ENOC has declared itself a “committed long term majority shareholder in Dragon Oil” despite the firm having a bid rejected to buy out the remaining shares of the company.

The firm had its offer of 455p a share rejected at a London meeting this week and in a statement made to ArabianOilandGas.com, the firm revealed: “We acknowledge that the deal has not been voted through. We were confident of a successful outcome, particularly following the recommendation by the
Independent Committee. We also noted that RiskMetrics Group had recommended to shareholders to vote for the recommended transaction and offer price.”

ENOC also revealed the firm is not under pressure to sell its current shares in Dragon, despite the tough economic crisis. “The wider economic back-drop in Dubai has not affected our ability to complete this transaction,” it stated.

The government backed firm was also cagey about the prospects of another bid for the remaining Dragon Oil shares: “ENOC cannot comment as to whether or not it may entertain making an offer to acquire the outstanding shares in Dragon Oil.”

ENOC also refused to comment on its future expansion and acquisition plans.

• The bid for Dragon Oil by Dubai’s ENOC was soundly defeated, achieving only 49% of
the votes by holdings rather than the 75% required. Votes in favour of the bid
accounted for just 28% of the free float. This implies a relatively small overhang (13.6%
of the total holding) of arbitrageurs and weak holders, which we expect to be quickly
flushed out. The stock fell from 388p to 360p immediately after the announcement and
recovered to 379.75 by the close.
• We believe the Dragon Oil can regard this as a vote of confidence in management and
the company as a standalone entity, its plans and long term potential. They can now
concentrate on continuing to demonstrate operational performance and delivery, and
finalising the commercialisation of the gas reserves. With four rigs operational, they
should be on track in their drilling programme for 2009-2010, with production growth
accelerating next year.
• With the opening of the connection of the export pipe to China (see below) and
expected restart of gas sales by Turkmenistan to Gazprom, we think the background for
commercialisation of gas is now stronger than it has been for most of this year, and we
expect to see progress comfortably in advance of the completion of gas separation
scheduled for the end of next year. We note that last week, Shenzen Gas announced
that it is paying CNPC $11.40/mmbtu for gas from Central Asia, as CNPC expands its
supplies.
• Beyond the operational momentum of Dragon itself, the position of ENOC in the wake
of the failed bid also raises questions which could have positive implications for
shareholders. We believe the access to Dragon’s cash which was a key driver of the
bid for ENOC means that they may wish to consider a special dividend, for which we
would see greater shareholder support. We would however watch for any indication that
ENOC press for any farmout of Dragon’s 100% stake to realise additional cash, but
note that with access to just over half the receipts this option is less attractive to ENOC,
who will also want to maximise their upstream hedge.
• The bigger question remains over whether ENOC will contemplate (or be able to resist)
selling down its stake, which without the blocking stake will have significantly greater
value. We have regularly pointed out the strategic attraction of the area to industry
players, and the pace of declarations of interest in the region (both explicit and implicit)
has accelerated during the timetable of the bid. Over the last three weeks, the
President of Turkmenistan has had meetings with the presidents of Italy, Russia and
China, with the latter in the country this weekend to open the pipeline to Xingjiang and
into the West-East pipeline. Turkmen gas sales are expected to start at 5bcma next
year then ramp up once the eastern section of the second West-East pipeline is
completed in 2011 (CNPC has signed a deal for 30bcma with an option to increase to
40bcma).
• We congratulate the shareholders for rejecting the offer from ENOC despite some
pressure and short term downside risk (which we estimated down to 370-380p). We
have confidence in the management of Dragon and expect them to renew focus on
operational momentum and building on the faith shown by their major shareholders,
which will drive underlying value. Over and above that, we do not rule out further
corporate interest for Dragon despite the stated commitment by ENOC to hold to end
2011 – we are sure that Dubai’s luxury resort Atlantis did not expect to offer flights from
UK and three nights at $699 when it did its business plan, but times change.
Peter Hutton, +44 20 7071 5227 peter.hutton@ncb.ie

Whatever the outcome of the meeting, I will be going to the pub afterwards and I invite everyone to come along.

Goodbody Stockbrokers Morning Wrap 7/12/2009 and 27/10/2009
Dragon Oil: Steady Progress
Recommendation: Buy
Closiing price 407p

“While the investment case surrounding Dragon continues to be overshadowed by the lack of clarity regarding ENOC’s intentions, at an operating level events continue to demonstrate progress.
Of note within the statement is the fact that capex ($56m in Q3)
continues to undershoot, while production (46.1 kbopd v our Q3 estimate of 44.0 kbopd) overshoots. With production trending ahead, and expectations of a four-rig complement early next year, confidence in our FY10 projection of 52.0 kbopd is reinforced.
Post the IMS, adjustments to our 2009 and 2010 earnings projections are at the margin (+2% in both years), with the increase in FY09 gross production (from 44.4 to 45.1 kbopd) and realised price (from $64.4 to $69.0 per barrel counteracted to a large extent by a lower forecast percentage entitlement.
That said, forecast net cash at the end of 2009 and 2010 increases by 12% and 15% respectively as we have shaved $50m in each year from our prior capex estimates due to the slower pace of infrastructure spend. With net cash at the end of September of $962m, we now expect Dragon to exit the year with c.$1bn in net cash (equivalent to 29% of the current market cap.) That has positive implications for our NAV with Core NAV rising from 478.6p to 494.1p, while Total NAV increases from 581.6p to 597.0p. The pending arrival of additional rigs and a rising oil price continue to provide confidence in production growth. Combine that growth potential with the obvious value (EV/BOE of $3.85, compared to typical take-out multiples in th range of $10 – $12 per boe) and we see no reason to alter our positive stance.
Our price target, which remains pegged to Core NAV(i.e. OIL PRODUCTION ONLY), nudges up from 470p to 495p. The signing of a gas sales agreement, which we anticipate at some stage in 2010, however, would highlight the value within its gas resource (3.2 TCF) and suggest a price target more in line with Total NAV. As such, we view our current target as consevative given progress in terms of oil production and the latent value within its gas resource and maintain our BUY recommendation.”

Enoc fears backlash from Dragon’s tail

By John Murray Brown

Published: December 7 2009 01:28 | Last updated: December 7 2009 01:28

The shareholders of a small Dublin-listed oil company will take a decision next week that could have big implications for Dubai’s debt crisis.

A special shareholder meeting in a Park Lane hotel on Friday of Dragon Oil, an oil and gas exploration company that is also listed in London, is voting to approve a takeover bid from the Emirates National Oil Company, which values Dragon at £2.3bn ($3.8bn).

Dragon

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Enoc, which already holds a 51.5 per cent stake, is offering 455p a share to buy out the minorities. It is financing its bid with $325m from the Emirates National Bank of Dubai and a further $1.1bn committed by Standard Chartered.

Under a scheme of arrangement, Enoc needs 75 per cent backing, rather than the 90 per cent applied under normal takeover rules. But with Enoc barred from voting with its own shares, brokers calculate just 12.2 per cent of the minorities could block the deal. In practice the threshold is likely to be even lower, given many shareholders will not vote at all.

“It’s far from being in the bag,” says Peter Hutton, analyst with NCB stockbrokers in Dublin.

When the offer was announced on November 2, the stock saw heavy buying by risk arbitrage funds who calculated it was likely to go through. But the discount to the offer price is widening now, suggesting investors are not so certain. On Friday the shares closed at 412.25p, up 5.25p on the day.

Baillie Gifford – the Edinburgh-based institution and after Enoc the next biggest shareholder – last Wednesday raised its stake to 4.4 per cent and rejected the offer as too low. Carmignac Gestion, a Paris-based long-only fund, and Noster Capital have also said the offer undervalues the company. It will be important how JPMorgan, with about 3 per cent, votes its shares.

However, Mr Hutton believes it could well come down to what he terms “the dragon’s tail”. This is the 55,000 small retail investors who together own close to 20 per cent of the equity. Many are Irish, dating from the days when the company was controlled and led by Ollie Waldron, a former Irish rugby international.

This, Mr Hutton suggests, is why the company is holding the meeting in London and not Dublin. “They’re placing a block in the way of the smaller Irish retail investors,” he says.

Enoc’s advisors are Standard Chartered and Goodbody stockbrokers. HSBC and Davy, which is broker to Dragon, are advising the independent directors, who back the deal.

The small shareholders are mobilising around a hastily launched website called Savedragon.com. Enoc for its part has retained Georgeson as proxy agents to inform small shareholders about the offer and urge them to use their votes.

“I’d hate to think of what Georgeson’s telephone bill looks like,” says Mr Hutton.

There is a strong operational logic for Enoc, which is essentially a refining company with a small 60,000 barrels a day production operation.

Dragon would give it access to potentially large upstream assets in a key developing region. Dragon is also sitting on about £1bn in cash on its balance sheet.

Mr Hutton believes the financial crisis in the emirate is hampering Enoc’s ability to offer a fair price.

But in the wake of news two weeks ago that Nakheel, another Dubai state-owned company had asked for a standstill on its debt, Mr Hutton says the takeover now is “all about Enoc’s need for cash”.

He adds: “This is what Enoc can afford to pay, not what these assets are worth. It is a take it or leave it choice and investors should leave it.”

NCB, the main independent broker covering the stock, has raised its long term price target to 805p, and believes a fairer take-out price would be about 650-700p.

Enoc has currently given an undertaking not to sell its stake until the end of 2011, but this was largely to reassure other investors it did not intend to “flip” the company in the event the bid was successful.

However, one consequence of that undertaking is that the company’s independent directors have not been able to consider alternative bids.

Mr Hutton says while Dubai’s creditors may feel it is right to pursue the takeover option – particularly as it gives Enoc access to the cash pile – attitudes may change.

“Lenders may start looking for Dubai to contribute to its own recovery by realising fungible assets where they can, ” he says.

In practice it would have been difficult to mount a hostile bid.

But in the wake of a failed takeover “an approach could be portrayed as supportive, rather than hostile, helping Dubai to raise cash to support its new term requirements”.

Copyright The Financial Times Limited 2009. You may share using our article tools. Please don’t cut articles from FT.com and redistribute by email or post to the web.

The board of Dragon, a company with substantial oil interests in Turkmenistan, recommended a 455p-a-share takeover by Enoc, the national oil company of Dubai, which owns 52 per cent of its shares. A meeting to vote on the takeover takes place on Friday.

Initially, the shares jumped to within 3 per cent of the offer price. However, they are now trading at just over 400p, after Baillie Gifford, Dragon’s second largest shareholder, said it was voting against the deal last month.

Because of the structure of the deal, Enoc is unable to vote. To succeed, the scheme of arrangement needs three-quarters of those voting to support it, meaning opponents need, at most, 12 per cent of Dragon’s shares to block it.

About 10 per cent of Dragon is owned by retail investors, who are less likely to vote, meaning a No vote by 10 per cent of its shares might scupper a deal.

Baillie Gifford has kept buying Dragon – 500,000 shares bought on Thursday took its stake to 4.63 per cent. Carmignac Gestion, with 0.83 per cent of Dragon, also plans to vote against the proposal.

Dragon Oil eased 5½p to 398p after Emirates National Oil Company (Enoc), which is controlled by Dubai, said it would continue to go ahead with its £2.36 billion acquisition of Dragon despite the emirate’s debt problems. There had been speculation that Dubai’s woes could scupper the deal or even force Enoc to sell part of its 52 per cent stake in the group. The proposed deal has angered a number of investors, including Baillie Gifford, which argues that the 455p offer undervalues the group. Angry smaller shareholders have set up www.savedragon.com, a campaign site.

Institutional shareholders in Dragon Oil have been rallying against majority shareholder Enoc’s (Emirates National Oil Co) offer of 455p a share, claiming that this undervalues the company.

Now proxy shareholder agency Manifest has rowed in on the issue, raising concerns about the independence of the ‘independent committee’ which recommended the deal.

It’s a small world in the oil business, and Enoc is owned by the Dubai government.

Essentially, Manifest feels that there are too many links between the independent committee and the Dubai government. Manifest said that a non-executive director, a Mr al-Muhairbi, has been involved with Margham Dubai Establishment, a wholly Dubai governmentowned company.

Another non-executive director, a Mr al-Mazrooei, is deputy vice-president of Operations at Dolphin Energy, which has signed a memorandum of understanding with the Dubai Supply Authority to provide gas from its fields in Qatar.

Meanwhile, committee member Nigel McCue stands to gain stg£1.1 million from the exercise of options in the company and subsequent sale of the shares at the bid price.

Ballie Gifford, the largest minority shareholder, Master Capital and Carmignac Gestion have all rejected the current offer, but Dragon Oil has said it won’t increase the price.

The buyout is to be conducted through a scheme of arrangement, and Enoc has stated that it will not vote at the meeting to approve the scheme.

If 12.125 per cent of the remaining shareholders vote against this, the bid will fail an outcome which looks increasingly likely.