Bloomberg: African oil explorer Tullow ripe for a takeover

By Brooke Sutherland, Dinesh Nair and Matthew Campbell

Dec. 3 (Bloomberg)

After almost a decade of deal speculation, Tullow Oil Plc 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. 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, Cnooc Ltd. and Exxon Mobil Corp. 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. 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.”

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 Organization 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 capitalization 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 amortization 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.

Today, Tullow shares fell 0.9 percent to 421.10.

‘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.”

The company’s own perception of its vulnerability stems in part from the fact that it has assets that now need big-oil development expertise and capital, and companies such as Total and Royal Dutch Shell Plc are considering bulking up in Africa, according to the people familiar with the matter, who asked not to be identified because the information is private.

Even mining giant Glencore Plc could be a possible buyer.

“My left-field favorite is always Glencore,” Al Stanton, an analyst at Royal Bank of Canada, said by phone. “They’ve got a small oil business but they are a big company. They know how to run big businesses.”

A representative for Baar, Switzerland-based Glencore said the company doesn’t comment on speculation. The $66 billion company in July bought Caracal Energy Inc. to take control of oil and gas assets in Africa. Rio Tinto Group rebuffed a Glencore merger offer earlier this year that would have created the world’s largest miner.

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.”

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 percent 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.

No Obstacles

An $11 billion offer may not seem so steep considering that the company was valued at twice that amount less than three years ago. There’s little else standing in the way of a buyer making an approach. Tullow doesn’t have a blocking shareholder, poison pill or a dual-class structure, BMO’s Warn said.

Value-focused U.S. investors have been buying up Tullow stock and would likely be receptive to an offer which makes strategic sense, according to one of the people familiar with the matter. Los Angeles-based Capital Group Cos., for example, increased its Tullow stake this year to about 10 percent, becoming the company’s biggest shareholder, data compiled by Bloomberg show. A representative for Capital Group said the firm doesn’t comment on individual holdings.

“A low oil-price environment is generally what stimulates M&A,” Amor of RFC Ambrian said. “Tullow would like to stay independent but it may not have the choice.” – BLOOMBERG