The largest minority shareholder in Dragon Oil rejected the latest offer from Emirates National Oil Company, which is attempting for the second time in six years to buy the Dublin-listed company outright.
Baillie Gifford, a fund manager based in Edinburgh, Scotland which owns just over 7 per cent of Dragon Oil, said that Enoc’s latest offer “materially undervalues” Dragon Oil, which it argues has the potential to double production at its main asset – the Cheleken oilfield in Turkmenistan – over the next 10 years.
If it were to achieve that rate, Baillie Gifford argued, “this would represent one of the fastest production growth rates of any listed oil company in the world”. Enoc on Monday raised its offer for the third time in three months, offering 750 pence a share to buy the 46 per cent of Dragon Oil that it does not already own. That would value the entire company at about £3.7 billion (Dh21.62bn) and was up from an offer of 735 pence in May and an initial offer of 650 pence in early March, when the shares were trading at 509 pence.In trading yesterday, Dragon shares were at 723.50 pence, not far off their 52-week high of 728 pence apiece. Baillie Gifford successfully rallied investors in 2009 to block an earlier bid by Enoc to buy out Dragon Oil.
Enoc had then offered 455 pence a share when Dragon Oil was producing at a rate of about 43,000 barrels of oil per day.
Dragon Oil said on Monday that production at Cheleken had reached 100,000 bpd and said it expects output to plateau at that level for at least five years.
Richard Sneller, Baillie Gifford’s head of emerging markets research, argued, however, that “Dragon Oil owns a valuable growth asset that we believe has the potential to see production rise materially over the next decade”. He added: “Its management team are highly capable of delivering on this complex asset’s potential [and we] share Enoc’s frustration that the stock market has been slow to appreciate the growth potential of the Cheleken Contract Area.”
Mr Sneller asked other minority shareholders, including Franklin Resources, which owns 4 per cent and Setanta Asset Management, which owns 3 per cent, to consider a number of detailed technical points it made in its statement about Cheleken’s potential.
Mr Sneller also noted that Baillie Gifford had offered to negotiate with Enoc about a “contingency payment note” for minority shareholders, whereby they would benefit if Dragon Oil were to achieve the growth they believe it is capable of.
“I’m not sure what they think they know that we don’t know,” said a spokesman for Enoc, which pointed out that Baillie Gifford’s analysis is not supported by an independent report that Dragon Oil commissioned on Cheleken’s development potential.
The Enoc spokesman noted that “the offer price was derived based on extensive feedback from numerous shareholders, and the Independent Committee,” chaired by an independent oil executive, which this week recommended the 750 pence offer.
Enoc needs to convince holders of just over 23 per cent of Dragon Oil to sell their shares to delist the company, but failure to cross that threshold will mean it stays public and subject to Irish stock exchange rules.
The process could drag on for months, although Enoc is resisting any efforts to improve the offer, either through a higher share price or a future contingency payment.
amcauley@thenational.ae
