re: cash flow projection brokers take Broker Consensus Estimates...

re: cash flow projection brokers take Broker Consensus Estimates
Last Analyst Update: 24 October, 2006

Strong Buy

Moderate Buy

Hold 6

Moderate Sell 2

Strong Sell

ProspectFcst
0 1 2 3 4 5 6 7 8 9 10

Number of Analysts

Contributing Analysts:
- CREDIT SUISSE - AUSTRALIA
- DEUTSCHE BANK SECURITIES
- CITIGROUP
- MACQUARIE RESEARCH EQUITIES
- UBS
- ABN AMRO
- SOUTHERN CROSS EQUITIES LTD.
- JPMORGAN


HDR directors unanimously support a proposed A$1.47bn acquisition by London Stock Exchange (LSE) listed Tullow Oil plc. Tullow's offer is at a 60% premium to HDR's volume weighted average price in the week prior to the bid. The proposed transaction is to occur via a scheme of arrangement and would see HDR shareholders offered A$2.02ps or alternatively 0.22289 new LSE listed Tullow shares subject to a maximum of 65m new Tullow shares. Australian shareholders are more likely to favour the security of cash. The offer is subject to Australian Court, FIRB and HDR shareholder approval.

Tullow's bid comes as somewhat of a partial `get out of jail free card` for us given we had valued HDR at up to $2.75ps prior to downgrading to $1.95ps in June of this year, after underperformance from HDR's 19% owned Chinguetti oil field in Mauritania. HDR has on occasion traded above $2.50ps and we regret any losses suffered by subscribers who acted on the positive recommendation during these periods. That said we had recommended the stock at $1.20ps levels in early 2004 and higher bids could emerge.


Business Impact: Our HDR valuation remains $1.95ps and the bid strengthened share price sees our recommendation downgraded from Buy to Hold. Attractions are the strong balance sheet, single digit forward earnings multiples and strong exploration program. Negatives are increased development risk, potential for ongoing Chinguetti underperformance and real sovereign risk. FY07 and FY08 earnings forecasts are unchanged at 11.4cps and 21.4cps respectively. Long term assumptions remain a US$60/bbl oil price, A$/US$ exchange rate of 0.76 and a 15% discount rate for Mauritania sovereign risk.

Forecast Impact: --

Recommendation Impact: Downgraded. (Last updated: 25/09/2006

Event Analysis

--
The HDR board says Tullow's offer is in the best interests of shareholders, potentially capturing several years of the risked upside in the company's portfolio, and recommends it in the absence of a superior offer. Just where an alternative offer may come from is anyone's guess but obvious candidates include fellow Mauritanian equity holders Woodside, British Gas and Dana Petroleum to name a few. Woodside could balk at bidding given its already majority 47.4%-53.8% equity in many of the Mauritanian leases, development difficulties encountered to date, and the fact it already sold a 10% HDR holding.

British Gas (BG) may have a more positive Mauritanian attitude. It has 10.2%-13.1% in Chinguetti and Tiof and a well publicised interest in the LNG potential from the Banda and Pelican discoveries. HDR's potentially large 18% owned Flamant gas prospect has only just been drilled with final results awaited. The 5TCF (790mmboe) target could add around 40cps of value to HDR if successful. In conjunction with Pelican and Banda, it could put beyond doubt commerciality of LNG sales into Europe. BG will no doubt be watching proceedings closely.


Dana Petroleum's 41.5%-63.9% operated areas in Mauritania include three PSCs covering Block 1, 7 and 8. With a market capitalisation of only A$2.4bn, HDR's A$1.4bn might be too large for Dana. Tullow's market cap is A$5.9bn while British Gas' market capitalisation is A$56bn. A number of other international oil and gas companies have yet to gain a foothold in Mauritania. HDR would be an attractive entry point. The company's other Atlantic margin assets could appeal as could the Uganda oil, a key attraction for Uganda JV partner Tullow. Testing of the Mputa and Waraga prospects confirms excellent reservoir quality and potentially commercial flow rates. Oil in place is estimated at 100-300mbls with an initial recoverable estimate of 30mmbls excluding near term upside. HDR says the greatest Uganda potential has yet to be tested beneath Lake Albert.


The Hold call is logical given the first bid in takeover situations is seldom the last and there is potential for more than one counter bidder in the mix. Director shareholdings are minimal and the register looks relatively open. HDR has agreed to pay an A$14.7m break fee to Tullow if an alternative bid is successful. This may be of small consequence to genuinely interested parties. HDR shareholders will vote on the scheme in mid December requiring both approval from a majority of shareholders and 75% of the vote. An explanatory memorandum and independent expert's report will be circulated in mid November after which any second bid would be logically timed. Exploration progress will be keenly watched in the meantime. HDR is spending $65m on exploration and appraisal this year and next. HDR's 16.2% Aigette (0.9TCF) in Block 7 and 21.6% Kibaro (130mmbls) in Block 4 are to follow Flamant.