Aiden Heavey knew absolutely nothing about the oil and gas industry when he started Tullow Oil [LON:TLW] in 1985. But he had a dream. And sometimes, this is all it takes.
He was talking to a friend in the bank one day about small oil fields in Africa. They had been left behind by the majors and no-one wanted to drill them.
Heavey contacted a friend at the World Bank who told him about a project in Senegal. The World Bank had some small gas fields that they were trying to get people to develop. Tullow went in to re-drill those old fields.
People said that Heavey was doomed to fail. He had no knowledge and no major backers.
The first couple of years weren’t easy. Tullow drilled more than its fair share of ‘dusters’ by 1990. In fact, in the early 1990s, Heavey got a phone call summoning him to meet with his bank manager.
The bankers had had enough of Heavey’s ‘oil party’. They said, ‘enough is enough’ and didn’t want to service Tullow’s overdraft anymore.
It took some time to negotiate but, reluctantly, the bank gave Tullow another shot.
After some limited success amongst drilling more dusters in the nineties, everything changed for the company in 2001.
Backed into a corner, Tullow paid British Petroleum (BP) £201 million for a bunch of gas fields in the North Sea that most people considered weren’t worth much.
Although the North Sea may not seem like a new frontier or challenging environment, field production had peaked three years earlier. And no one wanted anything to do with it.
Tullow then began re-drilling this old oil field — a bold move that paid off handsomely. With rising gas prices, Tullow’s revenues quadrupled within five years.
Tullow’s success attracted companies back into the region. This is no different to drilling a successful new frontier or deep water well — money follows opportunity.
At this stage, the company was getting some success in Senegal. In the end, the Senegal exploration program was working wonders. Production outperformed and the experts were speechless.
With success on the board, Heavey still had plans to achieve his African vision. Tullow spent over US$500 million and purchased Energy Africa in 2004. Energy Africa brought across some delicious oil fields in West Africa.
At the time, everyone thought it was a dud deal. The Financial Times said,
‘Most observers struggled to get very excited about the deal. Energy Africa has been sitting on the shelf for some time, its collection of minority interests failing to attract much attention.’
Tullow proved everyone wrong once again. The collection of West African assets ended up being highly productive. Uganda was the treasure in the chest.
Tullow didn’t stop there…
You may be aware that Tullow took over Hardman Resources. At the time, Hardman was an ASX top 200 company with some success in Africa. But the success was, well, volatile at best.
The main driver behind Hardman’s early success was Chinguetti, offshore Mauritania. Chinguetti’s first hit oil came through in 2001.
The exploration campaign caused a significant amount of excitement.
Chinguetti was thought to hold 123 million barrels of oil. But the company drilled some wells which were below expectation and this target had a major downgrade.
After a series of long delays, Chinguetti became Mauritania’s first oil producer in February of 2006.
Behind the scenes, Hardman was having significant success in Lake Albert, Uganda. Most people weren’t paying attention…everyone was thinking that the asset was too challenging to develop.
And with the flagship Mauritania asset underperforming, the share price was sinking.
All the analysts were screaming sell.
At this time, Tullow swept in with an offer that shareholders couldn’t refuse. KPMG’s valuation suggested that Tullow overpaid by as much as 36% for Hardman.
But guess what? Hardman’s assets ended up becoming some of Tullow’s top producing sites. Uganda was the diamond in the rough which everyone else had overlooked.
The key to successful investing is to identify value before everyone else. And this is even more relevant when investing in resources and oil and gas stocks.
Most people don’t realise it, but we’re entering an oil boom in new frontier and deep water drilling. This means drilling in places where punters don’t expect to find oil. Places where you’d only dream to find oil.
The fact is that less than 10 years ago, Africa, Asia and South America were really no go zones.
But thanks to technology, they’ve been the home to some of the world’s largest recent oil finds.
Some people think investing in Africa is risky. This may be true. But new frontiers are the place to be.
And China knows this. Regardless of the risk, they’ve invested billions in Africa. Look at Woodside Petroleum [ASX:WPL]. It’s also buying acreage all over Africa and Asia.
Despite the common perception that investing in new frontiers is risky, and it can be, many, many companies have been successful drilling and working in Africa for years.
Tullow Oil [LON:TLW] is one of these companies. At one stage, Tullow was a penny stock. Now the company is worth £483.90 per share and has a market capitalisation of £4.47 billion (AU$8.21 billion).
Hardman Resources was one of these companies. Within five years, the company had gone from a market capitalisation of $20 million dollars to a tune of nearly $1.4 billion dollars. The share price went up more than ten times — what we call a ten bagger.
Some companies may not be successful at the start. But with the right asset mix, management, vision and balance sheet…oilers can make you more than a small fortune. All you need is an appetite for risk and a little bit of patience.
In Diggers and Drillers, I’ve analysed four companies I believe will be the next BIG names in oil and gas. Any of these four companies could start flying as early as next year.
If you want to know more, have a read of the latest report I wrote…it’s free, by the way… and you’ll see for yourself what I mean about the ‘right asset mix’.
Resources Analyst, Diggers and Drillers