DNO Ups Stake in Faroe, Extends Offer: Update

(Updates with Faroe response in para 3)

Norwegian oil and gas operator DNO has bought more shares in takeover target Faroe Petroleum, bringing its stake to 30%, and has therefore extended for another 14 days its December 12 cash offer for Faroe, it said January 3.

DNO said that its offer still stood, despite the "significant deterioration in oil and equity markets and a steady stream of disappointing exploration news from Faroe," it said. It also has valid acceptances of its offer to buy another 13% of its target's shares at £1.52 ($1.91) each.

Faroe, in a January 3 statement urging its shareholders to hold on to their shares, said that DNO’s failure to secure sufficient acceptances for its offer to be declared unconditional by the first closing date of 2 January 2019 proved that its offer was "opportunistic and substantially undervalues Faroe." Under takeover rules, DNO has until 27 January 2019 to improve or otherwise change its offer, should it wish to do so and until 10 February 2019 to achieve sufficient acceptances for its offer to become unconditional.

Faroe had claimed January 2 that Gaffney, Cline & Associates' (GCA's) independent valuation "clearly supports our view that DNO’s offer substantially undervalues Faroe. [GCA's] valuation of Faroe’s oil and gas assets implies a value per share for Faroe in the range of 186p to 225p/share representing a 22%-48% premium respectively to DNO’s offer price."

But another of its exploration wells, Brasse East, was a dry hole, as DNO had suspected from Faroe's silence after it; it joins the Rungne well in the Brasse region, and the "step-change" Cassidy well, which had both also failed to deliver the hoped-for results. The Brasse development represents 35% of group reserves, according to Faroe's competent person's report.

However Faroe put a positive spin on Brasse East, saying the appraisal sidetrack did confirm hydrocarbons within the northern part of the Brasse field, as expected. "In addition, the excellent sand quality in the Brasse East Exploration well has reduced the reservoir risk of the Brasse Extension exploration prospect located to the north east of the Brasse field,” it said.

GCA's valuation did not include the Equinor asset swap that has yet to complete, "and consequently does not reflect the tax synergies we expect to realise through the accelerated utilisation of our Norwegian tax loss position from this transaction," Faroe said.

Nor did it include Faroe’s scarcity value in the current tight upstream mergers and acquisitions market, especially on the Norwegian Continental Shelf; Faroe’s going concern value of its management’s proven track record, in particular in exploration; or the strategic benefits that Faroe would bring to DNO whose business stands in stark contrast to Faroe’s high quality, full cycle and diversified North Sea business, Faroe said January 2.

Analyst Malcolm Graham-Wood said in his daily blog January 2 that Faroe shareholders "should think very carefully before giving away such a large amount of value for what seems like a paltry cash sum. Remaining with a high value holding and what is one of the best management teams in the industry should far outweigh the current thirty pieces of silver on offer."