The Investment Column: Price is not right for Clyde

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The Independent Online
The tempo of the Gulf Canada bid for Clyde Petroleum increased this week as both sides engaged in a brave attempt to interest investors in the arcane mysteries of oil company valuation. For those of an anorak tendency, the methodological details have a kind of dour fascination but it is hard to escape the conclusion that the facts being marshalled by bidder and target alike are more than usually selective.

Simple things first. Clyde would appear to have essentially given up hope of remaining independent. Halfway through the 60-day bid timetable, the dispute has boiled down to price. Either Gulf will convince investors that its 105p tabled offer is full and generous, or it will up its offer, or a third party will ride over the horizon on a white charger.

As for the details, Gulf's arguments are as follows. Clyde should be valued as UK oil companies always have been, relative to its underlying net asset value, essentially the net present value of the expected cash flows from the assets it owns. With analysts' estimates for that between 70p and 80p, Gulf claims its 105p represents a sizeable premium for control. If Clyde thinks it is worth so much more, asks Gulf, why have its directors sold more than 450,000 shares in the past year at prices between 63p and 81p?

Clyde claims it is not like most small UK exploration stocks, long on hope value but short on real revenues; it is more akin to small US oil producers, with reliable, predictable production, and should be valued on the US model which is a multiple of historic cash flows.

Getting a US oil consultant to put its name to a suggested range of multiples (5.3 to 6.4 times), Clyde calculates a fair value, on the basis of 1996's 27.6p cash flow, of between 146p and 177p. Chip in a premium for control, Clyde says, and we might think about it. By the way, our directors had more shares at the end of 1996 than at the beginning despite the sales.

Clyde now has 10 days more before day 39 of the bid timetable, which is the last date it can furnish new information to shareholders. Gulf then has a further week to come up with a final offer, which will remain open for another two weeks during which a white knight may emerge.

Key to the outcome will be whether or not Clyde comes up in the next 10 days with an independent assessment from Energy Resource Consultants of the value of its assets - essentially playing the game according to Gulf's rules. If it can secure a high enough figure, Gulf will be more or less forced to up the ante. If it can't, or chooses not to publicise the figure, then Gulf might have an argument that Clyde's cash flow approach is too optimistic. Whichever, with the shares at a high of 123p, there is time to wait and watch.