SHARES in UK oil and gas independents surged yesterday after Paladin Resources accepted a GBP1.22bn cash offer from Canada's Talisman Energy, fuelling speculation of further takeover deals in the sector.
Cairn Energy closed up 40p at 1632p after hitting its lowest level for two months on Wednesday, though this was less than half the gain the Edinburgh company enjoyed at its intra-day peak.
BowLeven advanced by 14-per cent, despite announcing losses, while Melrose Resources climbed 4.4-per cent and TullowOil by 5-per cent. The increases contrasted with sector heavyweights BP and Royal Dutch Shell - up 0.2-per cent and down 0.5-per cent respectively.
The surge in crude prices to record levels above dollars-70 a barrel this summer has flooded the coffers of oil and gas producers, fuelling speculation about how they will use the surplus cash.
BP and Royal Dutch Shell have opted to return money to shareholders, but analysts expect some consolidation as companies boost their reserves and expand their global presence through takeover deals.
Paladin's operations are mainly in the North Sea, where it has interests in five British fields, accounting for about 33-per cent of group production. It also has fourNorwegian fields generating about 37-per cent of output and operations in Denmark, Romania, Australia, Indonesia, Gabon and Tunisia.
Last year, Paladin produced 41,410 barrels of oil a day and this figure improved to 45,795 barrels during the first half of 2005.
The offer from Talisman, Canada's third-largest independent oil explorer, is worth 355p per Paladin share, a 29-per cent premium to the closing price on Wednesday. The price paid is slightly ahead of the around dollars-15.22 per proved barrel of oil equivalent of reserves that Denmark's Maersk and UK utility Centrica paid for KerrMcGee's North Sea assets in August.
However, Talisman expects the deal to boost cash flow as early as 2006.
"It will help deliver production per share growth forTalisman, which is now expected to be in excess of 10-per cent per annum from 2006 through 2008, " said Jim Buckee, Talisman's president and chief executive.
A month ago, Paladin forecast a strong second half amid rising daily production, as it posted a doubling of first-half earnings. Pre-tax profit for the six months to June 30 rose to GBP101.6m, on revenues up 23-per cent to GBP177.4m.
Roy Franklin, chief executive of Paladin, forecast at the time that the firm's daily production rate would rise to around 60,000 barrels by the end of next year from an estimated 47,500 barrels this year.
Commenting yesterday, he said Talisman's offer gave Paladin shareholders "an opportunity to lock in value at an attractive premium reflecting the quality of the Paladin business and its prospects in the current commodity environment".
Caledonia Investments responded to yesterday's announcement by immediately offloading its own 7.3-per cent stake in Talisman.
The Canadian company is buying 25 million Paladin shares from Caledonia and a further 26.3million shares from Aberforth Partners, totalling 14.96-per cent of Paladin.
The directors of Paladin Resources have also pledged their shares.
"The management of Paladin have achieved an excellent price for their investors, " said Brendan Wilders, an analyst at Oriel Securities.
This seems to be supported by the view of some industry observers that Paladin's longterm growth prospects could have been be hampered by a lack of affordable acquisition opportunities.
Paladin shares closed 27-per cent higher, or 74.5p, at 349.5p.
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