Lasmo falls to £2.4bn bid from Amerada Hess

In 1994, Lasmo famously saw off a hostile bid from Enterprise Oil, pitched at 162p a share. Six years on, the oil and gas exploration independent is recommending an offer worth not much more - 180p a share, or £2.4bn - from Amerada Hess, the US integrated oil group.

In 1994, Lasmo famously saw off a hostile bid from Enterprise Oil, pitched at 162p a share. Six years on, the oil and gas exploration independent is recommending an offer worth not much more - 180p a share, or £2.4bn - from Amerada Hess, the US integrated oil group.

Michael Spohn, an analyst at Petroleum Research Group, a New York energy consultancy, said: "Lasmo has been in the penalty zone since the Enterprise bid, and the stock price has reflected that.

"The company has not created value over the intervening years. Shareholders will want to seize this offer with both hands," Mr Spohn said.

In a rapidly consolidating industry, a bid for the likes of Lasmo was not unexpected. The historically high oil price means boom times for companies in the sector. Along with the high-profile marriages of giants, such as BP and Amoco, a number of independents, especially in North America, have also come together.

Peter Hitchens, an analyst at Williams de Broe, the City brokerage, said: "Takeovers are no surprise. A lot of [oil] companies are awash with cash and don't know what to do with it."

Although yesterday's bid came at a 28 per cent premium to Lasmo's closing share price on Friday, there was no premium to Lasmo's net asset value of 180p a share. The offer is 125p a share in cash, with the rest in Amerada shares. Analysts said the offer price was "mean". Agreed bids would normally command a premium to net asset value. Nevertheless, the deal is likely to go through.

The UK overlap between the two companies, which are both active in the North Sea fields, will mean a total of about 150 job losses in this country.

The logic of mergers among exploration and production (E&P) independents is different to that which has governed the process among the giant companies of the industry. When two giants merge, the emphasis is all on cost-cutting. In the independent sector it is more about gaining critical mass in order to borrow more cheaply; exploration is a capital-intensive business.

Lasmo was founded in 1971 to explore in the North Sea. The company struck lucky three years later with the discovery of Ninian oil field, one of the largest UK finds in the region. That allowed Lasmo to float on the market in 1977. During the 1990s the company, the second-largest UK independent after Enterprise Oil, expanded into Indonesia, Algeria, Pakistan and Venezuela.

The attraction of Lasmo to Amerada is not so much its North Sea assets, which still make up half its production, but its position in these more far-flung places. Amerada is already a big North Sea operator.

John Hess, the chairman and chief executive officer of the US company, said yesterday: "Our goal is to increase our reserves to over a third outside the US and North Sea, which are getting ever higher cost and more mature. We need access to low-cost assets."

Amerada appears to have given up the pretence that it can compete with the big integrated majors. It has downstream refining and retail interests in the US, including hundreds of petrol stations, but it clearly sees its future as an E&P upstream independent.

The business mix has already been changed significantly. In 1997, 57 per cent of the capital employed was in refining and marketing. It has since sold $2bn of assets and, after the Lasmo deal, refining and marketing will take up just 24 per cent of its capital. The rest will be upstream activities.

Mr Hess said: "We are trying to be a bigger fish in a smaller pond. After this deal, we will have 73 per cent of reserves in five countries. This improves the quality and life of our reserves immeasurably."

The US company will transform itself from the "no man's land" of being a mini-integrated operator, dwarfed by the big boys, to the upstream independent sector. Here, it can claim leadership.

Amerada's output of 374,000 barrels a day of oil, or its gas equivalent, will be combined with Lasmo's output of 191,000 barrels a day. According to Amerada, that will make them the biggest independent - a so-called "super-independent" - ranking above Unocal, another American player.

Back in 1994, the unsuccessful Enterprise Oil bid for Lasmo came at a low point in the oil cycle, shortly after a Lasmo rescue rights issue.

Then, as the oil price hit another low at the beginning of 1999, the two companies were in merger talks again, but could not agree on a deal.

Lasmo was also in trouble for another reason at that time. It had overpaid, in 1997, for entry into the Venezuelan market when it shelled out $453m in cash for the Dacion field.

Analysts said that only Lasmo's 1999 purchase of rival Monument Oil and Gas, for £460m in shares, saved it from a cashflow and debt crisis.

By the end of last year, Lasmo's situation was completely changed, with the oil price at historic highs. Under pressure from shareholders to give something back, Lasmo said it would return money through a share buyback. It had already earmarked about £40m to return and was expected to make asset disposals to give more back.

That spelt the beginning of the end of Lasmo's days as a stand-alone company. In the process of sounding out the market about sales of particular assets, including negotiations with Amerada over a stake in its Venezuelan possession, the Lasmo management landed an offer for the whole company.

The Amerada bid came at the opposite end of the cycle to Lasmo's two rounds of merger negotiations with Enterprise Oil. Oil mergers during a downturn are a defensive move, based on the need for survival. At the top of the cycle, such as today, it is an aggressive move, predicated on growth opportunities.

Mr Hitchens of Williams de Broe said: "Sentiment is not strong towards Lasmo. Historically, it does not have a good record for shareholders. It is not in the same league as Enterprise Oil. They were looking to return money to shareholders, but decided to go the whole hog."