View from City Road: Raised eyebrows at Lasmo results

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The Independent Online
A MILD flurry of interest in Lasmo shares accompanied the oil exploration and development company's better-than-expected interim figures yesterday. It lasted about as long as it took the City to find the interest paid/received line. The surprise that greeted the discovery that this showed a credit of pounds 6m was almost audible.

Lasmo has net debts of about pounds 914m thanks to the messy purchase last December of its rival, Ultramar. The gloomier brokers had expected a hefty interest charge to contribute to losses of up to pounds 10m. Instead the surprise capitalisation of a one-off pounds 22m 'holding charge' on Ultramar's downstream activities - sold in July - plus pounds 27m of interest on the costs of bringing fields into production meant Lasmo could show a post-tax profit of pounds 26m (1991 loss pounds 2m).

This energetic re-allocation of costs between the balance sheet and the profit-and- loss account was presumably accounted for by Lasmo's determination to maintain the interim dividend at 2.3p a share, a move that cost it pounds 17m. Lasmo shares have been reeling in recent weeks, losing more than a quarter of their value in the past month, partly in anticipation of a cut. Nevertheless, a lower final dividend still looks likely - an impression that a cautiously worded policy statement about 'maintaining dividends in real terms over the longer term subject to financial prudence' did little to dispel.

With that prospect hanging over the shares, and with a troubled two years ahead before Lasmo starts to benefit from the Ultramar acquisition, the investment outlook is poor. On the gloomier assessments, the shares, at 134p, are backed by net assets of about 160p. With a discount of, say, 25 per cent, that might indicate a floor for the shares of 120p. US buying, boosted by a weak dollar, might see a run up to 140p- 150p. But in that case a substantial number of unwilling Ultramar investors will probably take the opportunity to sell. In the absence of that ever-anticipated, ever-elusive bid, or an oil price significantly higher than dollars 20 a barrel, that will cap the price.

On fundamentals, investors should expect to have to hang on for at least two years. Unfortunately, soon after Lasmo starts looking more attractive it will also start needing more reserves to develop. With capital spending peaking this year, it is unlikely to get those replacement reserves from its own portfolio. Which is roughly where it was before it bought Ultramar. Same problem, bigger company.