Heritage Oil sells Ugandan fields to Eni for $1.35bn and backs out of Genel deal

Shareholders set for special dividend payout

By Sarah Arnott

Tuesday, 24 November 2009

Heritage Oil is selling its Ugandan oil fields to Italy's Eni for $1.35bn (£811m) in cash, with another $150m to come in either cash or assets.

The move signals the departure of Heritage from Uganda and also puts paid to the group's $6bn proposal to merge with Genel, the Turkish giant with major interests in the Kurdish region of northern Iraq.

Under the terms of the Eni deal, Heritage is selling its 50 per cent stakes in Blocks 1 and 3A of the oil-rich Lake Albert Basin. The lump sum is to be paid on completion of the deal, expected in the first quarter of 2010. The deferred consideration will be paid in either cash or an equivalent interest in a producing field, and is expected within the first six months of the year.

Heritage is also considering paying shareholders a special dividend of between 75p and 100p. The rest of the money from Eni will be used to boost activities elsewhere, and could even fund expansion into entirely new areas.

Tony Buckingham, the Heritage chief executive, said: "The disposal proceeds would provide Heritage with significant financial flexibility to accelerate existing exploration and development programmes, participate in value generating opportunities as and when they arise, as well as give us the ability to pay a special dividend to shareholders."

Uganda has proved hugely successful for both Heritage and Tullow Oil, which owns the other half of the two Heritage fields and another whole block in its entirety. Since drilling started in the area in 2005, more than 700 million barrels of oil have been discovered, and Tullow has predicted as many as 1.5 billion more. But there are massive infrastructure costs associated with developing the fields, including a pipeline to the coast estimated to cost £2bn, and a refinery needing £5bn.

The high costs have spooked both companies, and when Tullow opened up a "data room" for potential buyers of half of its Lake Albert fields this summer, it prompted the interest in Heritage Oil's assets that led to the Eni deal. Bids for Tullow's assets are expected in the new year. But Paolo Scaroni, the Eni chief executive, said yesterday that his company is no longer in the running, despite having shown interest. "We cannot do everything," he said.

The Eni deal not only provides Heritage with a cash windfall, it also strikes the pipeline problem off the group's agenda – hence the cancellation of the prospective Genel deal. Heritage's interest in Genel was born of its need for short-term cash. The group already has drilling interests in Kurdistan. But with production due to start in early June at Genel's wells, Heritage saw an opportunity to generate cash flow from immediate production. But the deal was held up by local political issues and delays establishing the mechanism for paying for the oil produced. In the light of the massive lump sum from Eni, it is now unnecessary, although the company will continue its exploration in the region.

Analysts supported the Eni deal yesterday. Peter Hitchens, at Panmure Gordon, said: "Heritage is in a strong position for a company its size because it is sitting on $1.25bn of net cash, even having paid out a special dividend."

But the group's shares dived 4.69 per cent. The fall was partly down to last week's rises on rumours of a deal. But shareholders are also concerned that the group sold out of Uganda too early, and, by backing out of the Genel deal, sacrificed the FTSE 100 listing that would have resulted.

Tony Buckingham: Boss in line for a £95m windfall

*Tony Buckingham, the colourful chief executive of Heritage Oil, could make as much as £95m from the special dividend payout linked to the Ugandan asset sale announced yesterday.

Out of the $1.35bn (£811m) cash pile generated by the sale of the Lake Albert Basin fields, the group is considering paying shareholders between 75p and 100p per share. And given that the chief executive holds around a third of Heritage Oil's 284 million shares, the resulting windfall could be anything from £71m to £95m.

Mr Buckingham has had an interesting career. Prior to founding Heritage Oil in the 1990s, his experiences in the oil and gas sector included spells as a North Sea diver and as a concession negotiator for, among others, Ranger Oil and Premier Oil.

But the part of his past life that draws most attention is what Heritage Oil's official biography describes as his time as "a security adviser to various governments".

The detail behind the generalisation is a stint as a partner in Executive Outcomes, a South Africa-based mercenary outfit whose most high-profile alumnus is Simon Mann – the former SAS officer who arrived back in the UK earlier this month after five years locked up in a prison in Equatorial Guinea on charges of involvement in a plot to overthrow the state.

When Heritage Oil listed in London last year, the company stressed that Mr Buck-ingham has had no contact with Mr Mann since 2000.

Alongside his working interests, Mr Buckingham is also a keen sailor. He has represented Great Britain at international competitions and won trophies at Cowes Week.