Shallow style pays off for Enterprise

Investment Column
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Enterprise Oil looked a company with nowhere to go after it failed to buy Lasmo two years ago. Thanks in part to its special expertise in Palaeocene rocks - the shallower strata above the better-known Jurassic that produce much of the North Sea's oil - the company has surprised investors by finding a role and a future.

Enterprise followed the strata from the Nelson field, where it found oil in the Palaeocene under the noses of the majors, to Norway and Denmark where it now has sizeable reserves. It is what you might call niche geology.

The icing on the cake was the news yesterday that reserves in which Enterprise participates onshore in Southern Italy have reached 100 million barrels and production could rise to 100,000 barrels a day in a few years' time. It is now clear that the company has the exploration and development capability to more than replace its output to at least 1999.

It was a shortage of future production that led Enterprise to bid for reserve-rich Lasmo in the first place and put a cloud over its prospects when the attempt failed. This is an example of how a failed bid can have a salutory effect, by forcing management to improve performance organically.

The results for the year to December showed pre-tax profits more than doubled to pounds 201m, net profit 43 per cent higher at pounds 101.6m and earnings per share up 56 per cent to 18.3p.

The dividend was unchanged at 16p for the year, despite the higher profits and a dramatic improvement in cash flow and gearing. But given the volatility of oil prices, it makes sense to restrain dividends to conserve cash to cover pending development costs.

Investors, dubious until yesterday about the recovery story Enterprise has been peddling, were convinced at last, and the shares rose 33p to 420p. After underperforming the whole of the oil and gas sector apart from British Gas over the last 12 months, Enterprise has now made a convincing case for an independent future. The potential for the shares, however, is clouded by the strong possibility of a sharp fall in the oil price in the spring. Hold.