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Oil’s Tumble Set to Make Tullow Takeover Talk Reality: Real M&A
2014-12-03 00:06:19.216 GMT


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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 of 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 debt is 5.2 times its earnings
before interest, taxes, depreciation and amortization in the
past 12 months, according to data compiled by Bloomberg. That’s
a higher leverage ratio than 90 percent of peers, the data show.
That doesn’t mean the company is going to struggle to pay
its bills or needs 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.”
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.”

For Related News and Information:
Oil at $40 Possible as Market Transforms Caracas to Tehran
Tullow Oil Cuts Exploration Budget to Focus on East Africa
OPEC Refusal Means Oil Industry’s Weakest Producers Left Behind
Oil Price Collapse Enables Buyers to Grab Top Targets: Real M&A
Tullow M&A News: TLW LN <EQUITY> TCNI MNA <GO>
Real M&A columns: NI REALMNA <GO>
Top deal news: DTOP <GO>

--With assistance from Will Kennedy in London.

To contact the reporters on this story:
Brooke Sutherland in New York at +1-212-617-0448 or
bsutherland7@bloomberg.net;
Dinesh Nair in London at +44-20-3525-3212 or
dnair5@bloomberg.net;
Matthew Campbell in London at +44-20-3525-8684 or
mcampbell39@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net;
Aaron Kirchfeld at +44-20-3525-8830 or
akirchfeld@bloomberg.net