Tullow Oil has announced that the Mahogany-2 appraisal well, offshore Ghana, has intersected a significant column of light oil (West Cape Three Points Licence, TLW 22.9%)

Management guidance is that the P90, P50 and P10 estimates will increase from 170m, 480m and 1.38bn to 500m, 1.0bn and 1.8bn respectively.

Updating our numbers to reflect the P50 estimate of 1bn barrels increases our core NAV from 371p to 500p. The P10 case of 1.8bn barrels would increase our core NAV to 700p.

This results in major changes in stock ratings and a
defensive shift from UK to continental Europe as we make substantial price target cuts for most stocks.

Conversely, in UK
property we double downgrade to Underweight British Land (target 560p, 56%) and Brixton (200p, down 49%), and downgrade to Underweight from EW Land Securities (1030p, 40%).

The four separate valuation techniques we deploy to gauge how much downside there is in property shares to the bottom of the current bear market (which we anticipate will occur around the end of 2009) all support the bearish outlook implied by the weighted 25% potential downside implied by our new price targets.

We think we are now close to the point at which banks in the UK will pull the plug on highly leveraged companies that are in breach of banking covenants, and expect this to lead to distressed sales of properties and hence another upward lurch in property yields.

However, the associated off balance sheet leverage, allied with significant capital declines, is placing the model under stress

Significantly above-average leverage, but with strong partners
Equity investors are undoubtedly spooked by the high leverage, and the recent disclosure of the RBS facility shows the risks involved. One cannot predict which course of action best suits a
lending bank in each case of a lending breach, but we believe investors should take some comfort from the fact that Morley and Hermes are the fund managers and, in some cases, the major investor in the three main funds.

Valuation: Upgrade to Buy
We resume coverage of Capital & Regional, with an upgraded Buy rating. Our new price target of 500p represents a 22% discount to our low-point NAV estimate (December 2009). At that price we believe the shares would yield just under 6%.

The deal, prompted by the effect of the credit crunch on business, is likely to send shockwaves through the building industry.

It is understood this is the second time Bellway has approached Redrow with an all-share merger proposal.

At Friday’s closing price, Bellway, with shares at 7161/2p, had a stock market value of £824 million while Redrow, at 2631/4p, was valued at £421 million.

Though Bellway is almost double the size of its target, Redrow has a larger land bank of 25,750 plots compared with Bellway’s 23,000 plots.
Both companies feel their value is not adequately reflected in their current share prices. If the deal goes ahead, they could face complex discussions to decide their respective values within the proposed merged vehicle.

Bovis IMS. There is nothing in this morning’s statement which should surprise anyone.

The group comments that market conditions since April have significantly deteriorated as a result of the tight conditions in the lending market.

Outlook and forecasts. The group has commented that if market conditions persist,
results for the full year will be below the board’s expectations at the time of prelims.
Whilst we have seen two downgrades since then, and our December 2008 EPS of 40.1p and December 2009 EPS of 35.6p are in line with consensus, it would not be a surprise to see a further downgrade to numbers, although we will firm up expectations after the analysts call this morning.

The group’s debt currently stands at £92m (the peak position of the year), and compares to the group’s committed facilities of £220m (2010 maturity). Given the strength of this balance sheet, the group will continue to open sites, which should help it to maximise sales revenues. Furthermore, Bovis has the best invested landbank in the sector, with 50% of its holdings delivered from its strategic land bank.

Valuation, target price and recommendation. The shares are currently trading on a
PNAV of 0.78x and yield 8.5%. We believe that this factors in the current negative
newsflow. Our target price is based upon the last reported NAV, and is set at 599p. We herefore maintain our Buy recommendation.

Following a review of the working capital requirement of the business, typically
carried out each year at this time, the Company has extended its existing
Revolving Credit Facility by #23m to #123m until 2012 on the same covenants.
This provides good working headroom to meet temporary fluctuations as required
and facilitates the early implementation of the cost reduction programme updated
below. The additional facility is at a margin and fees consistent with the
market.

The company is pleased to confirm that current trading continues to be good and
the pipeline of opportunities is strong, with Vanco selected as preferred bidder
for over 20 per cent more new business opportunities as at 31 March 2008 than at
the same time last year (these are all subject to contract).

On 1 April 2008 it was announced that the Company had agreed an extension to the
Company’s revolving credit facility (“RCF”) with its syndicate of banks in the
sum of #23.3m, taking the total available under the facility to #123.3m. The
Company has limited headroom under the RCF and other facilities. The Company is
in active discussions with its banking syndicate in respect of its financial
position.

Directorate change

Allen Timpany, Chief Executive Officer and founder of the business, has resigned
with immediate effect.

Andrew Coppel, the former Chief Executive of Jockey Club Racecourses and Queens
Moat Houses plc, has joined the Company as Chief Restructuring Officer.

For further information contact: -

John Mumford (Senior Independent Director) – 020 8636 1700

Katie Tzouliadis – Biddicks – 0207 448 1000

Morten Singleton – 020 8636 1700

BG Group’s bid for Origin Energy is beginning to look like another
example of Australian institutional investors selling resources assets
too cheaply to foreign buyers.

At $14.70 cash per share, the price is a 40 per cent premium to Origin’s
last sale. However, Origin’s share price is now sitting around $14,
instead of trading above the bid price as usual, because no hedge fund
is prepared to bet on a higher price. The impression you get is that
it’s all over bar the shouting and Origin’s shareholders are falling
over themselves to sign the acceptance forms.

Not so fast. Origin’s board should – and, I believe, will – reject BG’s
first offer and the British firm will have to pay more for a board
recommendation.

The bid is focused on Origin’s coal-seam gas reserves in Queensland,
which BG wants to convert to LNG at a new plant in Gladstone and export
to Asia. Those reserves are about to be substantially upgraded.

Moreover, the price BG is offering is well below what the existing
reserves are worth.

Including debt, the enterprise value inherent in the bid price is $16.4
billion.
Ivor Ries of Baillieu Stockbroking puts a value on Origin’s holding in
Contact Energy (the New Zealand gas company) of $6.5 billion and on its
non-coal-seam gas businesses of $7.9 billion.

That means BG is offering a bit less than $2 billion for the coal seam
gas reserves, which currently total 3,500 petajoules and are likely to
be increased to 4,900 PJ.

At current reserves BG is paying 57c per gigajoule (there are million
gigas in a peta); on the expected increased reserves figure for 2008,
it’s 40c per gigajoule. And if, as expected, reserves increase to 6,000
petajoules in two or three years, the price being offered for the gas by
BG falls to zero.

The average of recent gas transactions is around 90c per gigajoule.

In other words, BG is trying to get Queensland coal-seam gas via Origin
at half price or less. Fair enough: nothing wrong with that.

What would be wrong is selling it at that price.