British-Borneo shares slump after oil group says it has no bidder

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SHARES IN British-Borneo, the independent oil exploration group, fell by more than a third yesterday after the group announced problems in the Gulf of Mexico and said it was not in talks with a potential bidder.

British-Borneo shares fell 74.5p to 121p on the disclosure. The twin burst of bad news worsened investors' fears about smaller oil producers, fears that have kept their shares lagging while the multinationals have reflected the full benefit of a 1999 oil price rise from $10 to $25 a barrel.

The result has been to make minnows cheap compared with the majors, giving the big groups a huge opportunity to use their inflated share prices to make easy takeover bids.

British-Borneo is the only independent exploration and production company operating in the deep water of the Gulf of Mexico, which can rival the North Sea for hostility and where even BP Amoco has had trouble. But British-Borneo's statement underlined the independent companies' dependence on continued good news.

In recent weeks the company has brought its Allegheny field on stream on schedule with three producing wells. However, two of these wells have been disappointing and one has been shut in. This overshadowed the announcement that a fourth production well was being drilled.

While BP's Gulf troubles were submerged in its global operating results, British-Borneo has no such luxury. It has had to scale back expected production in the fourth quarter of next year from 90,000 barrels of oil equivalent per day (boepd) to 75,000. That will take estimated average production for 2000 down from 67,000 boepd to 60,000 boepd. As if that were not bad enough, the group's spending on its two Gulf fields - Allegheny and Morpeth - is going to have to more than triple, from $20m (pounds 12.5m) to $65m.

The absence of a potential bidder for British-Borneo took even more out of the share price, but a source close to the company stressed that last month's reference to a possible bid was a technicality which had been insisted upon by the City Takeover Panel. It appears that there never was a specific bidder, and analysts believe that one is unlikely to emerge until the company's Gulf headaches are resolved. This will increase the apprehensions of other small and medium-sized oil producers.

Alan Gaynor, British-Borneo chief executive, said: "I think the sector is becoming much more stratified. For a company like us, approaching the dangerous middle ground, the question is whether to get bigger or get smaller."

Lasmo shares rose 5.25p yesterday to 124.5p on a weekend report that Conoco might launch a bid for it. A Lasmo spokesman refused to comment, but pointed out there would continue to be such speculation until the stock market gave the independents credit for their true asset position. These companies are acutely conscious that they are hamstrung by a new accounting convention, FRS11, that makes them base their asset values on the year-end oil price. Those with 31 December year-ends had to do last year's asset calculations on a $10 oil price, and it will be several months before the latest oil price comes through in the 1999 annual reports.

Despite the fact that Dana Petroleum shares have performed well this year, jumping from 4p to 15p, chief executive Tom Cross points out that analysts estimate Dana's assets to be worth between 16p and 25p a share. "It does leave us vulnerable," Mr Cross said, "because the majors will simply buy into areas where they do not have exploration rights."

But the dilemma for the stock market is to separate the shares of genuinely undervalued oil producers from those like British-Borneo that are liable to deliver news that can send their share price crashing.