3rd UPDATE: Centrica Buys 22% Of UK Gas Producer Venture

The U.K.'s largest gas and electricity retailer, Centrica PLC (CNA.LN), moved Wednesday to boost its gas reserves and production by buying a 22.3% stake in North Sea gas producer Venture Production PLC (VPC.LN) for GBP239.4 million.

Centrica said it may in the future make a full cash offer for Venture, but there is no certainty at this stage. It has already acquired 33,016,611 Venture shares at 725 pence a share.

Venture made clear it doesn't believe 725p a share would be a good price for the whole company. "This substantially undervalues the company, its prospects and strategic position, particularly with regard to its U.K. gas resources," it said in a statement. It urged its shareholders to take no further action.

Centrica doesn't produce enough gas to supply all of its retail customers in the U.K. and its earnings are highly exposed to volatility in wholesale gas prices. One of the company's strategic goals is to reduce this exposure by acquiring gas producing assets.

"Venture remains one of our top picks in the exploration and production sector," said a research note from analysts at Collins Stewart. "While volume growth will be fairly modest this year, reserves growth should be strong and should presage stronger volumes in 2010-2011."

Venture would be a good fit with Centrica's upstream strategy, if it decides to make an offer for the whole company, another London-based analyst said. "It has the option to carry on Venture's strategy with a little more oomph," he said.

An outright acquisition of Venture would almost double Centrica's proven and probable reserves and increase hydrocarbon production by just over a third.

Venture's proven and probable reserves are 214 million barrels of oil equivalent, compared with Centrica's 238 million barrels of oil equivalent. Venture produced an average of 45,000 barrels of oil equivalent of hydrocarbons a day in 2008, compared with Centrica's output of 128,000 barrels of oil equivalent a day. The bulk of both companies' reserves and production are natural gas.

Venture's 2008 operating profit, announced Tuesday, almost doubled from the previous year to GBP231.1 million due to much higher gas prices.

Centrica is also in talks with Electricite de France SA (1024251.FR) about taking a 25% stake in its nuclear subsidiary British Energy, aimed at diversifying Centrica's electricity production.

At 1341 GMT Centrica shares were unchanged on the day at 246p. Venture shares were up 29.5%, or 170p, at 750p, in a flat broader market.

-By James Herron, Dow Jones Newswires; +44 (0)20 7842 9317; james.herron@dowjones.com

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