big game hunter

If Tullow Oil succeeds in buying the Australian explorer Hardman, it would make it a blue-chip company, which might in turn make it a target,
In the early 1990s, Aidan Heavey, Tullow Oil’s chief executive, got a phone call summoning him to a meeting with the company’s bank manager in Dublin. The branch had undergone a change at the top and the new regime had decided it no longer wanted to service Tullow’s IR£500,000 (€635,000) overdraft. The company was an exploration tiddler and Heavey had found his fair share of dry wells around the world since setting up the company in 1986. It was a hand-to-mouth existence.
“They told us they wanted the money back, that we weren’t the type of business it wanted to lend to any more,” Heavey recalled. “So I had to find IR£500,000 in a hurry. It took about a month, but we managed to get another bank to give us the money.”



Last October, Tullow raised $850m (€670.5m) in a loan facility from 20 banks to help fund its aggressive expansion programme. “Today the banks are crawling all over us,” Heavey said.
Bank of Scotland last week agreed to provide it with $1 billion to make a run at acquiring Hardman Resources, an Australian exploration company. Hardman has fallen out of favour with the market, but has potentially lucrative oil and gas assets in Africa and South America.
If Heavey pulls it off — the deal won’t go through until January — Tullow would have a market capitalisation of £2.9 billion (€4.3 billion). Having paid $500m for Energy Africa 18 months ago, the deal will also make Tullow one of the biggest oil independents in Africa. Heavey is building a reputation as independent oil’s big game hunter.
The Dublin accountant shrugs off suggestions that political instability on the continent could spike the company’s plans and that up to 70% of profits from any successful oil and gas finds can go in tax and royalty payments to governments there.
“We have operated in countries where there have been coups, but the incoming regime has never sought to change the terms of our contracts,” he said.
“By contrast, in the UK the taxes imposed can be changed each year in the budget and Gordon Brown [the chancellor] has done this twice to us in relation to the North Sea. I’ll take my chances in Africa.”
OIL in Africa is certainly not without risk. Last Tuesday, just 24 hours after Tullow’s £581m agreed acquisition of Hardman was announced, the Australian group told the stock market it had found a dry gas well in Mauritania. It was hardly an auspicious start to the pending nuptials. The Flament-1 gas project had been one of Hardman’s better prospects.
Heavey was unfazed by the news. “We know their assets very well, nobody has a better database than us of mineral resources in Africa,” he said. “We think we can extract a lot of value from them.”
On the plus side for Heavey, the fact the well was dry probably rules out a bidding war for the Perth-based company. Dana Petroleum, a UK independent oil and gas company, had been mentioned in dispatches as a possible rival bidder.
Heavey is so confident about the deal that Tullow did not even conduct any due diligence on Hardman before agreeing a price. This was in large part down to the fact that the pair are joint venture partners in the Albertine Basin in Uganda, where two discoveries have been made that could contain 300m barrels of oil.
“This gives us an advantage over other companies, there’s no doubt,” he said.
Tullow’s offer represented a 54% premium to the value of Hardman’s stock before the deal was announced. It immediately begs the question as to whether Heavey has paid too much.
One executive at a rival exploration company, who asked not to be named, said: “It looks like a rich price to me. Hardman has nowhere near the reserves and production that Tullow’s other big deals [North Sea and Energy Africa] had. It’s gambling on the up-side from the projects in Mauritania and Uganda. But to be fair, it [Tullow] is better placed to make a call on whether it is a gamble or not.”
In a note to clients on the proposed transaction, James Hubbard, an analyst with UBS Investment Research, said the deal was “strategically sound but expensive”.



UBS is predicting long-term oil prices at $41 a barrel, which it says would give Hardman a net asset value of $690m. With Tullow paying $1.1 billion for the company, Hubbard said this implies a dilution of 34p a share for Tullow. UBS has reduced its price target for Tullow from 415p a share to 375p and left its neutral rating on the stock in place.
It’s not a view shared by Heavey. “Brokers have been wrong about us before. If the oil price stays above $50 a barrel then this deal will work for us, given the reserves that Hardman has.”
Besides, Heavey believes oil prices will breach $100 over the next 12 months, spurred by a “world event” and increasing demand, particularly from China and India.
According to Gerry Hennigan, an analyst with Goodbody Stockbrokers, Tullow is paying about $10.50 for every barrel of oil reserve held by Hardman. This is roughly twice what the company paid in 2004 when it acquired Energy Africa in a £280m deal.
“Obviously the oil price was lower two years ago than it is now, but it’s still a step up on its last big deal,” Hennigan said.
He recently downgraded Tullow from a buy to an add, although he believes this is potentially “a good deal” for the Irish company. “He’s [Heavey] taking a long-term view and a lot will depend on where the price of oil goes in the future.”
Heavey seems to have a knack for buying big assets in advance of price rises in oil and gas, which then help to pay for the deals. It remains to be seen if he can pull this trick off again.
Oil prices have softened since July, easing back by 20% to just over $60 a barrel, helped by a mild hurricane season, an easing of political tensions in the Middle East and a year-on-year increase in stock levels. Most analysts, however, see this as a blip.
Kevin Norrish, a commodities analyst with Barclays Capital in London, is forecasting average oil prices next year of $76 a barrel, suggesting a good potential up-side for Tullow from this deal. Norrish believes the balance between supply and demand is too tight at present.
Paul Harris, head of energy and emissions at Bank of Ireland Global Markets, believes prices will hit $80 next year. “I’d be bullish about oil prices for the simple reason that there is less oil being discovered and it’s being used at a quicker rate.”
Tullow’s latest acquisition was agreed over dinner by Heavey and Simon Potter, Hardman’s chief executive, in a London restaurant three weeks ago.
Tullow has offered to pay for the company through a mix of cash and shares in a move that will lift its production of oil and gas next year by 10%. It will also boost its oil reserves by 30% and give it access to licences in Uganda, Mauritania, Tanzania, Guyana, Surinam and the Falkland Islands.
If the deal goes through, Tullow will have 16 extra wells to drill next year and double the number of acres to prospect. Heavey also believes he can save up to $30m a year by merging the two companies, with Hardman’s head office in Australia set to close.
Hardman does, however, come with a health warning. In April the company raised £65m in a placing of new shares at 98p each: it was trading last week at just above 80p a share. This reflects production problems at the $700m Chinguetti oil development in Mauritania, where Hardman has a 20% stake. Production began in February, but daily output has not lived up to expectations.
Hardman told the stock exchange in August that it was unlikely to recover more than 50% of the 123m barrels of oil anticipated under its current drilling plan.
Potter accepted that the poor drilling results in Chinguetti had taken the shine off the stock and bemoaned the fact that Australian institutions had sold large volumes. At one point this year, institutional investors owned 40% of Hardman’s equity. That has since dropped to just 10%.
Hardman had been a long-term target for Heavey and its difficulties over the summer prompted his offer to acquire the company. “Chinguetti turned out to be heavily faulted, but we’re not concerned about this, we think we can make it work and the company has other interesting assets,” Heavey said.

Job Langbroek, an analyst with Davy, said Tullow’s move on Hardman was well timed. “Generally his [Heavey’s] timing of deals tends to be good,” Langbroek said. “He’s done this deal after the production issue in Chinguetti and after Hardman had raised fresh capital. He also gets 100% control of the project in Uganda, which gives him an excellent footprint in Africa.”



With Russia and the Middle East seen as no-go areas, some governments in South America renationalising their oil and gas assets and the North Sea and Gulf of Mexico coming near the end of their natural lives, Africa is seen by many as the best location for oil exploration. Heavey is in that camp.
In addition to Uganda, Tullow has interests in Gabon, the Ivory Coast, Congo, Equatorial Guinea and Namibia. This year it has added projects in Angola and Ghana with near-term development potential.
Tullow is now one of the leading independent oil companies, operating at a level below BP, Shell and Total. “They’re the Premiership and we’re in the second division,” said Heavey.
Having acquired big assets over the past five years, Heavey could find Tullow is now on the radar of the super majors, according to John Teeling, the Clontarf entrepreneur who owns a string of small, quoted exploration companies.
“It has some significant assets in west Africa, Mauritania and Uganda, which would be of interest to a super major looking to get exposure to the region,” he said.
Heavey, who owns 2% of Tullow’s equity, said he has no intention of selling. “We are not for sale. We have a pretty tight control of the shareholder base and if we don’t want to be sold then we won’t be.” But given that Tullow is publicly traded in Dublin and London, it’s a decision that might be taken out of his hands. “He would say that, wouldn’t he?” Teeling said. “At the end of the day, he mightn’t have any choice. If somebody makes a good offer and the institutions want to take it, there’s probably not a lot he could do.”
A SALE is certainly not on Heavey’s mind. The Irishman believes there are more acquisitions out there and he could do another deal in 18 months. If the Hardman deal goes through, as expected, Tullow will join the FTSE 100. Cairn Energy will be the only other oil independent in such exalted company. “We’ll suddenly be a blue-chip,” he admits.
Heavey won’t name the financial institution that showed him the door more than a decade ago, but, happily for the manager, Tullow returned as a customer.
“There’s no hard feelings. They had a job to do, I understand that. And to be fair we probably should have gone out of business in the early 1990s.”
FROM A CORNER OF KILKENNY TO FAR-FLUNG FIELDS
TULLOW OIL’S meteoric rise over the past five years has been one of the biggest success stories in Irish corporate history, helping Aidan Heavey to win the prestigious Ernst & Young entrepreneur of the year award in 2005 — but the company is also one of the republic’s longest overnight success stories.
The company’s first licence, in 1985, was to explore a patch of land in Castlecomer, Co Kilkenny. Over the next 15 years, Heavey took the oil minnow to far-flung fields in Senegal, Panama and Pakistan.
Tullow turned a corner in 2001 when it paid BP £201m (€297m) for a clutch of gas fields in the North Sea that most people thought were on their last legs. Heavey reckoned that with a bit of tender loving care the fields could generate the cash he needed to fund exploration elsewhere.
It was a bold move that paid off handsomely with gas prices, and Tullow’s revenues, quadrupling in five years. The fields helped to propel it to a stage where it generates a lot of spare cash every year and had revenues of £445m last year.