Friday 2 December 2016

Mystery buyer builds 5pc stake in Tullow Oil

Published 24/11/2016 | 02:30

Tullow Oil boss Aidan Heavey
Tullow Oil boss Aidan Heavey

A MYSTERY buyer is thought to have secured control of more than 5pc of Anglo-Irish exploration firm Tullow Oil using derivatives that allow it to hide its identity.

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Tullow Oil, with a market capitalisation of £2.6bn (€3bn), owns stakes in two prized assets - the huge TEN and Jubilee oil fields off the west coast of Africa.

A filing with the stock exchange yesterday shows that JP Morgan Chase and affiliates have an interest of more than 5pc in Tullow, most of it held via cash-settled equity swaps.

Analysts have repeatedly flagged Tullow as a potential takeover target.

Derivative instruments have been used by a number of firms in the past to acquire stakes in target companies without having to reveal their own identity.

The disclosure by JP Morgan Chase showed that its notifiable interest had suddenly increased from well below a 3pc threshold where it would have been required to disclose the position, to 5.02pc.

Prior to making the disclosure to the London Stock Exchange yesterday, JP Morgan Chase had an interest in less than 1pc of Tullow, whose chief executive is Aidan Heavey.

The bank has now revealed that it controls over 4.2pc of Tullow via the cash-settled equity swaps. Those derivatives enable buyers to acquire interests in firms via brokers without holding the underlying shares, or their name being revealed.

There can be a number of reasons for that, including a straightforward interest in the price performance of the equity or an unwinding of a previous "short" bet that the stock would fall. In Tullow's case that could be linked to OPEC's oil output decision next week.

But cash-settled equity swaps have also been used in a number of high-profile cases where acquirers have built up stakes in targets under the radar.

In 2008, Porsche built a more than 30pc stake in Volkswagen in advance of what would ultimately be a failed takeover attempt. When Porsche disclosed the position, Volkswagen's shares spiked.

In 2010, luxury goods giant LVMH revealed that it had amassed a 17.1pc stake in rival Hermes, taking investors by surprise. LVMH also used cash-settled equity swaps to secure that stake. Using those instruments enabled it to shield its activity from the market until it chose to reveal it itself.

There's no suggestion, however, that any takeover bid will be launched for Tullow Oil by the owner of the cash-settled equity swaps revealed yesterday.

Mr Heavey said during the summer that he believes Tullow Oil's prospects are best served as an independent entity.

"There's a lot of talk about major oil companies buying Tullow but the last few years have caused a dent in the pocket of most of the companies," he told the 'Sunday Independent' in July. "Nobody has the cash any more, and we're quite a big bite."

Many oil companies are still busy fixing their own balance sheets, rather than even contemplating acquisitions. But Tullow's assets could still be of interest to a cash-rich national oil company, for instance.

Despite its £2.6bn market cap, Tullow has a huge $4.7bn (€4.45bn) net debt position. Mr Heavey said Tullow will begin to reduce that to about $4bn (€3.7bn) next year.

Cashflows from the TEN field off the coast of Ghana will help. The first oil flowed from the field in August. Tullow is the operator of TEN and owns just over a 47pc of it. It owns 35pc of the nearby Jubilee field.

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