff Head) also have exploration upside in surrounding acreage.
Arc's onshore Perth Basin assets, centred around Dongara, could now be seen as the "fifth cornerstone. (AWE's Lengo gas discovery in Indonesia is likely to lead to more finds in the area and yet another cornerstone in the expanding AWE polygon).
The Canning Basin acreage simply doesn't fit into this story, and the solution of forming a new frontier vehicle, Buru energy, with AWE as a 15% stakeholder, and Arc's Canning Basin true believers as Buru's chairman and executive is the best solution.
(But just think of what a $2 billion company could achieve in the Canning...)
Interestingly, AWE decided not to bid for increased stakes in BassGas (12.5%) and Cliff Head (24%) when Mitsui decided to sell them off last year, leaving it open to Arc to buy the assets for $US189.6 million ($A229 million).
What has changed since then? PNN's best guess is that there have two big changes. The company is now earning revenue from Tui and the gremlins at BassGas have been vanquished; AWE is a company that likes to live within its means, and it wasn't going to risk over-extending itself. In addition, like many upstream players, the company now has increasing confidence that oil prices will remain high and that eastern states gas prices will rise significantly in the medium-term as Queensland LNG export projects come online.
There is no doubt that AWE has the assets to comfortably complete the deal. Managing director Bruce Wood told journalists at the recent APPEA Conference that the company not only has no debt, it also has enough cash reserves that it has actually lent banks money on occasion.
