AGL Energy Ltd. (AGK.AU) has again flexed its strong balance sheet, on Thursday making a A$123.2 million takeover play for small oil and gas explorer Mosaic Oil NL (MOS.AU) to access its gas storage capabilities in Queensland state.

Australia's biggest energy retailer also revealed that it has struck a gas storage deal with BG Group Plc (BG.LN), conditional on it successfully acquiring Mosaic.

Under the storage deal, AGL will fund the development of a storage facility at Mosaic's depleted Silver Springs gas fields in the Surat Basin. Much more gas can be stored in natural, underground reservoirs than in artificially constructed storage tanks, which are also expensive to build.

BG would store coal seam gas at the facility for its proposed liquefied natural gas project at Gladstone.

The coal seam gas, however, will mix with other gas in the storage facility so AGL will use the stored gas for its own purposes and provide BG with replacement coal seam gas from Berwyndale when it's needed.

BG will make a one-off capital contribution to the development of the storage facility, AGL said, without disclosing a specific number.

AGL's offer of 15 Australian cents cash per Mosaic share represents a 92% premium to Mosaic's closing price Wednesday of 7.8 cents. At 0312 GMT Thursday, Mosaic shares were up 60% or 4.7 cents at 12.5 cents.

Mosaic said it hasn't yet considered the incomplete and non-binding offer but will meet with AGL to discuss the bid in further detail.

Sydney-based Mosaic has been trying to use hydraulic fracturing technology, where high-pressure bursts of water are used in drills to crack rocks and improve porosity, to try to get more out of its Churchie gas prospect in Queensland. Although in its very early stages, the plan hasn't worked yet, with flow rates from the first test well about the same as before.

RBS Analyst Jason Mabee said AGL's offer for Mosaic should do the trick, given it's already got pre-bid acceptances of 12.8% and given Mosaic's recent disappointments.

Still, Mabee said the depleted Silver Springs field could be very lucrative in AGL's hands and his valuation on Mosaic could increase to 20 Australian cents a share if some value for gas storage is taken into account, adding "arguably AGL could unlock more value than this over time".

AGL has also offered Mosaic shareholders a share-based alternative of 1.01 AGL shares for every 100 Mosaic shares.

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; Ross.Kelly@dowjones.com
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