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Positive omens combine for courtship of Imperial Energy

Times Online
The Times
August 5, 2008

Positive omens combine for courtship of Imperial Energy

Imperial Energy’s prospects look much brighter than they did in the spring, when it was forced to mount a rights issue to fund further development after failing to secure debt finance in the contracting financial markets.

Now the Russia-focused oil business is being courted by two suitors keen to get their hands on its expanding operations. The Oil and Natural Gas Corporation (ONGC), an Indian group, moved on Imperial last month and now China has entered the fray with an approach by the state-owned Sinopec. There is also speculation that a third bidder may emerge in the shape of Knoc, South Korea’s nationally owned oil company.

A competition should drive the price of the shares up. At £11.60, they are below the £12.90 cash offer from ONGC. Imperial should be able to capitalise on its sudden wave of interest to command a decent price. Cazenove is predicting a “kill zone” of about £13-£14; Daniel Stewart has a target of £15.

Yet analysts are not discounting the possibility of India and China working together on an offer. The two countries have some experience of cooperation for oil and could chose this route to avoid a costly bid battle.

But before we get carried away, there is the Russian Government to consider if the successful bidder is not Russian. Notwithstanding the problems at TNK-BP, analysts are not anticipating problems. Sinopec already has interests in the Sakhalin III oil prospect and ONGC in Sakhalin I. It is thought that the Chinese company sounded out the Russian authorities before making the bid. Additionally, there is speculation that Rosneft, the giant Russian oil producer and partner of Sinopec and ONGC in their Sakhalin ventures, would take a stake in the new Imperial business if it was sold, which would smooth the passage of any deal.

Neither of the bids is yet certain, but neither looks speculative, either. Moreover, both suitors have the resources. ONGC has a market capitalisation of $50 billion (£25.5 billion), compared with the £1.3 billion that it has bid for Imperial, and Sinopec effectively has the resources of the Chinese Government.

Imperial’s shares have taken their fair share of knocks over the past year. The business failed to sell a stake to Gazprom and clashed with the Russian authorities over environmental concerns. The British group was accused of overstating its reserves to boost its share price, provoking fears that it could face the same renationalisation moves as Shell’s natural gas venture in Sakhalin and BP’s Kovykta programme. Yet progress has been made since that scare and Imperial has been able to register reserves more successfully.

The company is also expanding rapidly, has large reserves for the size of its business and is developing key infrastructure in Siberia. In short, it has much going for it. Buy.

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