Interactive Investor

Dragon Oil tempted by £3.6bn bid approach

21st May 2015 17:39

Lee Wild from interactive investor

Two months after confirming it had approached Dragon Oil chiefs, Emirates National Oil Company Limited (ENOC) says it is prepared to pay 735p a share, or £3.6 billion, for the Dubai-based oil company. And shareholders will be sorely tempted at this price, a 63% premium to the December low.

In fact, adjust the Dragon Oil share price for £1.2 billion of net cash on Dragon's balance sheet, and the premium to the closing price on 13 March, the day before ENOC's initial approach, is 87.5%.

ENOC reckons its possible bid stands a good chance of success. It already owns 53.9% of Dragon Oil and considers the proposal "is full and fair and provides an excellent opportunity for Dragon Oil's shareholders to realise significant value today".

"There is great uncertainty in the sector and we believe, as a long term and supportive shareholder, that Dragon Oil has achieved as much as is possible through its existing upstream strategy," said chief executive Saif Al Falasi. "Moreover, Dragon Oil stands to benefit significantly from being part of the integrated platform that ENOC offers."

Dragon shares spiked on the news, briefly breaking above 700p, but closed the session at 683p, an 8% discount to the possible offer price.

But this is not the first time majority shareholder ENOC has tried to buy Dragon. It offered 455p a share five years ago, but was beaten off. And that was with the oil price at around $80 a barrel.

Prices are currently $65, and the slump from $113 last June has threatened to spark a fresh round of industry consolidation - Shell is already paying around £50 billion for BG Group.

It's something we discussed last month following a research note from Goldman Sachs. “We expect well-funded majors and NOCs [national oil companies] to scrap high-cost, high-complexity projects and focus on gaining exposure to low-cost projects via M&A,” said Goldman.

“We upgrade Tullow Oil [target price 411p] and Africa Oil to Buy from Neutral, believing that both offer exposure to strategic assets which sit low on the cost curve. Other Buy-rated stocks screening as potentially attractive M&A targets are Genel and Dragon Oil.”

Well, it got Dragon right. Westhouse Securities did, too. It was quick to point out those it thinks are vulnerable to an approach. It said in April:

“M&A is necessary amongst the mid-sized and smaller players, particularly in the E&P sector and would highlight Tullow Oil (West and East Africa), Ophir Energy (East African gas), Dragon Oil (massive cash balance), Genel Energy (Kurdistan) and SOCO International (SE Asia) as probably the top 5 candidates amongst UK listed players."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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