After the stock market closed last night, Dragon Oil (LSE: DGO) issued a statement confirming it had received an increased offer of 735p per share from its majority shareholder, Emirates National Oil Company (ENOC).
Dragon has been considering a previous, lower offer by ENOC since March. The level of the earlier proposal hasn’t been disclosed, but last night ENOC described its latest offer as “a substantial increase”.
Perhaps surprisingly, Dragon’s share price hasn’t moved this morning, and remains at 680p, 7.5% below ENOC’s latest offer. This suggests the market isn’t convinced the offer will be accepted.
I can see two possible reasons for this. Firstly, even at 735p, Dragon doesn’t look expensive. ENOC’s latest offer values Dragon’s proven and probable (2P) reserves at just $6.30 per barrel, or $4.13 per barrel when Dragon’s £1.2bn cash balance has been stripped out.
To put this in context, Royal Dutch Shell’s recent £47bn bid for BG Group valued BG’s reserves at $11.10 per barrel, while Genel Energy, which operates on the fringes of the ISIS conflict in Kurdistan and faces more severe political risk than Dragon, is currently valued at about $5.60 per barrel.
I wouldn’t expect Dragon to be valued on the same level as BG, but I would expect a larger premium to Genel.
A second problem
ENOC owns 53.9% of Dragon shares and would like to own the rest in order to develop its position as an integrated oil and gas company, like a smaller version of BP.
Not all of Dragon’s shareholders agree, however. ENOC has tried and failed to take control of the firm before and failed. My impression is that major long-term shareholders are happy to enjoy Dragon’s generous dividend yield and avoid a big capital gains tax bill.
ENOC seems to be getting serious about wanting to buy out Dragon’s other shareholders, but I’m not sure this latest offer will be enough to seal a deal.
Two more bid targets?
The hoped-for merger and acquisition spree in the oil market has not really materialised. Yet there are a number of firms that could potentially be targeted by buyers wanting to add to their proven reserves.
Two possibilities are Tullow Oil (LSE: TLW) and LGO Energy (LSE: LGO).
LGO’s main asset is its Goudron field in Trinidad. Goudron has 2P reserves of 7.2m barrels, according to the firm’s website.
The industry standard approach to valuing an oil firm is by the ratio of enterprise value (market cap plus net debt) to 2P reserves. Applying this formula to LGO gives an EV/2P cost of about $23 per barrel.
For a potential buyer to make a profit from LGO’s assets they’d need to add this cost to operating and development costs, plus the bid premium required to convince shareholders to sell.
With oil prices hovering around $60 per barrel, I’m not sure this is very realistic. In my view, LGO would have to be much cheaper to become a serious bid target.
What about Tullow?
Tullow Oil has 2P reserves of 345.3 million barrels of oil equivalent (boe). Valuing the firm on an EV/2P basis gives Tullow a price tag of $17/boe. This isn’t outrageous, but isn’t especially cheap either, considering the value of the recent offers for BG Group and Dragon.
Although each of these companies has a different oil-gas mix and varying costs, I don’t think Tullow is cheap enough to attract a takeover bid at this time.