Tullow Oil drops plan to sell assets

Jan 18, 2010

LONDON - Tullow Oil has dropped a plan to sell half of its Ugandan assets in a move analysts said was a “material” shift in focus toward oil production and away from risky, but potentially more lucrative, exploration.

LONDON - Tullow Oil has dropped a plan to sell half of its Ugandan assets in a move analysts said was a “material” shift in focus toward oil production and away from risky, but potentially more lucrative, exploration.

Tullow started the process to sell up to 50% of its Ugandan assets late last year, to attract a partner with experience of building the kind of pipelines and infrastructure needed to develop the fields.

However, Aidan Heavey, the chief executive, said Tullow now planned to sell the half-share in two oil blocks, which its partner in Uganda, Heritage Oil, had agreed to sell to Italy’s Eni for about $1.5b, and half the 100% stake Tullow owns in Block 2.

Tullow exercised its right to pre-empt the Heritage sale on Sunday, leaving it in a position to secure a partner or partners of its own choosing with the technical expertise the project needs, without reducing its interest significantly.

“We weren’t very keen on doing it, but we needed to do it to move the project forward at a pace. Now we can keep a higher percentage interest and deliver what the government wants,” Heavey told Reuters in an interview.

Tullow shares rose 1% to trade at 1,352 pence at 1029 GMT, ahead of a 0.7% rise in the DJ Stoxx European oil and gas sector index.

The historic strategy of explorers is to find an oil field, establish the extent of the discovery and then to sell the field to a larger company, such as Eni, which largely seeks to make money by efficiently producing oil, rather than by finding it.

Explorers typically return cash generated from asset sales through special dividends and retain a portion to invest in future exploration.

Tullow has grown to be Europe’s largest oil explorer by market capitalisation after it struck lucky in Uganda and Ghana, and analysts expected the company to significantly reduce its stakes in these finds in coming years.
One analyst on a conference call with Tullow said the decision to retain a larger stake in Uganda was a “material” change in strategy.

Another analyst, Al Stanton at RBC Capital Markets in Edinburgh, said the shift in focus toward production could mean shareholders could expect dividends in future, but also slower growth.

“It has an impact on the pace of share price appreciation. Rather than a company that is highly leveraged to the drill bit, it will be driven for the outlook for the oil price and reserves growth,” he said.

Heavey said Tullow plans to announce a buyer for the stakes early next month. It was too late for Eni to enter the process and be selected, unless the Ugandan government insisted they be admitted, the chief executive added.

Italy’s largest company had invested considerable effort in courting Uganda, helped by representations from the Italian government.

The Ugandan government has to approve Tullow’s purchase, but Heavey said the signals he had received from the government were that they supported the move.

Tullow and Heritage have found reserves of up to two billion barrels of oil in Uganda, but a pipeline must be built to move the oil to world markets, and since the oil is waxy, it must be a heated pipe to ensure fluidity.

The Ugandan government is also keen for a refinery and power generation facilities to be built.

Reuters

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