Australian Edge Conservative Portfolio lynchpin APA Group (ASX: APA, OTC: APAJF) is the dominant pipeline operator Down Under. In mid-December APA offered AUD0.50 in cash and 0.326 of its shares for each of the 79.3 percent of outstanding shares of Hastings Diversified Utilities Fund (ASX: HDF, OTC: none) it doesn’t own.

That puts Hastings’ overall market value at approximately AUD1.06 billion, but the AUD2 per share quoted by APA is disputed by Hastings. The target claims that, taking account of interim distributions by both companies, the per-share value put on Hastings by APA is closer to AUD1.92.

Hastings management has also registered objections to certain conditions on the offer, including a requirement of 90 percent uptake by Hastings shareholders until the deal became “compulsory.” APA is also asking for disclosure of certain of Hastings financing arrangements, including its “mezzanine” debt, as well as information on its fee arrangements.

The offer for the smaller pipeline operator represented a 12.6 percent premium, give or take, and based on APA’s Dec. 14 closing price, to its average trading price in the five days leading up to offer day and is a key step as APA attempts to consolidate its hold on pipeline operations in the eastern half of Australia.

APA already owns 20.7 percent of Hastings, which owns pipelines that link Moomba, South Australia, a Santos Ltd (ASX: STO, NYSE: STO) “company town,” with Adelaide and to southeastern Queensland. Hastings also operates a smaller pipeline in Dampier, Western Australia.

APA owns the Moomba-Sydney pipeline and a link between Sydney and Melbourne; acquiring the Hastings assets would make it the top gas supplier to Sydney, Melbourne, Brisbane and Adelaide.

In addition to its 20.7 percent interest in Hastings APA also owns 33 percent of fellow Conservative Holding and pipeline operator Envestra Ltd (ASX: ENV, OTC: EVSRF). Adding the rest of Hastings would allow APA, in management’s words, “to offer a streamlined service and enhanced supply security” to its customers.

The deal would also enhance APA’s already strong position in a domestic economy that will soon be subject to one of the toughest carbon regulation schemes in the world–and that’s likely to spawn a boom in natural gas demand, as this clean-burning fuel assumes a lead role in the race to replace coal as the primary feedstock for electricity generation.

Complicating matters–and perhaps forcing APA to boost its offer–is Hastings’ recent execution of a AUD460 million contract with Santos to move natural gas from Moomba to Queensland on the South West Queensland Pipeline. The 15-year deal will bring feedstock to Santos’ Gladstone LNG project. Hastings is in the process of upgrading South West Queensland, which ships gas east to west but will be capable of moving it both ways by 2014-15. That’s when AUD50 billion worth of liquefied natural gas (LNG) plants at Gladstone are scheduled to begin exports.

South West Queensland also connects to three APA pipelines: the Roma-Brisbane Pipeline, the Carpentaria Pipeline to Mount Isa and the Moomba Sydney Pipeline.

The Santos contract, in the words of one analyst, is likely to be “highly accretive,” as it will involve zero capital outlay by Hastings. It would therefore boost Hastings’ value. During early Friday trade in Australia Hastings shares had pushed up to AUD2.05. At the same time APA shares are changing hands at AUD4.49, down from the AUD4.57 closing price on Dec. 14, the day it made its offer to Hastings.

Based on announced terms Hastings shareholders are getting about AUD1.96 per share, so it’s clear that the market is telling the hunter its prey will be more dear should it choose to continue. The promise of a carbon-tax-mandated shift to natural gas suggests there may be more room in the pipeline-operator game that APA dominates. As it is, assuming Hastings eventually accedes to a deal, APA will have to justify itself to the Australian Competition & Consumer Commission.

APA has AUD477 million on its books from the sale of 80 percent of its interest in Queensland gas distribution network Allgas, sufficient to cover the AUD214 cash component of the Hastings offer. Management noted during its conference call discussing the original offer that the Hastings assets fit, given “benefits provided through integration into our network,” and that the deal “would provide a rate of return above the regulated return.”

The key is that, at the time and according to the original terms, it could be funded without impacting distributions or distribution policy going forward.

APA’s offer will remain open until Mar. 31, 2012, unless it’s extended or withdrawn. Management has shown little willingness to budge, noting in its mid-December conference call that its existing 20.7 percent stake would likely dissuade any competitor bids. The question now is what kind of value Hastings represents to APA now. A revised offer reflecting Hastings’ improved market condition as well as a similar premium included in the original offer might have to approach AUD2.30.

On the other hand, Hastings shareholders have to look at APA’s long-term track record of building wealth. Over the five years that ended Dec. 14, 2011, the day of APA’s offer, Hastings generated a total return of 13.96 percent in Australian dollar terms, 44.7 percent in US dollar terms. That bests the negative 6.4 percent return in Australian dollar terms for the S&P/ASX 200 Index, which did manage an 18.86 percent gain when accounting for the aussie’s gain against the US dollar.

APA, meanwhile, is 69.79 percent to the positive in Australian dollar terms and has returned a total of 115.6 percent in US terms since late 2006. The Allgas sale won’t impact fiscal 2012 financial performance, which management forecast will be “driven by strong operating performance.” EBITDA guidance of AUD530 million to AUD540 million was reiterated, and APA will pay a distribution in 2012 that’s “at least equal to” what it paid out in fiscal 2011, AUD0.344 per share, good for a 7.8 percent yield as of midday Friday in Australia.

The Roundup

The Australian stock market, as measured by the Standard & Poor’s/Australian Securities Exchange 200 index, is headed for a double-digit decline for 2011, in price terms about 14 percent, in total return terms about 10 percent. That’s in local Australian dollar terms. Currency effects make the loss in US dollar terms about 15 percent on a price-only basis, about 11 percent including dividends.

That’s a second straight decline in Australian terms on a price-only basis for Australia, as in 2010 the loss was 2.57 percent. Including dividends pushed it to a 1.6 percent total return for Australians. 2010 was a stellar year for US dollar investors in the Australian market, where a buck invested in the S&P/ASX 200 Index returned 11 percent on a price-only basis and almost 16 percent including dividends.

The good news is Australian Edge launched at about what’s proving to be the 2011 nadir for the most widely quoted Australian index. The S&P/ASX 200 is actually up 9.7 percent in US dollar terms since Sept. 26, 2011, when the AE Portfolio debuted in our preview issue. The original eight members of the Portfolio have combined to generate an average total return of 16.08 percent since then. And for 2011 these eight stocks have generated an average total return in US dollar terms of 13.76 percent.

Here’s a Holding-by-Holding look at performance during 2011 and since the respective stock was added to the AE Portfolio. Also included is information on upcoming dividend and earnings reporting dates. All data is as of midday Friday, Dec. 30, in Sydney, Australia.

Conservative Holdings

AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY) is up 6.21 percent in US dollar terms since Sept. 26, though the total return for 2011 is negative 2.64 percent. The company, one of the original eight members of the AE Portfolio, will announce fiscal 2012 first-half earnings Feb. 23, 2012. The Australian Securities Exchange (ASX)-listed shares will trade ex-dividend Mar. 5, 2012. AGL Energy is a buy under USD15.30.

APA Group (ASX: APA, OTC: APAJF), also an original Portfolio member, is up 22.05 percent since Sept. 26 and 19.38 percent for the year. APA will announce fiscal 2012 first-half earnings Feb. 22, 2012. APA will pay an estimated AUD0.17 per share interim dividend on Mar 15, 2012, to shareholders of record on Dec. 30. The shares went ex-dividend Dec. 22. Buy under USD5.

Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) has generated a total return in US dollar terms of 18.48 percent since Sept. 26. ANZ, our favorite among Australia’s Big Four banks, is down 6.9 percent including dividends in 2011. Management will report fiscal 2012 first-half results on May 2, 2012, and will next trade ex-dividend as of May 10, 2012. ANZ is a buy up to USD22.

Cardno Ltd (ASX: CDD, OTC: COLDF) is down 3.32 percent since we added it to the Conservative Holdings in the Nov. 11 issue, though the broader S&P/ASX 200 Index is down 6.57 percent in US dollar terms over the same time frame. For the year the mining, infrastructure and energy engineering services firm is off 1.46 percent, also better than the benchmark. Cardno will report fiscal 2012 first-half results on Feb. 15, 2012. The stock goes ex-dividend Mar. 7, 2012. It’s a buy under USD6.

CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY), an October addition to the Conservative Holdings, is up 4.14 percent since in US dollar terms, impressive considering the 4.03 percent decline for the S&P/ASX 200 Index over the same period. For 2011 CSL is off about 10 percent including dividends, roughly in line with the benchmark index. CSL will report fiscal 2012 first-half results Feb. 16, 2012; it goes ex-dividend Feb. 15. CSL is a buy under USD35.

Envestra Ltd (ASX: ENV, OTC: EVSRF), an original member of the AE Portfolio, is up 17.67 percent since Sept. 26 and 47.95 percent for 2011. The pipeline operator will report fiscal 2012 first-half results on Feb. 23, 2012. The stock will next trade ex-dividend as of Feb. 10. It’s a buy under USD0.75.

M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF) joined the AE Conservative Holdings as of the December issue. The stock has traded down over the last two weeks, shedding about 2.49 percent in US dollar terms against a loss of just 0.31 percent for the benchmark index. M2 has outperformed in 2011, however, as its 3.48 percent decline pales in comparison to the nearly 15 percent swoon for the S&P/ASX 200 Index. M2 will report first-half 2012 results on Feb. 25, 2012, and will next trade ex-dividend as of Mar. 16, 2012. Buy under USD3.

Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY), an original AE Portfolio member, is up 14.48 percent in US dollar terms since inception. And in 2011 it’s up 30.27 percent. Management will report fiscal 2012 first-half results on Feb. 9, 2012, and it next trades ex-dividend as of Feb. 20.

Telstra is a buy under USD3.40 on the ASX or on the US over-the-counter (OTC) exchange using the symbol TTRAF. The US American Depositary Receipt (ADR), which represents five ASX-listed shares, is a buy under USD17.

Aggressive Holdings

BHP Billiton Ltd (ASX: BHP, NYSE: BHP), a charter member of the AE Aggressive Holdings, is up 5.95 percent since Sept. 26 on the ASX. But for 2011 the stock has generated a negative total return in US dollar terms of 22.7 percent. BHP will report fiscal 2012 first-half results on Feb. 8, 2012. The stock will trade ex-dividend as of Feb. 17, 2012. Buy BHP under USD80 on the New York Stock Exchange, USD40 on the Australian Securities Exchange.

GrainCorp Ltd (ASX: GNC, OTC: GRCLF), also an original member of the AE Portfolio, is up 24.95 percent since Sept. 26 and 26.69 percent for calendar 2011 in US dollar terms. Management will report fiscal 2012 first-half (end Mar. 31, 2012) results on May 22, 2012. The stock trades ex-dividend as of Jun. 15, 2012. Buy under USD8.50.

Mineral Resources Ltd (ASX: MIN, OTC: MALRF), a December addition to the Aggressive Holdings, is off to a rough start, shedding 2.4 percent in its first two weeks in the Portfolio. For calendar 2011 the stock is down 8.21 percent, which only looks good in comparison to the S&P/ASX 200 Index’ negative 11.21 percent total return for the year. Mineral Resources will report fiscal 2012 first-half results on Feb. 17, 2012, and will go ex-dividend as of Mar. 12, 2012. Buy under USD12.

Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY), an October addition to the AE Portfolio, has a performance to match gold’s swoon over the last couple weeks. The stock is off 19.58 percent in US dollar terms since Oct. 14, a commodity-price-driven slide that’s been exacerbated by production problems. We’re taking a close look at Newcrest as well as our rationale for its inclusion in the Portfolio. Newcrest will report fiscal 2012 second-quarter results on Feb. 10, 2012, and will trade ex-dividend as of Mar. 19, 2012.

New Hope Corp Ltd (ASX: NHC, OTC: NHPEF), an original member of the AE Portfolio and still the subject of a managed auction, is up 18.83 percent since Sept. 26, having backed off a bit from the heights well above AUD6 it occupied in the immediate aftermath of the auction announcement. We like the company for its solid operations and long-term wealth-building potential, too. For 2011 the stock is up 18.03 percent in US dollar terms. Management will report fiscal 2012 first-half results on or about Mar. 27, 2012. The stock will trade ex-dividend as of Mar. 20, 2012. It’s a buy under USD6.