Dragon Oil closes in on Petroceltic £491 million deal

Dubai-based Dragon Oil has offered a premium of nearly 29 per cent a share for the Dublin-based explorer.

Dubai-based Dragon Oil is near a deal to buy the Dublin-headquartered Petroceltic for about £491.5 million (Dh2.88 billion), a takeover that would help Dragon achieve its aim of diversifying its oil and gas interests away from Turkmenistan.

Dragon Oil, which is 54 per cent owned by the Dubai government via Enoc’s shareholding, confirmed yesterday that it has been in talks to offer 230 pence a share in cash for Petroceltic, a 28.85 per cent premium to its closing share price on Friday.

Petroceltic stock was up more than 22 per cent in early afternoon trading in London.

The Petroceltic chief executive, Brian O’Cathain, said the potential offer would be a good deal for shareholders. “It’s a reasonable premium over when we started our discussions a couple of months ago – 45 per cent over our average share price, and in cash.”

A compelling aspect of the take-over would be the ability to fund Petroceltic's big Algerian gas project, which might otherwise prove difficult next year. Mr O'Cathain said that development of the Ain Tsila gas discovery there is expected to cost US$1.6bn, with most of the costs being incurred late next year. Petroceltic, which is operator and owns just over 38 per cent, has a funding obligation of about $600m, half of which it has secured.

But Mr O’Cathain said: “Funding for that would be running out towards the end of 2015 and depending on perceptions of Algeria, of North Africa in general, that could have been challenging to fund. When this [potential Dragon Oil deal] came along and they understand the region and the project, and they have a couple billion dollars cash on their balance sheet, it seemed like a compelling fit.”

Dragon Oil said in its first-half results that it had net cash on hand of $364m, with cash and equivalents of $1.86bn. Dragon Oil is currently about five times larger than Petroceltic, with revenue in the six months to the end of June of $547m, while Petroceltic had revenue in the same period of $96.3m. Dragon Oil had an operating profit for the period of $388.5m, whereas Petroceltic booked a loss of $57.4m due to write offs of poor results on drilling.

The two companies have complementary oil producing and exploration assets in North Africa and Iraq, though Dragon Oil’s principal asset is offshore Turkmenistan in the Caspian Sea. The acquisition would give it exposure to production in Algeria, eastern Europe, and elsewhere.

“Dragon Oil has been for some years been pursuing a diversification strategy and this would meet that,” a spokesman for the company said. Dragon Oil had production in the first half of the year averaging just over 73,000 barrels per day from the Cheleken field, offshore Turkmenistan. The Petroceltic deal would add about 25,000 barrels of oil equivalent a day of production, diversifying it also into natural gas.

Mr O’Cathain said early feedback from shareholders was positive, though only the company’s chairman, Robert Adair, who is the second-largest shareholder with about 20 per cent of the company, was fully briefed before yesterday’s announcement. The largest shareholder, Worldview Capital Management, a London-based hedge fund run by management from Russia and representing Middle East sovereign wealth funds, owns 24 per cent.

Any deal would require approval from shareholders of both companies, as well as the Algerian government, which owns more than 43 per cent of Petroceltic’s Ain Tsila project.

Initial views from analysts on the potential offer were mixed.

Werner Riding, of the brokerage firm Peel Hunt, reckoned the price was too low, particularly because of the potential appeal of Ain Tsila to others. “The absolute value for Petroceltic’s resource base is relatively straightforward to define. What is less straightforward, however, is the more qualitative strategic value that an acquiring company would be prepared to pay for long-term security of gas supply. In our view, if a firm offer for Petroceltic is made by Dragon we would not be surprised to see a counter offer made by another party closer to our estimate of … 250 pence a share.”

Thomas Martin of the stockbroker Cannacord Genuity thought the offer was fair unless circumstances change. "An assumed chance of success higher than 70 per cent for Ain Tsila, a lower discount rate than 10 per cent, and/or a Brent oil price above $100 a barrel – assuming the Algerian gas contract is linked to Brent – would be required to justify a competing, higher offer, but this looks like a good price to us," he said.

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