THE TIMES (UK): Tullow raises the stakes in battle of oil independents: “Tullow Oil yesterday threw down the gauntlet to Cairn Energy, the incumbent, after spending £200 million buying the Schooner and Ketch North Sea gasfields from Shell and ExxonMobil” (ShellNews.net) 21 Dec 04

Tempus

By Robert Cole

December 21, 2004 

THE race for the title of the UK’s biggest independent oil and gas company is on in earnest. Tullow Oil yesterday threw down the gauntlet to Cairn Energy, the incumbent, after spending £200 million buying the Schooner and Ketch North Sea gasfields from Shell and ExxonMobil. The deal follows Tullow’s £320 million May takeover of Energy Africa. Tullow’s shares have risen more than 80 per cent this year.

With a market capitalisation rapidly approaching £1 billion, Tullow is second only to Cairn in size. And the challenger can smell blood. Cairn is reeling after investors, disappointed with last week’s operating update, wiped 20 per cent off its share price. Whereas Bill Gammell of Cairn has led his company to exploration glory — and now doubt — in India, Aidan Heavey, his Tullow counterpart, has adopted a very different strategy. Mr Heavey’s plan is to acquire assets with proven reserves of oil and gas and to work on them to maximise output. With luck, and the application of new oil industry techniques, assets can be sweated some way in advance of expectations.

Tullow has a lower risk profile than Cairn but that does not mean it is low risk. Too often companies overpay for assets, or pick duds. Then there is the price of oil and gas to take into account. While Tullow has taken full notice of the way the price has tumbled in recent weeks and the possibility that the weakening will continue, there is always a chance that the company will attain disappointing prices for the gas it sucks from beneath the North Sea. Meanwhile, Tullow’s Energy Africa acquisition will take time to digest because some of its core value lies in its exploration potential.

Schooner/Ketch should prove an immediate moneyspinner, however. Tullow may be a beneficiary of fears circulating about Western European over-dependence on Russian gas in the context of the continuing Yukos saga.

The deal will be financed with debt, doubling Tullow’s gearing to about 55 per cent. Tullow says the deal will be earnings-accretive once it settles early next year, however. Importantly, a planned £71 million capital expenditure programme to boost the gasfields’ production from 60 to 140 million cubic feet of gas a day is unlikely to affect Tullow’s African exploration budget. Hold.