Chasing the Dragon

So, Dubai state-owned oil company Enoc is gearing up for a second attempt to take Dublin and London-listed Turkmenistan producer Dragon Oil private. It currently owns 53.9pc, although in the past it has held as much as 69.4pc.

So far, it has only made a preliminary approach but, with oil earnings diving, the attraction to the Dubai government of securing full control of a reliable cash cow is clear.

An all cash offer of 455p/share through a Scheme of Arrangement failed in 2009 when the only other sizeable shareholder — Edinburgh-based investment manager Baillie Gifford with 6.8pc — rallied the minority shareholders and secured a rejection.

Baillie Gifford is passing no remark this time round but, barring a stellar offer, there’s little reason to think there will be a rush to sell. Dragon is wonderfully stolid — production up by 6.8pc at 79,000 b/d last year with more growth targeted, 2014 profits up by 27pc, a share price that has stood up well to falling prices, a balance sheet to die for.

News of the Enoc approach sent Dragon’s share price to £6 from around £5. But, on a fair value basis, stockbrokers are saying it’s worth £6.50-£7/share.

So what would an Enoc-owned Dragon look like? Some years ago, a very senior executive exiting the company made clear his frustrations as an “oil man”. The top priority was expansion out of Turkmenistan, using experience there and the Middle East connection to acquire serious assets in those parts of the world. But this was blocked by government bean counters, he grumbled. At that point, the company had a war chest of $300mn.

Five years ago, Dragon Oil’s chief executive said: “Going forward we have a strong balance sheet with a net cash position of more than $1bn and no debt, which provides us with significant financial flexibility as we look to diversify our asset base.” At the end of last year, it was sitting on $2bn, having pulled out of a move to buy London-listed Petroceltic. It still insists it is looking for opportunities.

Given the oil price collapse, the retreat from Petroceltic was maybe not surprising, although, arguably, it was a buyer’s market. Whatever the ins and outs of that non-deal, the fact remains that Dragon’s acquisitions have been pretty paltry. Expect no rush to spend if Enoc buys the whole shop, not because it wants to pocket the $2bn — it could have done this through a special dividend had it wanted to — but because of the inherent conservativeness of the Dubai government.

One of Dragon’s abiding problems since its crude swap arrangement with Iran broke down five years ago has been securing favourable marketing terms for its oil. It did manage to secure an improved deal with Azerbaijan’s state-owned Socar, but remained unhappy and, from the beginning of this year, broke links with Socar. It is now marketing some of its volumes through Makhachkala in Russia as well as through Baku.

The Iranian oil ministry has said on several occasions that it wants to reinstate swap deals, taking crude in the Caspian in exchange for crude in the Mideast Gulf. If Enoc wholly owned Dragon, would the chances of renewal of such an arrangement increase?

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