Shares in Mozambique-focused Cove jumped as much as 12 percent to 250.5 pence on Wednesday, above PTT's offer of 240 pence a share and signaling investors expect Shell to come back with a higher bid.
Shell could counterbid as much as 300 pence a share, and still stay within the range of prices others have paid for international oil and gas assets in recent years, said Stuart Joyner, oil analyst at Investec.
"Clearly the game is not yet over," analysts at Singer Capital Markets said in a research note.
East Africa is set to become one of the world's largest gas exporters, executives operating in the region believe, after a string of major discoveries across Mozambique and Tanzania. That has fuelled speculation of a wave of takeover deals involving companies active there.
Cove has an 8.5 percent stake in massive gas finds offshore northern Mozambique. Project leader Anadarko Petroleum
PTT sees Cove as an opportunity to secure energy resources to help power Thailand's economy. Shell hopes Cove will be a springboard to a major presence in east Africa.
Cove management said hours before of a deadline for investors to accept Shell's bid that it had switched to back an improved 1.22-billion-pound ($1.9 billion) offer from PTT.
It had previously supported Shell's offer, which followed a PTT bid that trumped Shell's opening salvo in February.
An official within Mozambique's minerals ministry told Reuters the government would prefer a company with LNG expertise, but did not say whether it would block PTT's bid on the basis it had not previously built an LNG export plant.
Investors say this is now the biggest risk facing the deal.
"We're all exposed to the Mozambique government risk now," said one hedge fund manager holding Cove stock.
Nonetheless, many investors doubt Mozambique will block PTT, and force them to accept the lower Shell bid.
"We will keep our position in Cove for now on the anticipation that Shell might come back with an even higher offer," said Anne-Sophie D'Andlau, co-founder of Paris-based hedge fund firm CIAM.
Anglo-Dutch group Shell, Europe's biggest oil company by market capitalization, declined to comment.
PTT shares tumbled following news of its higher bid, while Shell's were down in line with the UK market.
CONSOLIDATION SEEN
The latest wave of exploration in Kenya, Tanzania and Mozambique in recent years was led by smaller explorers including London-listed Ophir Energy, Aminex and Wentworth Resources and Toronto-listed Africa Oil.
Industry executives say they expect a burst of consolidation as larger companies such as Norway's Statoil, Britain's BG Group and U.S.-based ExxonMobil, which have entered the region more recently, snap up smaller players.
Shell has already said it would like to add other acquisitions to Cove's Mozambique interest. If it is successful in buying Cove, it is expected to bid for a share of a neighboring block that Italy's Eni said it planned to sell.
These ambitious plans means Shell is not expected to walk away from Cove without a fight.
"Whilst it is not in Shell's corporate culture to get into lengthy bidding wars, given the strategic nature of the asset, they may come back with a yet higher bid," said Westhouse Security analysts.
Yet analysts said Shell would likely try and lobby the Mozambique government to back its bid rather than enter a counter-bid immediately.
Whoever buys Cove will have to pay a capital gains tax to Mozambique, which Shell has estimated at around $200 million, pushing the value of PTT's bid above $2 billion.
Cove will also owe Shell a 11.1 million pound break fee under the terms of the deal agreed in April.
Three sources close to the process said around 70 percent of Cove shares were in the hands of risk arbitrage hedge funds, whose strategy is to squeeze every last penny out of a takeover situation.
(Addtional reporting by Khettiya Jittapong in Bangkok, Agnieszka Flak in Johannesburg, William Mapote in Maputo and Laurence Fletcher in London; Editing by Mark Potter)
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