After the stock market closed last night, Dragon Oil (LSE: DGO) issued a statement confirming it had received an increased offer of 735p per share from its majority shareholder, Emirates National Oil Company (ENOC).
Dragon has been considering a previous, lower offer by ENOC since March. The level of the earlier proposal hasnt been disclosed, but last night ENOC described its latest offer as a substantial increase.
Perhaps surprisingly, Dragons share price hasnt moved this morning, and remains at 680p, 7.5% below ENOCs latest offer. This suggests the market isnt convinced the offer will be accepted.
I can see two possible reasons for this. Firstly, even at 735p, Dragon doesnt look expensive. ENOCs latest offer values Dragons proven and probable (2P) reserves at just $6.30 per barrel.
If you strip out Dragons cash, which equates to 251.8p per share, then the proposed price looks even cheaper. The 735p offer values Dragons oil and gas reserves at just $4.13 per barrel.
To put this in context, Royal Dutch Shells recent 47bn bid for BG Group valued BGs reserves at $11.10 per barrel, by my calculations.
A second problem
ENOC owns 53.9% of Dragon shares and would like to own the rest in order to develop its position as an integrated oil and gas company, like a smaller version of BP.
Not all of Dragons shareholders agree, however. ENOC has tried and failed to take control of the firm before and failed. My impression is that major long-term shareholders are happy to enjoy Dragons generous dividend yield and avoid a big capital gains tax bill.
ENOC seems to be getting serious about wanting to buy out Dragons other shareholders, but Im not sure this latest offer will be enough to seal a deal.
Two more bid targets?
The hoped-for merger and acquisition spree in the oil market has not really materialised. Yet there are a number of firms that could potentially be targeted by buyers wanting to add to their proven reserves.
LGOs main asset is its Goudron field in Trinidad. Goudron has 2P reserves of 7.2m barrels, according to the firms website.
The industry standard approach to valuing an oil firm is by the ratio of enterprise value (market cap plus net debt) to 2P reserves. Applying this formula to LGO gives an EV/2P cost of about $23 per barrel.
For a potential buyer to make a profit from LGOs assets theyd need to add this cost to operating and development costs, plus the bid premium required to convince shareholders to sell.
With oil prices hovering around $60 per barrel, Im not sure this is very realistic. In my view, LGO would have to be much cheaper to become a serious bid target.
What about Tullow?
Tullow Oil has 2P reserves of 345.3 million barrels of oil equivalent (boe). Valuing the firm on an EV/2P basis gives Tullow a price tag of $17/boe. This isnt outrageous, but isnt especially cheap either, considering the value of the recent offers for BG Group and Dragon.
Although each of these companies has a different oil-gas mix and varying costs,I dont thinkTullow ischeap enough to attract a takeover bid at this time.
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Roland Head owns shares in Royal Dutch Shell. The Motley Fool UK has recommended Tullow Oil. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.