Shareholders in Dragon Oil (LSE: DGO) could lose their generous dividend and even see their shares delisted, if the current takeover bid by majority shareholder Emirates National Oil Company (ENOC) fails.
That was the message passed to the market this morning. It appears to be a warning for major Dragon shareholder Baillie Gifford, which has a stake over just over 7% in the oil firm and is resisting ENOC’s recent 750p per share offer.
ENOC wants to incorporate Dragon’s Turkmenistan assets into its own operations, as it moves away from being a downstream (refinery) operator and towards becoming an integrated oil firm.
In a statement issued to this morning, ENOC, which has a 54% stake in Dragon, says it “no longer sees the need to maintain a dividend profile” for Dragon Oil, “whether or not Dragon is delisted”.
In today’s statement, Saif Al Falasi, ENOC’s group chief executive, said:
“These are difficult decisions for any publicly listed company and we see this as another reason for delisting Dragon Oil.”
In my view, the twin threat of cancelling the dividend and delisting Dragon will be enough to persuade most shareholders to accept ENOC’s offer.
If Dragon was delisted and cancelled its dividend, its shares would be almost impossible for private investors to trade, and thus would effectively be worthless.
Cranking up the pressure
ENOC also warned investors that it believes Dragon’s stated goal of maintaining production at 100,000 barrels oil per day (bopd) for five years faces “operational challenges”.
Apparently, rising water and gas production, ageing wells that may cease to flow, and declining well pressure are among the possible issues.
As a result, ENOC believes that to maintain production, Dragon will need to increase its 2015 capital expenditure beyond the planned level of $700m.
Given current low oil prices, this would result in a reduction in cash generation and thus, I suppose, a reasonable argument for cutting the dividend.
Finally, ENOC said that it would set a “sustainable and de-risked” production target of 90,000 bopd for Dragon Oil. That’s essentially what the firm is producing now, according to Tuesday’s trading statement, which reported first-half production of 92,060 bopd.
Even if the Dragon shares remain listed, you don’t need to be Warren Buffett to work out what will happen to Dragon’s share price if the dividend is cancelled and production plateaus.
Is it a good offer?
The general view in the City following ENOC’s 750p per share offer was that this is quite a good deal. I agree. Dragon shares are 35% higher than at the start of the year, despite the oil price crash.
It’s also worth remembering that Dragon is basically a one-hit wonder.
Although Baillie Gifford, in a statement last month, said that Dragon Oil should be valued on its long-term growth prospects, the reality is that Dragon has never achieved anything of note outside Turkmenistan, despite a massive $1.9bn cash pile.
I don’t think ENOC will increase its offer. For private investors in Dragon, there are only two sensible options, in my view. Sell now, or make sure you’ve accepted the offer through your broker before the 30 July deadline.