Ten-year wait for investors to sell RAK Petroleum stakes ends this week

Above, the Bukha A Oman oil field in Oman being operated by DNO, where RAK Petroleum owns a stake. Pawan Singh / The National

RAK Petroleum’s founding shareholders will soon get a chance to sell their stakes, but the company’s core owners are likely to hold on to their shares and consolidate control.

A six month lock-up period on the bulk of their holdings in the Norway-listed entity is due to expire on Thursday giving them the chance to realise gains from what has been a decade-long wait.

The Oslo listing took place in November, starting the final chapter on a story that begun in 2005, when investors rushed to put their money in the Ras Al Khaimah-based firm ahead of an anticipated IPO on UAE stock markets.

However, the regulatory landscape shifted and ultimately investors found themselves in a fully funded private equity deal rather than a public equity sale. The then management, having already raised the capital, went on an acquisition spree, buying stakes in companies in other sectors, such as RAK Airways – the carrier that suspended commercial operations in December 2013.

The current management, led by the executive chairman Bijan Mossavar-Rahmani, after 2008 proceeded to divest from what it saw as non-core businesses and instead built up energy assets across the region including acquiring a significant stake in Norwegian explorer DNO which is active in the Kurdish region of Iraq. It also has gas interests in the Ivory Coast via a holding in Foxtrot International.

Mr Mossavar-Rahmani, who is also chairman of DNO, told The National that he expected that most shareholders would take advantage of the upcoming liquidity opportunity that has been a long-held target since he took charge.

“There is a lot of interest in RAK Petroleum [from investors] who haven’t bought shares up to this point,” he said. “I expect some of them will now move to acquire positions in the stock.”

Øyvind Hagen, an analyst who covers DNO for ABG Sundal Collier, a brokerage in Oslo, does not expect liquidity to pick up significantly after Thursday but said that RAK Petroleum’s shares are undervalued.

“RAK is currently trading at around 20 per cent discount to the value of the DNO stake alone,” Mr Hagen said. “In all holding companies you typically see some discount, but at 20 per cent you might find some investors are interested.”

Mr Mossavar-Rahmani expects that valuation gap to close somewhat after Thursday. A source with knowledge of the matter said that founder shareholders would be keen to sell up, even with the possibility that DNO could become a target for bigger firms interested in its assets.

Despite the slump in oil prices and continued security concerns in Iraq, the prospect of consolidation among explorers in the region has become more likely since the Kurdistan Regional Government moved to resolve its long-running dispute with the central government in Baghdad that has hampered oil exports from the region. Progress with the new Iraqi government at the end of last year helped the KRG to start making back-payments owed to foreign oil companies, a precursor to consolidation there, executives have said.

Mr Mossavar-Rahmani said that while DNO has its “hands full” and has not been looking at potential acquisitions it would naturally “be on the radar” of any of the oil majors on the hunt.

He declined to comment on if there have been any discussions with any of the big energy companies for a possible deal.

Mr Hagen said that oil majors will be moving in or looking to increase exposure in the Kurdish region of Iraq after the issue of payments from the central government is fully sorted out.

“It is more likely that [DNO] are a target. DNO have been pretty open that they have been looking to diversify their portfolio,” said Mr Hagen. “Also their Tawke [oilfield] is probably the best asset in the region.”

In its annual report RAK Petroleum says it owns 42.84 per cent of DNO but Bloomberg data from Wednesday shows a 40.45 per cent holding. Last month, DNO issued more than 60.5 million new shares raising 975 million Norwegian kroner, diluting RAK Petroleum’s stake, after it elected not take up its allocation.

According to the company, the market value of its stake was US$971 million at the end of last year.

Mr Mossavar-Rahmani said RAK Petroleum did not take up the extra shares partly because it is now looking to acquire assets in other regions, but did not elaborate on where.

In last year’s Oslo listing existing RAK Petroleum shareholders were allotted restricted shares and an associated number of founder shares amounting to about 90 per cent of their shareholding in RAK Petroleum, the remaining 10 per cent were unrestricted.

The expiration date of the lock-up period is Thursday. However, shareholders can “opt-in” to maintain their restricted class A shares and accompanying class B shares, which count for two votes, the company said this month.

Mr Mossavar-Rahmani holds 23.2 per cent of voting shares, followed by a unit of the Dubai-based Juma Al Majid Group, which is the distributor for Hyundai cars, with 9.2 per cent. The government-owned RAK Gas holds 6.3 per cent and DNO holds 4.8 per cent, according to RAK Petroleum’s website. DNO bought the shares before the Oslo listing in a series of transactions during the first nine months of last year. Teodor Sveen-Nilsen, an analyst at Swedbank, Oslo, said that DNO’s acquisition of RAK Petroleum shares raised some corporate governance concerns.

“The root of my concerns are that DNO acquired shares last year in RAK, its biggest shareholder, and not its own shares. It is a much stronger and more credible signal to the market if you acquire your own shares,” he said, acknowledging that DNO managers have said it was cheaper to acquire DNO shares by buying RAK Petroleum shares.

Mr Mossavar-Rahmani emphasised that the move was based on a “value proposition” for DNO.

It “was able to acquire a considerable number of shares at a considerable discount giving it greater exposure to its own assets given their weight in RAK Petroleum’s portfolio,” he said.

It also allowed DNO to diversify because of RAK Petroleum’s interest elsewhere, including the Ivory Coast.

RAK Petroleum recorded a net loss for last year of US$110.9 million, mainly because of a write-down in the value of DNO’s assets, it said in its 2014 annual report released on Monday. It made a Dh58.1m profit in 2013.

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