(RDSA) This Small Oil Producer is Ripe for a Takeover – Here’s How to Profit

November 20th, 2009

by Sheena Martin, Contributing Editor
Friday, November 20, 2009

Takeovers are big news in the market at the moment.

In fact, did you know that takeovers have the biggest one-day gain in stocks for any asset?

As my colleague – and takeover expert – Louis Basenese says, they’re “some of the safest companies you can own. According to FactSet Merger Stat LLC, the average one-day return for shareholders of the target company is 48%.”

Furthermore, Louis says, “Industries naturally go through cycles of consolidation – waves of mergers, acquisition and takeovers.”

One industry riding this wave as it comes out of recession is oil. And I have a takeover target making strides in oil exploration that could put money in your pocket in a few months time.

The British Are Coming

Small U.K.-based exploration company Tullow Oil PLC is a gem for a “Big Oil” firm breaking into reliable production in Africa.

In early November, Tullow signed a deal with oil major Royal Dutch Shell (NYSE: RDSA) on a smaller, developed project. The agreement saw Shell purchase a 33% stake in Tullow’s offshore oilfields in French Guiana, which have a combined rate exceeding 95,000 barrels per day.

As a result, Tullow shares climbed by 8% in November. But that’s not the only deal…

Tullow’s Major Oil Discoveries

In March 2009, a field more than twice the size of Lake Michigan was discovered off the coast of Ghana. Production estimates top one billion barrels of oil and Tullow has partnered up with Anadarko Oil Corp. (NYSE: APC) on the project. And the companies’ third partner, privately owned Kosmos Energy, had its stake bought out for $4 billion by ExxonMobil Corp. (NYSE: XOM) last month.

Given that, there is considerable potential for ExxonMobil to go after Anadarko and Tullow as the project progresses.

What’s more, Tullow has made significant oil discoveries in Uganda. And with easy to access oil reserves, Tullow has enjoyed almost 100% success in exploration on the Ugandan side of the Lake Albert Rift Basin.

That success rate, particularly in a region not popularly known for its oil riches, is few and far between.

Lots of Oil… But Nowhere to Go

Given the sizeable potential of oil production in Uganda alone, you might wonder why one of the big oil companies hasn’t reeled Tullow in by now. I mean, Tullow has already done all the legwork in exploration and discovery. Shouldn’t that make it easy for another company to profit?

Well, there are still hurdles to clear. For instance, what are small villages in Uganda going to do with nearly one billion barrels of oil?

In addition, no oil pipelines run through Uganda. And there are no refineries in the region.

Tullow will use trucks to feed local energy demand early on, but it continues to seek a partner that can head up pipeline construction and possibly a small refinery.

To sweeten the deal, Tullow announced in August that it would share profits from in its Ugandan production in return for refining and a pipeline to the Indian Ocean, costing about $5 billion to $6 billion. The company plans to announce a partner early next year.

Who Are the Players?

Recent rumors suggest ExxonMobil is considering partnering with Tullow on its Uganda project, as well as taking Tullow’s stake in Ghana.

Other interested investors include Royal Dutch Shell, BP (NYSE: BP), China’s state-owned oil giant CNOOC Ltd. (NYSE: CEO), India’s Oil & Natural Gas Corp. Ltd. and Italy’s Eni SpA (NYSE: E), which has a 43% stake in pipeline builder Saipem.

If any of them throw their budgets behind Tullow, its shares should benefit as a result. And there’s a big reason for them to do so: A pipeline and refinery in Uganda gives easy access to Asia, which is thirsting for energy.

Don’t let Tullow Oil’s 2009 revenues fool you. It scaled back overall production by 16% at the beginning of 2009 in order to focus on capital investments in Ghana and Uganda.

Instead, focus on the more than $334 million that Tullow boasts in operating cash flow. The firm is well positioned to develop production in Ghana and Uganda. And it bodes well that Shell has already demonstrated its confidence in Tullow’s discoveries.

The bottom line is that Big Oil will continue to flock to African production and Tullow has done all the legwork in proving profitable reserves. Tullow investors will profit from the crude production and marketing. And the stock should continue to advance as further infrastructure is constructed.

Consider buying Tullow now before it joins forces with more Big Oil firms and the stock rises before you can grab your share.

Good investing,

Sheena Martin

P.S. For more on how my takeover expert colleague, Louis Basenese, digs out the most profitable takeover targets like E*Trade Financial (Nasdaq: ETFC) check out this article.

View original at: Investment U