Roll out the barrel - it's party time for oil explorers

Since Paladin Resources was taken over by Talisman Energy for £1.2 billion nearly two years ago, the industry has been waiting for the big bids to come. The question for investors is whether Eni's interest in Burren is very company- and asset-specific or whether it heralds the big land grab expected from the international oil companies, like BP and Shell or Exxon and Chevron, and the big Asian and Middle Eastern state-owned giants.

Some believe Burren is a very specific target for Eni. The core of the Burren story is the Congo's M'Boundi oilfield. Burren has 37% of the field and Eni has recently bought a 43% stake. One argument is Eni has what Citigroup is calling an "informational advantage", and knows there is far more to come from this already-producing field.

Eni also knows that, by launching a bid for Burren, any rival bidder and potential new owner of Burren would have to work with Eni in the Congo. That in itself is a "poison pill", even without considering that Eni could have pre-emption rights over M'Boundi.

"The deal would give Eni 80% of the M'Boundi field in Congo and a reasonable priced entrée into Turkmenistan, where the change in president has sharply increased international interest," says Colin Smith of Dresdner Kleinwort. Such an overlap could, says Dresdner, put a value of 1400p on Burren, though it guesses Eni is unlikely to want to pay more than 1300p after its initial 1050p sighting shot.

Others, however, see the Burren bid as a seismic shift in exploration and production (E&P) valuations, with the offers for Burren indicating consolidating companies could be prepared to pay well in excess of $60 a barrel for reserves. "It suggests the industry is moving [in its valuation forecasts] to higher oil prices than the equity markets are currently discounting," says Morgan Stanley's Michael Alsford.

"This may accelerate a grab for assets by the international oil companies and lead to another round of consolidation among the UK E&Ps."

Morgan Stanley says the last time there was a splurge was around the turn of the decade, when Lasmo and British-Borneo were snapped up by Eni and Enterprise Oil was bought by Shell.

Alsford says: "At a glance there is a huge difference - the oil price was recovering from the collapse to $10 a barrel in 1998-99 and E&P companies were recovering from perilous positions. At $80 a barrel life is somewhat different. However there is a key similarity: oil companies took a view on oil prices that was more optimistic than the equity market.

"We think the same is happening today. Add to that a fear the nationally-owned oil companies and/or Middle Eastern capital will look to the UK E&P sector for energy investments, and the case for being early to a round of consolidation becomes compelling."

The argument isn't simply academic. Morgan Stanley reckons on the Burren valuation there is around 70% upside to be had in the shares prices of Tullow and Soco, and around 40% to Cairn and Dana. Similarly ABN Amro argues for Premier Oil and Imperial Energy as the most attractive plays. Dresdner Kleinwort throws in Sibir Energy.

The downside risk is that further exploration fails to bear fruit and the oil price falls. Share-price movements, as there were in the run-up to this week's announcement concerning Burren, are likely to inform where the smart money in the casino is going.