Tuesday afternoon (17 March), Dragon Oil announced that it has received an approach from Emirates National Oil Company (ENOC) regarding a possible offer for the company. The value of the potential deal has not been announced, but ENOC said that “the approach reflects a premium to the closing share price of £5.09 as of 13 March 2015’’. ENOC currently owns 54% of Dragon’s shares. ENOC had previously bid for Dragon in November 2009 and offered £4.55 a share, a 35% premium to the price when Dragon announced to the market regarding a possible offer. However, the last offer was rejected by minority shareholders that viewed the offer undervaluing the company.

With 1) Dragon representing a much better company than it did in 2009 (higher 2P/higher production volumes/lower operating costs); 2) most operating and financial metrics having gone in favor of bidder’s side (GBPUSD exchange rate, net cash,..); 3) Dragon still trading much cheaper vs oil & gas comps; & 4) fact that most likely bidder will not want to make same failed deal mistake as it did in 2009, it looksvery credible that ENOC will want to successfully move again now at this opportunistic timing (with oil prices falling; Dragon production having finally taken off in its main field in Turkmenistan to almost 100k/bbl a day; and potential for bidder to fully access Dragon’s hefty $2bn net cash balance to do more regional oil M&A going forward at a time when further M&A opportunities will be significant).

Based on various take out metrics, there is significant probability that any take out would materialize at further premium to current share pricing (range GBp 650-800 vs current share price around GBp 600).

However, main unknown is related to timing, as a) Dragon as Irish listed company is governed by Irish Takeover code –without any firm PUSU deadline; and b) it looks like process could now take a bit of time as now an Independent Committee to evaluate ENOC approach has been set up (consisting of 4 non-ENOC affiliated Board members). According to a Dragon banker, the Committee is established to consider the approach – initially they will assess if approach is reasonable in any sense (that it’s not just a ridiculous offer) –if that is the case, there will be a discussion back and forth between the Committee and ENOC with a view of potentially recommending any offer.

We would recommend to keep a patient stance on this one as the break risk looks the highest in the short term , however given the longer there will be no update from Dragon (Independent Committee), the higher likelihood that a firm offer should materialize (as Independent Committee will not have rejected outright any ridiculous offer and potentially be in process of recommending any premium offer).We will monitor the situation and wait for any potential price correction in next couple of weeks to consider any position.