Dragon Oil plc Agrees £3.7bn Takeover Offer — Could Gulf Keystone Petroleum Limited Be Next?

Could Gulf Keystone Petroleum Limited (LON:GKP) follow Dragon Oil plc (LON:DGO) and attract a takeover bid?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shareholders of Dragon Oil (LSE: DGO) are being offered 750p per share by the firm’s majority shareholder, Emirates National Oil Company (ENOC).

As I predicted in May, 735p per share was not quite enough. ENOC has agreed to top up its previous offer in order to get the backing of an independent committee of Dragon’s directors.

Today’s offer values Dragon at £3.7bn and represents a 47% premium to Dragon’s closing share price of 509p on 13 March, the day before ENOC’s initial approach.

ENOC already owns 54% of Dragon shares and today’s offer is likely to be final, unless a number of Dragon’s large minority shareholders combine to block the deal. According to ENOC, acceptances are needed from a further 23% of shareholders for the deal to go through.

Once this threshold is reached, Dragon shares will be de-listed from the Irish and London stock markets. At this point, any shareholders who choose not to accept the 750p offer will be left with shares that could be difficult to sell and may no longer provide a dividend income.

I believe this is quite a good offer for Dragon shareholders. Their firm only has one material asset and has proved unable or unwilling to expand over the last few years, despite the benefits of a $1.9bn cash balance and no debt.

Is Gulf Keystone next?

Dragon Oil has a number of similarities with Gulf Keystone Petroleum (LSE: GKP).

Both companies own one, large asset providing the potential for prolific long-term, low-cost production. Both operate in areas of the world where political risk is a factor. Both companies seem unlikely to make any further progress as independent operators.

It’s clear that Dragon’s Cheleken field will fit well into ENOC’s larger portfolio. Many oil experts believe that Gulf’s Shaikan field could fit equally well into a larger portfolio.

There’s only one problem. Dragon is well financed and has net cash of $1.9bn. Relatively little investment is needed to maintain production from Cheleken at current levels of around 90,000 barrels of oil per day (bopd).

The story is quite different at Gulf. While production from Shaikan has risen to around 40,000 bopd over the last year, significant investment will be needed to take production up to the firm’s targeted level of 100,000 bopd.

Gulf also has $527m of debt that may need restructuring over the next 6-12 months. As of 8 April 2015, the firm’s cash balance was just $87m.

A potential buyer would need to buy or restructure the firm’s debt, as well as acquire its shares. They would also need to inject enough money to fund further Shaikan development.

A number of new wells would need to be drilled for future production and to try and convert Gulf’s 1,024m barrels of oil equivalent of contingent resources into commercial reserves.

On top of all of this, there are the risks posed by the ISIS conflict in Iraq and long-running payment delays for oil exported from Kurdistan.

In my view, it all adds up to a situation where shareholders do not have a strong hand. Gulf’s funding needs and the rights of its bondholders mean that the firm’s shares could prove a risky buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

3 essential factors for investors to consider when aiming for passive income success

Mark Hartley outlines three of the most important considerations investors are faced with when attempting to secure a lucrative passive…

Read more »

Investing Articles

£10,000 invested in Barclays shares 1 month ago is now worth…

Barclays shares have carried on where they left off in 2024, by climbing far faster than the FTSE 100. Harvey…

Read more »

Investing Articles

I’ve been watching the easyJet share price like a hawk. Here’s what it did last week

Harvey Jones can't take his eyes off the easyJet share price. He thinks it looks good value and ready to…

Read more »

Investing Articles

A £10,000 investment in Nvidia stock 6 months ago is now worth…

Nvidia stock's shown a lot of volatility for a mega-cap company in recent weeks. Dr James Fox explores how an…

Read more »

Investing Articles

4 reasons Ferrari could continue to be a stock market winner

The global luxury goods market may have struggled in recent years, but you wouldn’t guess that from Ferrari’s soaring stock.

Read more »

Investing Articles

5 perfect starter stocks to consider for a Stocks and Shares ISA in 2025

Wondering which shares to buy for a newly opened Stocks and Shares ISA? Our writer thinks these five investments are…

Read more »

Row of terrace houses.
Investing Articles

Thinking about buy-to-let? Consider these UK stocks instead

Owning UK property stocks could be a better way to invest in buy-to-let, though there are drawbacks. Royston Wild explains.

Read more »

Investing Articles

Here’s a plan to target £7,500 a month in passive income

This writer outlines a roadmap that someone could consider taking to try and aim for a substantial future passive income…

Read more »