Eni Considered Tullow Bid, Ruled It Out As Too Costly -Source

Italian oil and gas company Eni SpA (E) has decided Tullow Oil PLC (TLW.LN) is too costly a takeover target, after recently studying the U.K. oil company and its African oil-development prospects, a person familiar with the matter said Friday.

Two people familiar with the matter said Eni recently studied Tullow and other potential acquisition targets, but had reservations over Tullow's potential price tag. One of those people said Eni then decided not to pursue Tullow as a takeover target.

Eni remains interested, however, in partnering with Tullow - for instance, by purchasing a stake in Tullow's African assets, the people said.

Eni declined to comment on the matter, and Tullow said the company isn't for sale.

The news that Eni considered and then rejected the idea of a takeover bid for Tullow follows market speculation about whether Eni was planning such a move. Eni Chief Executive Paolo Scaroni last month visited Ghana and Uganda, where strategic Tullow assets are located, prompting speculation from analysts about his reasons for the trip.

Tullow's valuation jumped by more than $1.5 billion this week after it announced two large discoveries in its fast-growing African portfolio. By midday Friday, Tullow's market capitalization stood at GBP9.96 billion ($16.4 billion), a 10.4% rise in 2 1/2 days.

In Uganda, Eni is looking at possible partnerships with Tullow on a string of projects that include oil blocks, people familiar with the matter previously said. Eni is interested in buying stakes in Tullow's oil blocks, and partnering in building a proposed $3 billion pipeline and a refinery, the people familiar with the matter have said.

Any outright takeover attempt by Eni for Tullow would have faced steep obstacles.

One person familiar with the matter said Tullow would "put up a huge fight" against any takeover bid and argue its stock has unrealized potential. Any prospective buyer would probably have to pay at least a 50% premium for Tullow, based on Addax Petroleum Corp.'s (AXC.T) recent acquisition by China Petrochemical Corporation, the Chinese state oil company also known as Sinopec Group, the person said.

Sinopec said in June it had agreed to buy Addax, which is based in Geneva and listed in London and Toronto, for C$8.27 billion ($7.2 billion). Addax is one of the largest independent oil producers in West Africa and the Middle East.

Tullow's hydrocarbon reserves update, due later this year, is expected to reclassify a significant part of its unproven resources into proven reserves and unlock more of its market potential.

Tullow said Wednesday a consortium that includes Tullow and Houston-based Anadarko Petroleum Corp. (APC) made a potentially multibillion-barrel oil discovery off the West African coast, in Sierra Leone.

Thursday, Tullow said it had made the largest oil discovery yet in the Lake Albert region of Uganda, an area where it already found more than 700 million barrels of oil equivalent.

Tullow's cash flow will rise with the start-up of production in Ghana next year, and oil prices are expected to rise between now and 2012, the person said.

By contrast, Eni's "strong financial constraints" would have made it difficult to buy Tullow, said one of the people familiar with Eni's consideration of Tullow.

A cash offer for Tullow could have put Eni's credit rating at risk, and a share exchange could have faced opposition from the Italian government, which owns 30.3% of Eni, people said.

Eni's CEO Scaroni recently said the company is "quite happy" with a net debt-to-equity ratio of about 0.4. The company's ratio was 0.37 at the end of June.

"Eni is like a child looking through the window of a toy shop," but can't come through the door, said one person familiar with the company's bid considerations.

-By Liam Moloney and Benoit Faucon, Dow Jones Newswires; [phone]; [e-mail] (James Herron and Carol Dean in London contributed to this report.)