British Borneo rights on track

THE INVESTMENT COLUMN

When a company, with shares trading at 378p, stages a two-for- five rights issue at 310p, the arithmetic points to a notional ex-rights price of 359p. It is quite some indication of the enthusiasm in the City for the oil explorer British Borneo that in just those circumstances yesterday, its shares actually jumped to 410p.

Since 1989 British Borneo has transformed itself from what was essentially an investment trust, a portfolio of oil company shares, into a well-regarded and focused oil exploration and production company. The building of that business, however, has not been at the expense of shareholder value - growing cash flow and earnings have easily funded a good dividend and the share price has quadrupled since the beginning of 1992.

Analysts left yesterday's meeting with the company impressed by its strategy of diversifying out of existing strongholds in the North Sea and shallow waters of the Gulf of Mexico and into the Gulf's deeper waters. It is an oil region of immense promise that has attracted a lot of interest.

The big players, however, are really only interested in developing fields where they can retrieve more than about 75 million barrels of oil. That leaves plenty of work for smaller companies, especially if they can create cost advantages.

British Borneo believes it has a significant competitive advantage in the area, partly thanks to a recently announced alliance with an American company that has developed a low cost production platform called SeaStar. Thanks to an agreement with Shell to appraise and develop a field called Morpeth, Borneo has become one of the first independent exploration companies to establish a significant presence.

The rights issue, to raise pounds 54m, was accompanied by full-year results for the 12 months to December, showing a useful rise in pre-tax profits from pounds 11.4m to pounds 13.6m. Despite higher petroleum revenue tax last year, post-tax earnings increased to 23.1p (21.1p), allowing an unchanged dividend of 7.5p.

Financially strong and with good asset backing, the shares look nicely underpinned but it would be surprising if, following their recent run, they didn't pause for breath.