Oil firms in firing line: Enterprise bid for Lasmo is likely to spur more merger moves

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The Independent Online
ENTERPRISE OIL'S pounds 1.4bn takeover bid for Lasmo has started a game of name-that- bidder in the oil sector, with Arco, British Gas, Mobil and PowerGen among the mooted predators.

The industry is rife with speculation of more takeovers and mergers to come. Clyde Petroleum, Goal and Premier are among those regarded as targets.

One factor is that institutional investors who have seen the value of their holdings in exploration stocks plummet in the past few years are applying increasing pressure for mergers to reduce overheads.

With Brent crude selling at about dollars 15 a barrel, trading conditions are tough. The world is awash with surplus oil and many companies are struggling.

The long-term outlook also looks grim, as few expect oil prices to improve significantly during the rest of the decade, forcing the industry to concentrate on cost-cutting.

Inevitably, the most vulnerable groups, such as Lasmo, are coming into the firing range of competitors. Lasmo has been through a torrid time ever since it took over rival Ultramar for pounds 1bn three years ago.

The takeover pushed up Lasmo's borrowings to unsustainable levels just as the real price of crude was heading towards a 20-year low.

The problems were exacerbated by Lasmo's high cost base, plunging the group into a combined pounds 500m loss over the past two years.

Enterprise has fared much better thanks to its share in two of the North Sea's newest and relatively low-cost oilfields, Scott and Nelson. Rising cash flow from these has put it in a strong position to expand.

Graham Hearne, Enterprise Oil's chief executive, believes Lasmo would make a good fit, giving the enlarged group bigger international clout. 'You need size and scale to make meaningful and lasting progress,' he declared after the bid was launched last Thursday. 'This is a big boys' game and Lasmo will give us the next step we need.'

But the rationale has received a sceptical response from the City. Both Lasmo and Enterprise are already large, and some experts doubt whether size alone will deliver any extra benefits for shareholders if they are merged. This view appears to have been reflected in Enterprise's share price, which has fallen by almost 6.5 per cent since the bid was launched.

Certainly, the combined group, with a market value of about pounds 3bn, would be one of the world's biggest independent oil and gas producers. It would boast proven and probable reserves of about 1.6 billion barrels and production of about 325,000 barrels a day.

But many companies are focusing activities into key areas to reduce costs instead of spreading resources across the globe. Indeed, analysts attribute Enterprise's success since its privatisation in 1984 to its heavy concentration in the North Sea.

In contrast, part of Lasmo's problems can be blamed on the hundreds of millions of pounds it frittered away on a huge worldwide drilling effort without much success.

'Companies will have to devote time, capital and become more focused on specific areas rather than adopting a scatter-gun approach,' said David Basham, oil analyst with Kleinwort Benson.