DNO International and UAE-based RAK Petroleum have signed a heads of agreement to merge RAK Petroleum’s Middle East and North Africa (MENA) operating subsidiaries into a subsidiary of DNO in exchange for DNO shares to be issued to RAK Petroleum, the companies announced yesterday.
The deal, which values RAK’s MENA business at $250-300 million, will give DNO access to three new potentially lucrative national markets and boost their producing asset base.
DNO’s shares surged 21% on the Oslo Bourse on the news, having previously shed 30% of their value in 2011 on the back of poor reciepts from expensive operation in Iraqi Kurdistan.
The deal is currently non-binding until voted on by shareholders and is subject to an independent review of RAK’s oil and gas assets by consultants DeGolyer and MacNaughton.
The announcement reverses industry expectations of how a merger between the operations of DNO and RAK would pan out. In February 2010 RAK boosted its stake in DNO above 20%, and the expectation was that RAK would then push to but the remaining shares in DNO.
It now appears that RAK are happy to go the other way, and divest their MENA operations in return for a 40% shareholding in the enlarged DNO. RAK CEO and RAK and DNO Chairman Bijan Mossavar Rahmani says that DNO for the short term has been on “a very bumpy ride”. “If it hadn’t been on this bumpy ride it would have been out of the reach of RAK Petroleum to take a share in this company,” he said.
Rahmani is thought to be referring both to DNO’s unprofitable venture in Kurdistan and their production in Yemen, where revenue is under threat following political unrest and sabotage of export infrastructure by disgruntled tribes.
A further explanation – aside from DNO’s mixed fortunes – for the structure of the deal is that DNO is responding to investor demand in the region on the back of significant opportunities arising from investment programs by national oil companies.
The Norwegian company has a mixed record on breaking into new markets, having borrowed heavily and invested in a Mozambique project in 2003 that proved disappointing.
The hope is that a strong yet diversified Middle East focus will shore up DNO and eventually prompt further concolidation opportunities with regional firms. Rahmani told Reuters that a number of oil companies had called him “to consider combining” as political turmoil sweeps the Middle East and pushes down share prices.
DNO also has an eye on Iraq, and appointed Rahmani as company Chairman a fortnight ago in a bid to improve relations with local contacts.
The deal with RAK improves the chances of turning DNO’s current projects to profit, while reducing the enlarged company’s overall exposure to the country, which has seen renewed violence in recent weeks and where the fortune of the new hydrocarbons law remains unclear.
Rahmani is quoted in a Reuters report saying the move improves the Norwegian company’s chance of gaining a profitable long term export deal in the country.
DNO was the first international oil company to sign a production contract in Iraq after the 2003 US-led invasion. However, the firm saw no payment for exports from its Iraqi Tawke field until the Kurdish regional government released $104 million in May this year. Baghdad claims the production-sharing agreement signed with the Kurdish authorities is illegal, and it’s fate will not be clear until the country’s much-delayed hydrocarbons laws are passed.
Following the merger DNO aims to list the enlarged company in London while retaining its existing Oslo listing. Again, this is with a view to attracting a broader range of investors. London has a stronger profile of attracting MENA investment than Oslo, and is a more vibrant merger and acquisition market.
The consideration shares will be issued at a minimum DNO share price of NOK 8.25 ($1.54) and a maximum share price of NOK 10.00 ($1.86).
The heads of agreement provides the basis of negotiation of definitive merger documents, including an integration agreement.
“There is a compelling logic in combining the DNO and RAK Petroleum operating assets to build a first rank independent MENA upstream operator,” said Bijan Mossavar-Rahmani, Chairman and Chief Executive Officer of RAK. Mossavar-Rahmani was also voted in as Chairman of the Board of DNO at the 9 June 2011 annual shareholders’ meeting of that company.
“The opportunities for growth for MENA oil and gas companies with regional experience, strong assets and geographic diversity have never been better,” he added.
The headquarters of the enlarged company will remain in Oslo, Norway; operations offices will be located in the Kurdistan Region of Iraq, Yemen, the United Arab Emirates, Tunisia and Oman.
The expanded business will boast 629 staff and 326.5 million barrels of proved oil reserves.
