Tullow Oil: takeover speculation grows as share price slides

Speculation is growing that Irish exploration group Tullow Oil could find itself in the crosshairs of one of the world's oil majors on the back of a weak share price that analysts believe undervalues the company.

Tullow’s price slid almost 3 per cent in London, where most of its stock is traded, to 408.9 pence yesterday, less than half its 12-month high of 909.5 pence.

Recent falls in the price have sparked a fresh wave of speculation that the company may find itself a takeover target, with the likes of Exxon, French player Total and Chinese group CNOOC, Tullow's own partners in a major oil field in Uganda, being namechecked as possible suitors.

Analysts who follow the company agree that its price now undervalues Tullow's assets, namely its oil exploration and production businesses, mainly in Africa, where it has struck rich fields in Ghana, Kenya and Uganda.

Brendan Warn, analyst with Bank of Montreal in London, says the shares are trading at similar levels now to what they were before the Irish company had uncovered those substantial reserves of oil, particularly Kenya and Uganda, where its fields could yield 2.3 billion barrels of crude.

He said those fields help make the company particularly attractive to prospective buyers.

“They are strategically important, it is very hard to take over strategic assets, some countries won’t allow you to do that, but Tullow does not have that protection.”

However he argues that the slide in oil prices that is partly responsible for Tullow’s low valuation could also hinder any bid to take it over as this is obviously going to impact any buyer’s cash flow and limit their capacity to do such a deal.

Investors

A 30 per cent drop in the price of oil has turned investors off Tullow, along with the rest of the sector. However, it has also had other issues to deal with.

This year it was unable to farm down part of its interest in the TEN project off the coast of Ghana and so will have to shoulder all of its share of the total $4.9 billion development cost.

At the same time its $3 billion debt is around three times its earnings although none of this is due for repayment in the short term.

Caren Crowley of Dublin brokers Davy says its banks have offered to increase its facilities.

Last month, Tullow said that it would cut spending on exploration to $300 million from $1 billion in 2015