DNO launches hostile takeover bid for Faroe Petroleum

Norwegian oil and gas operator DNO has said it will launch a takeover bid for Faroe Petroleum, an oil company focused on the North Sea oil and gas exploration and production.

Illustration: Transocean Arctic rig recently used by Faroe for North Sea drilling/ Image by Marcusroos, under Public Domain license

DNO, already a significant shareholder in Faroe Petroleum with a 28.22 percent stake said on Monday it would offer 152 pence in cash for each Faroe share, valuing Faroe’s existing issued and to be issued share capital at approximately £607.9 million ($780.5M).

Of the offer value of approximately £443.8 million on a fully diluted basis, £402.6 million is attributable to the current issued share capital of Faroe (other than those Faroe Shares already held by DNO and the Faroe Employment Benefit Trust) and the balance £41.2 million is attributable to DNO’s understanding of the number of outstanding share options and awards granted by Faroe to its directors, management and employees, representing approximately 7 percent dilution of Faroe’s current issued share capital, DNO said.

Per DNO, the offer price represents a premium of 44.8 percent to Faroe’s share price of 105 pence at the close of business on April 3, 2018, the last business day before DNO announced its first acquisition of shares in Faroe and a premium of 20.8 percent to Faroe’s share price of 125.8 pence at the close of business on November 23, 2018, the last business day before the Monday announcement.

DNO has earlier this year clashed with the Faroe Petroleum board after attempting to appoint two of its directors to the Faroe Petroleum board of directors.

Faroe then expressed concern with DNO intentions, advising against the DNO representation on the board due to a potential conflict of interest, after which DNO backed away, temporarily, coming back with the takeover offer on Monday.

Commenting on the takeover offer, Bijan Mossavar-Rahmani, Executive Chairman of DNO, said: “We are pleased now to engage directly with the Faroe shareholders with a proposed all-cash voluntary offer of 152 pence per share which represents a premium of 44.8 percent to the closing price of 105 pence on the day before DNO announced its first acquisition of Faroe shares last April, and a premium of 20.8 percent to the closing price of 125.8 pence last Friday.

“In the period between our first acquisition, triggering significant bid speculation, and this offer, the price of Brent crude has dropped 13 percent and oil and equity markets have entered a period of great uncertainty.”

“For those shareholders who wish to exit, DNO is, therefore, offering a considerable premium.”

“For those who wish to remain, there is no assurance of Faroe achieving its full value potential in a volatile commodity and financial markets environment as a relatively small scale, financially constrained UK-AIM listed company whose share price performance has remained stubbornly disappointing, with the very notable exception of short-term spikes following the sale of a particular large block of shares by one investor to another (most recently to DNO) and the attendant speculation about an impending takeover premium with each such transaction.”

He said DNO was of a firm belief that Faroe’s assets, the substantial part of which are Norwegian, “are better placed in the bosom of DNO, Norway’s oldest independent oil and gas company.”

Per the DNO CEO, DNO’s currently operating gross production is 125,000 barrels per day, which compares with the 7,500 barrels of oil equivalent a day of gross production operated by Faroe.

“DNO’s proven and probable reserves were nearly four times those of Faroe’s as reported at 31 December 2017,” Mossavar-Rahmani said.

He further said: “Whether the offer achieves DNO’s minimum acquisition target or the acquisition of all of Faroe’s shares, we attach great importance to retaining the skills, knowledge and expertise of Faroe’s operational management and employees. We intend to retain Faroe’s Aberdeen head office and each of the other offices.”

 

Shareholders urged to take no action

 

Responding to DNO’s unsolicited offer, Faroe said in a separate statement on Monday that DNO did not engage with Faroe before making the announcement of its unilateral offer, adding that its board will meet together with its advisers to consider the offer.

“In the meantime, Faroe shareholders are strongly urged to take no action in relation to their Faroe shares,” the oil company concluded.

 

‘Opportunistic’ bid 

 

BMO Capital Markets, which advises Faroe, said that DNO’s bid looks opportunistic coming on the back of recent weakness in commodity markets and that Faroe’s strong balance sheet and growth trajectory means it is relatively well insulated against short-term oil price moves.

BMO further said: “We value the shares much higher at ~170p/sh, although fully de-risked our valuation increases to ~£2.10/sh with ~25p/sh of exploration to come. In our view this bid is pricing in only $62/bbl on a risked basis, which undervalues Faroes’s assets and potential.”

Cantor Fitzgerald, a financial services firm, agreed DNO’s offer is an opportunistic one, given the recent oil price weakness, and that it significantly undervalues the shares.

“While DNO’s significant existing stake may make a takeover now appear ultimately inevitable, in our view investors would be ill-advised to accept what is clearly a “low-ball” offer. We maintain our BUY recommendation and 166p target price,” Cantor Fitzgerald said.

Jefferies also agreed that DNO’s all-cash offer of 152p/sh for Faroe Petroleum materially undervalues the company.

In addition, Malcolm Graham-Wood, a founding partner of HydroCarbon Capital, which provides independent advisory services to the oil and gas sector, said in his blog on Monday that DNO’s offer could be described as “an opportunistic and derisory offer which shareholders should have little difficulty dispatching.”

“Having said that, with 28.2% of the company they do have a head start and FPM are going to have to polish up that defense document and get on the road, they have an impressive list of shareholders to whom they must get the message across,” Graham-Wood added.

Offshore Energy Today Staff

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