Heritage sells fields to Eni, ends Genel Energy talks

Heritage’s Chief Financial Officer said on Monday that proceeds from the sale would be used to develop Heritage’s existing assets, including non-producing fields in Kurdistan, to make acquisitions and may fund a special dividend of 75-100 pence/share.

“We’ll have a billion dollars in cash so we’ve certainly got the financial resources to undertake some very large transactions,” Paul Atherton told Reuters in a telephone interview, adding the company was targeting companies and field stakes in Africa and the Middle East.

Analysts said the deal made strategic sense, as the Ugandan fields are about to enter a complex development stage, which would be better managed by a big oil company. However, the price was below most analysts’ valuations of the fields -- Morgan Stanley valued them at $2 billion. “The discount reflects Heritage’s cash requirements to fund Kurdish Regional Government and perceptions as a forced seller,” Morgan Stanley said in a research note.

Heritage made large oil finds in the semi-autonomous Kurdish region of Iraq earlier this year. It lacked the cash to develop them alone, so agreed a merger with Kurdish-focused Genel Energy, a unit of the Çukurova Group, one of Turkey’s largest conglomerates. Genel was ramping up output at its Kurdish fields and the two envisaged using Genel’s cash flow to fund Heritage’s fields. However, this relied on Baghdad and the Kurdish Regional Government agreeing an oil revenue sharing deal that would allow Kurdish producers to be paid for oil exported across Iraq.

So far, this has not happened and Heritage’s decision to back away from the deal represents an acceptance that no payments are likely soon and hence, it must fund its fields alone. Genel declined to comment. The deal is the latest in a string of African acquisitions by Eni in recent years. It bought London-listed Burren Energy in 2008 and French explorer Maurel & Prom’s interest in the M’Boundi in Congo field in 2007.

Heritage’s 50 percent interests in block 1 and block 3A, which cover the northern and southern end of Lake Albert, bring estimated recoverable reserves of 300 million barrels of oil, although ongoing exploration aims to uncover more. Heritage says on its website Heritage said Block 1 alone has “multi-billion barrel potential”.

Tullow Oil, Heritage’s non-operating partner in these blocks, is currently running an auction to sell up to half its shares in Blocks 1 and 3A, and up to a 50 percent share in Block 2, in which Tullow holds 100 percent. The sale likely removes Eni as a potential bidder for these assets, analysts said. This and the lower-than-expected price is bad news for Tullow but is likely to be outweighed by fact it will be easier to sell stakes in fields being managed by a prestigious international oil company, analysts at UBS said in an email.

Most of the oil produced in Uganda is likely to be exported to international markets, requiring the construction of a pipeline to the Kenyan coast. Eni’s involvement and the project’s complexity could be good news for Italian energy engineering company Saipem, which is controlled by Eni.

Eni will pay $1.35 billion upfront and a further $150 million in cash or a stake in a producing oil field of a similar value within two years, provided certain conditions are met, the companies said in statements. Heritage said it expected to complete the sale in the first quarter of 2010.

The acquisition and the capital expenditure it commits Eni to will place an additional burden on the company, which is already above its targeted gearing levels. Eni declined to say how it will fund the deal. Heritage shares were down 5.7 percent to 478 pence at 1128 GMT against a 1.2 percent rise in the DJ Stoxx European oil and gas sector index .SXEP. Eni shares rose 1.4 percent to 17.0 euros, while Tullow shares were down 0.8 percent.