Outlook: British-Borneo

Outlook: British-Borneo

THE FORMATION of British-Borneo Oil & Gas does not have quite the same ring or breathtaking scale of, say, the BP-Amoco merger. But in a small way, it will have as much, indeed perhaps more, significance for the minnows that swim around in the second tier of the oil exploration sector.

Not that British-Borneo used to be that small. Until the collapse in oil prices, British Borneo was worth not far short of pounds 1bn, against a closing value last night of half that.

As the name suggests, British-Borneo has a colonial pedigree - it was founded in 1912 on the strength of a fistful of exploration licenses for what was then British North Borneo, and is now part of east Malaysia. Later it was turned into what was effectively an investment trust, staying that way until 1989, when the tax perks ran out and the present chief executive, Alan Gaynor, brought it back to life as an active exploration company.

Yesterday's agreed all-paper acquisition of Hardy Oil & Gas marks a modest attempt to recreate the glory days of Empire. The press release bangs on about strategic, asset and cash flow fit. On paper at least, the merger looks a compelling blend of British-Borneo's production flow from the Gulf of Mexico with Hardy's longer-term portfolio of interests and whizz- bang technology.

The deal also offers a dignified exit for Hardy, which sweated to get its pounds 86m rights issue away in July. With the collapse in the oil price, Hardy is struggling to keep its head above water. For British Borneo, however, there is the prospect only earnings dilution, for the time being at least - hence yesterday's 13 per cent retreat in the shares. There is a need for consolidation in the exploration sector, but less of an appetite for yet more shares. For one of the oil majors, Hardy represents nothing more than spare change. Industrial logic is no substitute for value, and if someone could be persuaded to pay cash for