equities research

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In recent weeks, the HDR share price has been trading consistently above the Tullow Oil cash offer price of
A$2.02 per share. The premium reflects the Tullow Oil share price and the fact that HDR shareholders may elect
to receive 0.22289 Tullow shares for each HDR share. On the basis of the 7 December Tullow share price
and the exchange rate and considering the limited number of Tullow shares available for the deal, we have
determined that the HDR share price captures the pro-rata value of the Tullow shares available for the deal and
the remaining component that would have to be taken as cash.

Implications

In recent weeks, major institutions have been buying HDR shares at prices above the A$2.02 cash offer price.
There are now five institutions that hold 35% of HDR between them. There is speculation that these institutions
may be aiming to extract a higher bid from Tullow. For that reason, we believe it is worth holding the shares past
the shareholder vote on 18 December 2006. However, if the deal is approved, those shareholders who do not
wish to hold UK-listed shares may wish to sell into the market rather than accept the cash offer, as this would
allow them to capture 40% of the premium associated with the 0.22289 Tullow share aspect of the offer.

Investment Opinion

After spearheading three major discoveries in West Africa, HDR began a new stage of its life in February 2006,
with production commencing at the Chinguetti oilfield offshore Mauritania. However, since then, the joint venture
has faced operational difficulties, which are being addressed. Exploration work in Uganda has provided multiple
wells, which appear to be economic. HDR is currently subject to a takeover offer from its partner in the Ugandan
operations, the UK-listed Tullow Oil.
At Chinguetti, output reached a peak production rate of 75,000 bbl/day within two weeks. Since then, production
has been hampered by operational issues. Our favourable view for HDR over a 12-month time frame has been
mirrored by its Ugandan JV partner Tullow Oil, which has entered into a scheme of arrangement to acquire HDR.
There is the possibility that another offer could be made by a third party or major shareholders may be able to
extract a better offer from Tullow.

Recent share price activity

In recent weeks, the HDR share price has been trading consistently above the Tullow Oil cash offer price of A$2.02 per share.
The premium is a reflection of the Tullow Oil share price and the fact that HDR shareholders may elect to receive 0.22289
Tullow shares for each HDR share. The factors determining the current HDR share price are the following:
The closing price for the UK-listed Tullow shares on 7 December 2006 was 405 pence. Using today's GBP/AUD exchange rate
of 0.4019 and the 0.22289 conversion factor, the HDR shares are theoretically worth:
405 / 0.4019 x 0.22289 = A$2.24
However, there is a limit of 65M Tullow shares available for this offer. Given there are currently 727.25M HDR shares on issue,
162.10M Tullow shares would be required if every HDR shareholder were to accept the 0.22289 Tullow shares instead of the
cash. Tullow has already stated that in the event of the demand for the share component of the offer exceeding the 65M shares
available, the oversubscription will result in a pro-rata scale back. Therefore, the availability of the Tullow shares needs to be
factored into the calculation.
If it is assumed that every HDR shareholder elects to receive Tullow shares, the following pro-rata scale back will occur:
65.00 / 162.10 = 40%
Therefore, each HDR share would receive 40% of the Tullow share component of the offer and the remaining 60% would have
to be taken as the cash component. Converting this into an equivalent A$ value is the following calculation:
( A$2.24 x 40% ) + ( A$2.02 x 60% ) = A$2.11
This is just above the closing price for HDR on 8 December 2006.

Institutional activity

In recent weeks, major institutions have been buying HDR shares at prices above the A$2.02 cash offer price. Currently,
Deutsche Bank holds 7.15% of HDR, JP Morgan holds 6.07%, UBS holds 6.86% and Newton Investments 5.43%, and Merrill
Lynch has a 9.6% stake dating back several months. While the possibility of a competing bid emerging is becoming less likely,
there is now speculation that these five institutions may be aiming to extract a higher bid from Tullow. The logic behind this is
that Tullow requires 75% majority at the HDR shareholder vote on the proposal on 18 December 2006, and given these
institutions hold 35% of the shares, they could block the deal.
While this is possible, it is worth considering that, assuming the deal is approved, a number of HDR shareholders may not elect
to receive the Tullow shares. This is because the Tullow shares are to be listed in the UK only and many smaller shareholders
may not wish to hold shares listed on a foreign bourse or may not have the means to sell them if they did. Only if there were
sufficient numbers of HDR shareholders who chose to accept the cash offer, the pro-rata calculation detailed above would
improve. Accordingly those who do elect to receive Tullow shares would receive a higher value due to a larger percentage of
the transaction coming in the form of Tullow shares. This could be incentive enough for the major institutions to take the
positions they have in HDR.

Summary

All the calculations above are dependent on the Tullow share price and are therefore changing on a daily basis. While we agree
it is less likely that a competing bid will emerge, there remains the possibility that Tullow may be forced to lift its offer. For this
reason, we believe it is worth holding the shares until the shareholder vote on 18 December 2006. However, if the deal is
approved, those shareholders who do not wish to hold UK-listed shares may wish to sell into the market rather than accept the
cash offer, as this would allow them to capture 40% of the premium associated with the 0.22289 Tullow share aspect of the
offer.