Kurdistan consolidation? DNO's proposed offer for Gulf Keystone

On Friday 29^th July, DNO made a proposal to acquire Gulf Keystone for USD300 million in cash and shares. The tactics around the timing of this offer are unclear, given that Gulf Keystone are part way through a creditor restructuring. Negotiations during creditor processes are generally messy with the potential acquirer having to become involved in discussions with the debt holders, who hold significant power given their ability to "pull the plug" on the distressed company and/or dictate restructuring terms that lead to massive dilution of the existing shareholder base.

The offer of USD300 million, which comprises c.USD120 million in cash and the remainder in shares, represents:

• a 20% premium to the share price of $0.0109 at which, on 14^th July 2016, Gulf Keystone issued shares representing 5.6% of its share capital; and
• a 20% premium to the price at which Gulf Keystone intends to issue further shares. 

DNO further noted that the cash element of the offer would provide an early exit for noteholders and bondholders unable or unwilling to hold equity in DNO.

The acquisition of Gulf Keystone would create further scale and operational synergies for DNO in Kurdistan, and the enlarged entity would operate the Tawke and Shaikan oil fields, with current combined net production of c.89mbopd. Gulf Keystone holds a 58% stake in and operates the Shaikan oil field at a current level of ~40,000b/d, which is transported daily by road tanker to DNO's unloading and storage hub at Fish Khabur for onward pipeline transport to export markets.

For the past couple of years, Gulf Keystone's debt has dominated its story and a combination with DNO together with a clean balance sheet is likely to be viewed favourably by the KRG. However, it is noted that the heavy-oil Shaikan project is a high capex and low margin business that would generate a relatively low rate of return for DNO. As with Genel at Miran, DNO will likely need the support of a farminee to push ahead with the full field development.

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Gulf Keystone debt restructuring

On 14^th July, Gulf Keystone announced the terms of its proposed balance sheet restructuring, marking the culmination of months of discussions with the company's debt holders. The restructuring, if approved by shareholders, will be implemented by way of a debt-for-equity swap and will see existing shareholders significantly diluted.

The company has c.USD600 million of debt, comprising USD335 million of Convertible Bonds and USD266 million of Notes. The restructuring proposes:

• USD335 million of Convertible Bonds: Complete equitisation
• USD266 million of Notes: Refinanced with USD100 million of new notes (the "Reinstated Notes") and through equitisation

Pro forma capital structure

Post transaction, balance sheet debt will be reduced from c.USD600 million to USD100 million. As part of the restructuring, it is envisaged that an USD25 million equity raise be launched as an open offer to the existing shareholders, equating to 10% of the restructured entity if fully subscribed.

Existing shareholders will be significantly diluted and will hold 5% of the company post transaction (pre-open offer) and 14.5% of the company if they fully subscribe to the open offer. Convertible bondholders will represent 20% of the company and the current noteholders will hold 65.5% of the company.

Pro forma ownership

The restructuring is subject to shareholder approval and will be implemented through a UK scheme of arrangement. The board of Gulf Keystone has recommended that shareholders support the transaction, failing which, the company is expected to enter into a formal insolvency and liquidation process.

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Brasse - Brage's younger sibling

On 11^th July, Faroe announced the completion of a successful side-track appraisal well on the Brasse discovery in PL740 (50% WI) in the Norwegian North Sea and revised volume estimates for the discovery.

The objective of the Brasse side-track well was to appraise the south-eastern part of the structure previously identified by the main discovery well. The side-track reached a depth of c.2,530m and encountered a 25m gross oil column and a 6m gross gas column. The side-tack encountered oil and gas in good quality Jurassic reservoir sandstones, similar to those seen in the main well.

Total gross volumes of recoverable hydrocarbons are now estimated to be 28 – 54mmbbl of oil and 89 – 158bcf gas (43 – 80mmboe in aggregate, which compares with pre-drill estimate of 14 – 33mmbbl). The reservoir is of good quality and believed to be analogous to the effective reservoir at the Brage producing oil field in which Faroe has a 14.3% interest.

The Brasse discovery is located within tie-back distance to existing infrastructure with available capacity. It is c.15km to the south of the Brage field platform, c.15km east of the Oseberg Sør field platform, and c.15km to the south east of the Oseberg field platform. Faroe and its partner, Point Resources (50% WI), will now begin assessing options for monetising this discovery.

Brasse area map

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