Oil Tumble Boosts Odds Of Tullow Takeover

TullowOilJubileeAfter almost a decade of deal speculation, Tullow Oil Plc (TLW) may finally be ripe for a takeover.

The plunge in oil prices has erased more than half of Tullow’s market value since June.

Management is now concerned the $6 billion company could be vulnerable to an approach by a larger oil and gas producer, according to people familiar with the matter told Bloomberg.

Tullow’s shareholder roster has also changed. U.S. funds that would probably be more receptive to a sale have taken on a greater proportion of the stock, one of the people said.

The London-based explorer is responsible for some of Africa’s largest oil discoveries, giving it enough production potential to entice megabuyers.Total SA (FP), Cnooc Ltd. (883) and Exxon Mobil Corp. (XOM) would be among logical bidders since they’ve expressed interest in African assets before, said Bank of Montreal.

And a buyer wouldn’t have to contend with obstacles such as a poison pill or dual-class stock structure, according to BMO.

Tullow offers “a significant operating position that would not look out of place in the portfolio of a larger company,” said David Mirzai, a London-based analyst at Societe Generale.

He said Tullow’s drop and the decline in oil prices would certainly make it a lot easier to win the investor base around than in previous years.

George Cazenove, head of media relations at Tullow, declined to comment.

Representatives for French producer Total and Cnooc, China’s biggest offshore oil and gas producer didn’t respond to requests for comment. A representative for Irving, Texas-based Exxon declined to comment.

 Oil Frontiers

Tullow has been the subject of takeover speculation since at least 2006. The company leapfrogged its peers with billions of barrels of oil discoveries in African frontiers including Ghana and Uganda.

“Ghana and Kenya and Uganda offer a big company material production and enough reserves for it to move the needle,” Brendan Warn, a London-based analyst at BMO, said in a phone interview.

“There’s a pretty low-risk upside. The oil in place is there. You’ve just got to get the recovery, to get the oil out of the ground,” he said.

The company’s best takeover defense these past eight years has been its lofty valuation. That may not be as strong a shield today.

 Market Concern

Oil has slumped more than 30 percent since peaking in June, dropping below $70 a barrel in recent days, as the U.S. pumps oil at the fastest rate in three decades and global demand growth slows.

The Organisation of Petroleum Exporting Countries’ failure to cut its production target last week has some speculating crude could sink a lot lower.

With oil in freefall, investors have punished the stocks of producers, particularly those such as Tullow that have sizeable debt burdens and projects that are going to require more funding.

The company has lost about $7.5 billion in market capitalisation since oil prices peaked this year and is now valued at just a quarter of its $23 billion high in 2012.

Tullow’s $3.1 billion in total debt is 5.2 times its earnings before interest, taxes, depreciation and amortisation in the past 12 months, according to data compiled by Bloomberg.

When write-downs for exploration costs are excluded, Tullow’s ratio of debt to earnings is less than 2. The company also has about $2 billion in undrawn lending facilities.

That company isn’t going to struggle to pay its bills or have to find a buyer, but “the share price wouldn’t be where it was if the market wasn’t concerned,” Stuart Amor, head of oil and gas research at RFC Ambrian Ltd. in London, said in a phone interview.

‘Challenging Time’

Tullow last month said it will cut its exploration and appraisal budget to $300 million from $1 billion amid what Chief Executive Officer Aidan Heavey deemed a “challenging time for the oil industry”.

 Not Willing

Just because Tullow’s management feels vulnerable doesn’t mean it would be a willing seller.

If CEO Heavey and his team think they can weather the current weak environment, “the last thing they want to do is roll over today,” Stanton said.

“Tullow is no longer a darling quite clearly but equally I don’t think it’s stumbling around yet. I think there’s still a way to go before they are willing to throw in the towel,” he said.

It would probably take a bid of at least 700 pence or 800 pence a share, or as much as 7.3 billion pounds ($11.4 billion), to get management to entertain a sale, said Warn of BMO.

“That would be an 88 per cent premium to the stock’s closing price yesterday of 424.70 pence. The big oil producers will have to be comfortable enough with the volatile commodity environment to lay down that kind of cash, which may put a deal farther off,” he said.

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