Shareholders of Dragon Oil (LSE: DGO) are being offered 750p per share by the firm’s majority shareholder, Emirates National Oil Company (ENOC).
As I predicted in May, 735p per share was not quite enough. ENOC has agreed to top up its previous offer in order to get the backing of an independent committee of Dragon’s directors.
Today’s offer values Dragon at £3.7bn and represents a 47% premium to Dragon’s closing share price of 509p on 13 March, the day before ENOC’s initial approach.
ENOC already owns 54% of Dragon shares and today’s offer is likely to be final, unless a number of Dragon’s large minority shareholders combine to block the deal. According to ENOC, acceptances are needed from a further 23% of shareholders for the deal to go through.
Once this threshold is reached, Dragon shares will be de-listed from the Irish and London stock markets. At this point, any shareholders who choose not to accept the 750p offer will be left with shares that could be difficult to sell and may no longer provide a dividend income.
I believe this is quite a good offer for Dragon shareholders. Their firm only has one material asset and has proved unable or unwilling to expand over the last few years, despite the benefits of a $1.9bn cash balance and no debt.
Is Gulf Keystone next?
Dragon Oil has a number of similarities with Gulf Keystone Petroleum (LSE: GKP).
Both companies own one, large asset providing the potential for prolific long-term, low-cost production. Both operate in areas of the world where political risk is a factor. Both companies seem unlikely to make any further progress as independent operators.
It’s clear that Dragon’s Cheleken field will fit well into ENOC’s larger portfolio. Many oil experts believe that Gulf’s Shaikan field could fit equally well into a larger portfolio.
There’s only one problem. Dragon is well financed and has net cash of $1.9bn. Relatively little investment is needed to maintain production from Cheleken at current levels of around 90,000 barrels of oil per day (bopd).
The story is quite different at Gulf. While production from Shaikan has risen to around 40,000 bopd over the last year, significant investment will be needed to take production up to the firm’s targeted level of 100,000 bopd.
Gulf also has $527m of debt that may need restructuring over the next 6-12 months. As of 8 April 2015, the firm’s cash balance was just $87m.
A potential buyer would need to buy or restructure the firm’s debt, as well as acquire its shares. They would also need to inject enough money to fund further Shaikan development.
A number of new wells would need to be drilled for future production and to try and convert Gulf’s 1,024m barrels of oil equivalent of contingent resources into commercial reserves.
On top of all of this, there are the risks posed by the ISIS conflict in Iraq and long-running payment delays for oil exported from Kurdistan.
In my view, it all adds up to a situation where shareholders do not have a strong hand. Gulf’s funding needs and the rights of its bondholders mean that the firm’s shares could prove a risky buy.
