Tullow Oil Announces $372m Norwegian Deal

Published in Company Comment on 11 December 2012

The shares of Tullow Oil (LSE: TLW) slide as it buys a Norwegian explorer.

The shares of Tullow Oil (LSE: TLW) dived 65p, or 5%, to 1,191p during early trade this morning after the FTSE 100 (UKX) member revealed the purchase of Spring Energy, a Norwegian exploration company.

Tullow said it would pay $372m, equivalent to roughly £233m, for Spring. The oil group also said bonus payments of up to $300m would be paid depending on Spring's exploration results.

Spring holds 28 offshore licenses that cover approximately 18,000 square kilometres across the North, Norwegian and Barents Seas. Tullow claimed that Spring had made six commercial oil discoveries from twelve wells drilled since 2008, and that Spring would drill a further 16 wells during the next year or two.

Tullow also reckoned Spring's licence portfolio could contain in excess of 230 million barrels of "risked prospective resources".

As well as the Norwegian deal, Tullow announced today it would take offers for various gas assets within the North Sea. The blue-chip admitted these assets were now "non-core" to the group and no longer fitted within its "tight light-oil focused portfolio".

Commenting on the deals, Aidan Heavey, Tullow's chief executive, said:

"Active portfolio management is a key part of Tullow's exploration-led strategy. These transactions are part of an ongoing process of carefully refocusing our business and ensuring efficient allocation of capital by monetising non-core assets and re-investing the proceeds in high potential oil exploration."

"Our Southern North Sea gas assets are therefore no longer core to Tullow's business, which has a clear focus on light oil in Africa and the Atlantic Margins. The acquisition of Spring adds a material portfolio of oil exploration assets and high quality people that will provide a superb foundation for building our portfolio and expertise in the highly prospective North Atlantic."

Prior to today, City experts that followed Tullow were expecting current-year earnings of about 50p per share and a dividend of around 12p per share. The projections equate to a P/E of 24 and a yield of 1%.

On the face of it, those ratings suggest a lot of Tullow's £11bn market value is based on the oil reserves that may be extracted in the future, rather than those reserves that are already in production.

Still, Tullow's shares have surged 170-fold under the leadership of Aidan Heavey during the last 20 years or so. As such, it may pay to stick with one of the sector's most talented executives.

Of course, whether today's Norwegian deal, the current valuation and Mr Heavey's phenomenal share-price record combine to make Tullow a 'buy' or a 'sell' remains your decision.

Indeed, you may wish to consult this free Motley Fool report, which explains the factors you need to consider -- and the risks you might encounter -- when evaluating oil and gas explorers. The sector has always provided its fair share of multi-baggers and falling knives that can persuade even the most cautious of investors to take a wild punt.

Anyway, if Tullow's fall is tempting you today, please click here to read the Fool's exclusive oil and gas report before you hit the 'buy' button.

> Maynard does not own any share mentioned in this article.

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