Lasmo ready to strike it rich

Buying its way out of trouble has paid off for one of Britain's biggest oil independents

Lasmo, one of Britain's top two independent oil exploration and production companies, has had a rough time of it over the past decade.

But in recent months there has been a growing impression of a company entering calmer waters. Interim results in August confirmed what many in the City had been hoping for: improved profitability, better cashflow, and a tighter grip on costs - all with a steady drip feed of good news on its oil fields and exploration sites around the world.

It is a far cry from the late 1980s when, battered by a falling oil price, the firm was pushed to the brink of bankruptcy.

It had to resort to going round the City, begging bowl in hand, for a pounds 161m rights issue. In 1991, it embarked on its greatest gamble to extricate itself from the mess it was in: the pounds 1bn acquisition of Ultramar, another UK independent.

This was its biggest ever deal but, in retrospect, Lasmo had little choice - either it paid top whack, or it faced a future with a dwindling asset base, and a sagging share price. But at the time, the company was accused of overpaying, and with some justification. Given its weak balance sheet, Ultramar proved a hard beast to digest. In 1994, the group had to come back with another rights issue, to raise pounds 225m.

But five years on, the Ultramar deal looks to have been vindicated. Many of the group's most promising assets have come from the acquisition: Liverpool Bay, its off-shore gas venture, Markham, in the southern North Sea, another UK gas field, and Hamilton, in the Irish Sea, are all part of the Ultramar legacy, as are its Indonesian assets, now the jewel in Lasmo's crown.

There was a price for its failings as old management was booted out. To replace Chris Greentree, in came Joe Darby, a soft-spoken chief executive, who was outside the traditional mould of the Lasmo grandee.

His first major test came in 1994, when Lasmo faced the trauma of a hostile bid from its greatest rival, Enterprise Oil. Lasmo was able to give Enterprise the slip, partly because the bidder made several major errors. Since then, its fortunes have been improving steadily. In 1995 the company reported its first profits after four years of losses.

The new look Lasmo appeals on several counts. In Algeria it has discovered oil which it describes as "major fields by world standards". To date it has logged up reserves of 82m barrels of oil from its 12.5 per cent stake in the field, which has potential reserves of 1.5bn barrels. Ultimately, Lasmo should be able to up its Algerian reserves to around 160m barrels - significant, on current reserves of 745m barrels. First oil should flow in 1998, but the real impact will probably not be felt until the turn of the century.

The company has always enjoyed a good track record at finding and developing its assets. A more distant prospect would include an application it has to search for oil off the Falkland Islands. The company admits conditions would be testing, but the substantial improvements in deep water technology may yet make it the next big oil province.

Despite continued weakness in the oil price - the recent flurry following President Clinton's latest stand-off against Iraq notwithstanding - the company has energetically focused on lower-cost oil fields.

Although the future looks brighter than it has done for a long time, there are certain caveats. While it has written off valuations of its reserves to reflect the lower oil price, some would say the company failed to bite the bullet properly at the time. If the oil price were to fall substantially, to under $16 a barrel, some of the older, high cost reserves it may carry on its books would become instantly unprofitable. The company says it would be comfortable with an oil price below $16 a barrel.

Political risk, too, plays a factor. Algeria, undergoing a period of political instability, is one trouble spot. The company says it is reassured by the involvement of other oil majors, like BP and Total, however.

Lasmo looks to have put its troubles behind it, while it has a clutch of world-beating assets. Prospects are good for an uplift in the dividend, after several fallow years. The shares justify a buy.