Dragon Oilminority shareholder says Enoc offer below fair value

Emirates National Oil Company’s (Enoc) fight to own Dragon Oil outright hit another bump yesterday when the Dublin-listed explorer’s second-largest minority shareholder argued that the offer is too low.

Enoc said, however, that it did not expect the efforts of Dragon Oil’s two largest minority shareholders – the investment funds Baillie Gifford of Edinburgh and Setanta Asset Management of Dublin, which collectively own just more than 10 per cent of the company – to be enough to rally support to block its buyout offer.

In two previous notes to investors, Richard Sneller, Baillie Gifford’s head of emerging markets, argued that Enoc’s offer of 750 pence a share for the 46 per cent of Dragon Oil it did not already own was below “fair value”.

He said Enoc’s offer did not recognise the potential to double production at Dragon Oil’s main asset – the Cheleken oil and gasfields off the shores of Turkmenistan – over the next 10 years.

Richard Doyle, a Setanta fund manager, voiced a similar opinion. Setanta is Dragon Oil’s second-largest minority shareholder, with about 15 million shares, or 3 per cent of Dragon Oil.

“We emphasise both the potential for increased recovery of oil and the strong production from recently-drilled wells at the Cheleken field,” said Mr Doyle yesterday.

He said Enoc’s offer did not recognise “the value of its substantial natural gas reserves, for which infrastructure is being developed, and Dragon Oil’s overlooked exploration portfolio”. For instance, in Block 9 in Iraq, where Dragon Oil holds a 30 per cent interest from only two wells, “early results have been better than the comparable early flow rates at Cheleken”, he said.

“We additionally highlight the potential for Dragon to achieve better realisations [prices, that is] on its oil – a much lower discount than that currently achieved through export via Azerbaijan and Russia,” said Mr Doyle. Cheleken reached a production level of about 100,000 barrels of oil equivalent per day last month and Dragon Oil said it was expecting that output level to be maintained this year.

Enoc has questioned the analysis of Baillie Gifford and Setanta, saying an independent analysis Dragon Oil commissioned last year found Cheleken had a much more modest production potential.

Nevertheless, Baillie Gifford said it wanted Enoc to negotiate a “contingent payment note” that would pay up to an additional £2 per share if Cheleken were to exceed certain production levels in the coming years.

But Mr Doyle argued for a simpler solution that pays shareholders extra for cash that Dragon Oil holds currently, as well as the potential production growth.

“We believe that the additional value could be more practically shared through simpler means, such as a special dividend, recognising the substantial cash balance of Dragon that belongs to all shareholders,” he said.

Investors have until July 30 to accept or reject Enoc’s offer.

Neither side could say how Dragon Oil shareholders who have yet to publicly declare their positions might vote. Only GLG Partners, a part of Man Group, and LGM Investments, a unit of Bank of Montreal, have publicly supported the Enoc offer, and they represent less than 2 per cent of shareholders.

An Enoc spokesman noted that a large number of recent transactions had been too small to register the owners and speculated that they probably were arbitrageurs looking to turn a quick, small profit between the market price and the offer prices.

“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 an Enoc spokesman yesterday.

Mr Doyle said: “We do not know the outcome of the tender offer. However, it is our understanding that while Enoc claims to have taken minority shareholders’ views on board, the two largest minority shareholders have publicly questioned the price offered by Enoc to minority shareholders.”


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Anthony McAuley

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