Mid-cap oil producerDragon Oil(LSE: DGO) has announced today that it was in discussions to acquire smaller peerPetroceltic(LSE: PCI) for around 230p in cash perPetroceltic share.
However, the deals not done just yet and Dragon Oils management has warned that there can be no certainty that any offer will be made, or any certainty that the terms of any offer will be similar to those announced today.Dragons majority shareholder still has to approve the deal with Petroceltic before any binding agreement can be signed.
That being said, Dragon Oil has completed an extensive confirmatory due diligence of Petroceltic, so it can be assumed that the company believes Petroceltic has something to offer.
Rise of the dragon
Dragon Oil is one of the oil sectors uncovered gems. The groupsmain production assets are in Turkmenistan and the company has been growing production steadily over the past few years, as well as expanding its international reach.
Further, the groupcounts theEmirates National Oil Company Limited as its largest shareholder, with a 54% ownership.
And at present levels the company looks like a steal. Dragon is currently trading at a forward P/E of 6.2 and the company is set to support a 4.1% dividend yield next year. Additionally, the acquisition of Petroceltic should only boost the companys growth as one of Petroceltics main assets is the Ain Tsila gas field in Algeria, close to where Dragon Oil was recently awarded new oil and gas licenses.
Whats more, there could be other acquisitions on the horizon for Dragon as the companys balance sheet is flush with cash. Specifically, at the end of 2013 Dragon had just under $2.5bn of cash and no debt.
A higher offer?
The offer from Dragon represents a near 30% premium to Petroceltics closing price on Friday and appears to be an appropriate offer for the companys assets.
Indeed, despite having a portfolio of attractive assets and first half revenue of nearly $100m, Petroceltic has been struggling with exploration write offs, which have cost the company in the region of $100m during the past 18 months.
Still, these non-cash write-offs have not set the company back too much, although the groups cash generation remainsweak as management presses forward with an expensive exploration program. Petroceltics weak cash generation forced the company to raise $100m earlier this year. Nevertheless, with the financial backing of Dragon, unlocking value from Petroceltics portfolio of assets should bebecome a much faster process.
It certainly looks as if a tie-up between Dragon and Petroceltic would be beneficial for both companies.
What to do?
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Rupert Hargreaves 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.
