Heritage sells fields to Eni, ends Genel talks

LONDON (Reuters) - British oil explorer Heritage Oil (HOIL.L) agreed to sell its Ugandan interests to Italian Eni (ENI.MI) for up to $1.5 billion, enabling Heritage to back out of a planned Kurdish tie-up which Iraqi political disputes made increasingly unattractive.

Proceeds from the sale would be used to develop Heritage's existing assets, including non-producing fields in Kurdistan, to make acquisitions and may fund a special dividend of 75-100 pence, finance director Paul Atherton, said on Monday.

"We will have a billion dollars in cash so we have certainly got the financial resources to undertake some very large transactions," he told Reuters, adding the company was targeting companies and field stakes in Africa and the Middle East.

Analysts said the deal made strategic sense, as the Ugandan fields are about to enter a complex development stage, which would be better managed by a big oil company.

However, the price was below most analysts' valuations of the fields -- Morgan Stanley valued them at $2 billion.

"The discount reflects Heritage's cash requirements to fund Kurdistan and perceptions as a forced seller," Morgan Stanley said in a research note.

Heritage made large oil finds in the semi-autonomous Kurdish region of Iraq earlier this year. It lacked the cash to develop them alone, so agreed a merger with Kurdish-focused Genel Energy, a unit of the Cukurova Group CUKRO.UL, one of Turkey's largest conglomerates.

Genel was ramping up output at its Kurdish fields and the two envisaged using Genel's cashflow to fund Heritage's fields.

However, this relied on Baghdad and the Kurdish Regional Government agreeing an oil revenue sharing deal that would allow Kurdish producers to be paid for oil exported across Iraq.

So far, this has not happened and Heritage's decision to back away from the deal represents an acceptance that no payments are likely soon and therefore it must fund its fields alone. Genel declined to comment.

REGULATORY PROBES

The Genel tie-up has also been in doubt since Heritage said in August said that an investigation by UK stock market regulator, the Financial Services Authority (FSA), could affect the ability of members of Genel's operational management team to assume their proposed roles in the combined entity.

A probe by the Norwegian authorities into share dealings involving Genel in another Kurdistan-focused company, DNO International (DNO.OL), had also cast a shadow over the merger, although Heritage said last week it still hoped to sign a firm deal with Genel by year-end.

The deal is the latest in a string of African acquisitions by Eni in recent years. It bought London-listed Burren Energy in 2008 and French explorer Maurel & Prom's (MAUP.PA) interest in the M'Boundi field in Congo in 2007.

Heritage's 50 percent interests in block 1 and block 3A, which cover the northern and southern end of Lake Albert, bring estimated recoverable reserves of 300 million barrels of oil, although ongoing exploration aims to uncover more.

Heritage says on its website Block 1 alone has "multi-billion barrel potential."

Tullow Oil (TLW.L), Heritage's non-operating partner in these blocks, is running an auction to sell up to half its shares in Blocks 1 and 3A, and up to a 50 percent share in Block 2, in which Tullow holds 100 percent.

Eni CEO Paolo Scaroni told a conference call that his company was not interested in buying Tullow's assets.

This, and the lower-than-expected price weighed on Tullow shares which closed down 0.3 percent at 1,256 pence, lagging a 2.0 percent rise in the DJ Stoxx European oil and gas sector index .SXEP.

Most of the oil produced in Uganda is likely to be exported to international markets, requiring the construction of a pipeline to the Kenyan coast.

As the crude under Lake Albert is of a thick consistency, the pipeline will need to be heated, making it an expensive project -- a project beyond most explorers' competence.

Eni's involvement and the project's complexity could be good news for Italian energy engineering company Saipem (SPMI.MI), which is controlled by Eni. Scaroni noted the company is competent in such complicated infrastructure projects.

Eni will pay $1.35 billion upfront and a further $150 million in cash or a stake in a producing oil field of a similar value within two years, provided certain conditions are met, the companies said in statements.

Heritage said it expected to complete the sale in the first quarter of 2010.

The acquisition and the capital expenditure it commits Eni to will place an additional burden on the company, which is already above its targeted gearing levels. Eni declined to say how it will fund the deal.

Heritage shares closed down 4.7 percent to 483 pence while Eni shares were down 0.3 percent at 17.20 euros.

(Reporting by Tom Bergin; Additional reporting by Ayla Yackley in Istanbul and Giancarlo Navach in Milan; Editing by Simon Jessop and Mike Nesbit)