Although it holds a range of on-shore and offshore permits in New Zealand, L&M Energy regards the Ohai and Waiau permit areas 70km northwest of Invercargill as having the most potential for development, and has initiated talks with Fonterra and its Edendale processing factory and Rio Tinto-owned Tiwai Pt aluminium smelter in Bluff.
The takeover proposal would encompass 12 permits, covering almost 13,000sq km, including Otago, Southland, the West Coast, Taranaki and the Waikato.
Under the cash-less takeover offer, L&M Energy will take possession the coal seam gas (csg) permits of L&M Coal Seam Gas, covering an estimated 173 petajoules of csg energy around Ohai, which it wants to harness and sell in the South Island.
L&M Energy chief executive John Bay and L&M Coal Seam Gas chief executive Kent Anson, who would be joint chief executives under the merged company looking after respectively petroleum and csg exploration and development, were in Dunedin yesterday for the first of eight New Zealand roadshows.
Talking to about 15 investors, Mr Bay said $6 million cash-in-hand would finance L&M Energy's drilling programmes through 2010, which crucially must move the estimated P3 resource to P2, or from a 90% chance to 50% likelihood of being "proven and possible" to extract and commercialise.
"P3 [in fishing terms] is a baited hook in the water where you've caught fish before. P2 is a fish hooked and about to be landed in the boat; P1 is a fish in the boat."
Mr Bay told investors of the significance of upgrading southern csg estimates from P3 to P2 during further test drilling this year.
Mr Bay predicted the company would be cash-flow positive by 2012-13, but confirmed no supply contracts were signed.
Craigs Investment Partners broker Peter McIntyre said Australia had recognised the importance of csg exploration and development as an energy source and L&M Energy was well placed to make progress towards commercialisation.
However, he cautioned investment was "not for the conservative".
The forecasts coming from L&M Energy's roadshow would be closely scrutinised for the next three years; from the takeover, commercialisation plans, gas contract sales and estimated cash flows.
The takeover proposal has raised the hackles of some investors concerned at the percentage dilution of their shareholding, and of three major shareholders taking a more than 80% stake in the new company.
Mr Bay highlighted that the issuing of 444 million shares to L&M Coal Seam Gas shareholders would move L&M Energy from a company with $28 million market capitalisation to one of about $100 million, saying shareholders would benefit from the increased size and opportunities available to a larger company.
Mr McIntyre said while the company would move from $28 million to $100 million, at present about 16c per share, the volatile commodity sector was in general "wide open to wild swings" in share values, being a "high-risk high-reward" investment.
Investors were told by Mr Bay a "relatively small" capital raising would be announced, assuming success at the shareholders' meeting for the takeover on February 22.
He later told the Otago Daily Times that possibly $A6 million to $A8 million might be sought, which could include an offer to existing shareholders and institutional investors.
He acknowledged to the investors there was a perception the South Island had no infrastructure for distributing gas, but highlighted the southern potential for on-site power generation, replacing South Island imports of 80,000 tonnes of lpg with csg, big-business opportunities such as Fonterra and Tiwai Pt, with which L&M Energy has been in preliminary talks, and also domestic supplies.
Mr Bay updated investors on what the Waitutu offshore Southland petroleum permit held, predicting it would cost $US25 million to explore further.
Partners might be sought, but going ahead was "a coin toss", because of the high expenses involved.
