Deal Reporter
One of Dragon Oil’s [LON:DGO] top-five shareholders said the company’s 10 July production update supports its view that Emirates National Oil Company's (ENOC) offer undervalues the oil producer.
“We believe that the update is supportive of our contention that the current offer does not adequately reflect the value of Dragon Oil however that value might ultimately be realised,” said Richard Doyle, fund manager for Setanta Asset Management.
Dragon has achieved production growth of 25% in the first half of 2015, compared to the same period in 2014, noted Doyle. “This level of growth, while over a six month period, is highly unusual in the oil and gas industry, where growing production has been a challenge for many companies,” he said.
Dragon’s second biggest shareholder Baillie Gifford believes that ENOC’s bid does not reflect the production potential of Dragon’s key asset, the Cheleken contract area, offshore Turkmenistan. The Edinburgh-based fund manager has called for the inclusion of a contingent payment note to allow minorities to benefit from future production milestones.
Despite their criticism of the offer, neither investor has said it will vote against the deal in its current form. ENOC already owns 54% of Dragon, and so only needs acceptances from 23% of Dragon shareholders to de-list the company.
ENOC’s initial approach in March was at 650p per share, which was rejected by Dragon’s independent committee. A number of further proposals were also rejected before ENOC announced a revised proposal of 735p per share on 21 May. Following consultation with shareholders, the independent committee recommended a firm bid at 750p per share.
Other shareholders, such as LGM Investments, Man GLG and Syquant Capital, support the deal at the current price. “In our view, the offer is fair and fully reflects the value of the company,” said Henri Jeantet of Syquant Capital. A fourth minority investor also said previously that he would be very likely to accept the offer.
“Based on our direct ongoing engagement with Dragon Oil's shareholders, we are confident that there is significant shareholder support for the full and fair offer of 750p,” said a spokesperson for ENOC
A special dividend is one way the offer could be improved, according to Doyle. Dragon pays its interim dividend in September and its final dividend in April. The record date for the 2014 interim dividend of 12p per share was 15 August and the payment date was 15 September.
In the update Dragon said that average gross production was 92,060 barrels of oil per day (bopd) and a gross production rate of 100,658 bopd was achieved on 9 June. Production is expected to average at around the 100,000 bopd level until the end of this year, with this rate maintained for a minimum of five years from 2016.
Production has been added from existing wells, highlighting the field’s productivity, according to Doyle. In addition, the 100,000 barrels per day target has already been reached, he said.
The initial closing date for the offer is 30 July. The deal is only conditional on a minimum of level of 80% acceptances or 75% minimum level of acceptances representing a majority of the voting rights held by independent shareholders.