Ireland's Tullow Oil Feasts On Leftovers

The indie operator is cleaning up in places the majors passed over

Twenty years ago, Irish accountant Aidan J. Heavey got a tip that changed his life. A banker friend told him that Senegal was looking for a company to develop the country's oil and gas fields, too small to be of interest to the biggies. "Like most people in Ireland back then, I knew little about oil except what I learned from J.R. on Dallas," he recalls. Undeterred, Heavey flew to Senegal, reading an oil primer en route to learn the lingo.

He must have been a quick study. Heavey landed the contract. Returning to Ireland, he took out a bank loan, mortgaging his house, and hit up former employer Tullow Engineering for backing. Heavey found a geologist through the yellow pages and bought a used oil rig in Texas, shipping it and its U.S. crew to Senegal. The rig made it, but the crew didn't; none of them had passports. Eventually, a crew was found. "Our first well was a dry hole," the 51-year-old says. "A hell of a shock."

Today, thanks to shrewd deals and impeccable timing, Tullow Oil PLC ranks among Europe's top independent oil companies, with a market cap of just over $2 billion. The company, which will report 2004 results in April, is expected to double sales and profits, to $430 million and $185 million, respectively. Its Dublin and London traded shares have soared more than 70% in the past year.

Tullow is one of a hardy band of European independents riding the crest of high oil prices. The wave of mega mergers of the past five years have opened up opportunities for smaller players as the giants divest older fields to chase bigger and riskier bets elsewhere. For companies like Tullow that focus on squeezing out greater efficiency, these cast-off fields provide a steady revenue stream to fund new exploration. And with oil prices at record highs, a crop of new players hopes to emulate the success of more established independents like Tullow and Cairn Energy, an Edinburgh-based outfit with sizable reserves in India.

A sharp drop in prices could end this game, but Tullow seems to have staying power. In 20 years, the company has amassed more than 90 production and exploration licenses in 16 countries. Production currently averages 55,000 barrels of oil equivalent per day (BOEPD). That's paltry next to the 4 million BOEPD of BP PLC (PLC ), but bolstered by high oil prices, it gives Tullow cash flow -- $191 million as of mid-2004 -- and the muscle to pounce when deals crop up. Heavey plowed $1 billion into acquisitions in the North Sea and Africa last year. "Tullow has been able to grow quickly because management has the guts to complete big transactions," says Richard Slape, oil analyst at London investment bank Seymour Pierce.

Tullow's opportunities were at first limited to small, mature fields in Bangladesh, India, Pakistan, and Syria. "The areas we really wanted to get involved in -- the North Sea and offshore West Africa -- were all controlled by the majors," says Heavey. But in 2000 oil giants started shedding assets in established areas, and Tullow bought some of BP's pipelines, offshore platforms, and gas fields in the North Sea's South Basin. Not only did gas prices skyrocket a year later but the infrastructure has also become a major asset as other companies pay Tullow to use it.


In May, 2004, Tullow pulled off its biggest deal yet, the $570 million takeover of Energy Africa Ltd. Acquiring the South African company more than doubled Tullow's oil reserves. Since then, production has increased by 20%. And with oil prices now 45% higher than a year ago, the price tag of $5.40 per barrel looks cheap.

Lately, tullow has expanded further in the North Sea. In December it bought the Ketch and Schooner gas fields in the SouthBasin from Shell Oil Co. (RD ) and Exxon Mobil Corp. (XOM ) for $382 million. Rhodri Thomas of Wood Mackenzie thinks Tullow could produce 200 million cubic feet of gas a day by 2006, up from 175 million now. The company should continue to benefit as giants sell off mature assets. "If BP or other super majors want out, Tullow is their first call," says Bruce Evers of London's Investec Securities.

With a portfolio balanced between gas and oil, and exploration and production, Tullow's chief believes his company is protected against major price shocks. By budgeting exploration prospects at $20 per barrel and development deals at $25 per barrel, Heavey has built in a sizable cushion. When prices are high, he'll focus on exploration and development. And when prices fall, he'll acquire.

Another way out is to sell. Rumors are always swirling about a bid for Tullow. Heavey says there are no such plans, but he knows how to go with the flow. Negotiating concessions in Iraq in the late 1980s he and his colleagues stopped for coffee along a mountain road. Greeted by men armed with machetes and kalashnikovs, Heavey saw they had wandered into a smugglers' camp. Pulling out Cuban cigars, Heavey and his co-workers suddenly found themselves among friends. In the oil patch, it pays to be quick.

By Kerry Capell in London

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