Faroe Petroleum plc (LON:FPM) shares advanced around 17% this week as the AIM-quoted offshore oil firm became the subject of stake-building by DNO ASA.
It comes as the Oslo headquartered, Kurdistan-focused company has looked to establish a new area of focus, territories offshore UK and Norway - which happens to be where Faroe has built its business.
On Wednesday, DNO announced a deal to acquire 15.37% of the company from Israel’s Delek Group, with the Norwegian business paying £70.4mln, taking 56.35mln shares priced at 125p each.
Following a flurry of regulatory statements over the course of Wednesday and Thursday revealed that it held 27.68% of Faroe.
As a result, DNO quickly became Faroe’s largest shareholder.
DNO is building a new business area
DNO re-entered Norway in mid-2017, when it acquired Origo Exploration by assuming the explorer’s work commitments.
It subsequently, DNO applied for ten exploration licences in Norway’s 2017 licensing round (seven in Norwegian North Sea, one in North Sea and two in Barents Sea), and that adds to nine other licences it holds across Norwegian and UK waters.
In a recent investor presentation, DNO said it was “actively pursuing” additional stakes in the region including exploration, development and production assets.
The Norwegian company has previously talked about a potential listing and as a result of its partnership with Genel Energy, in the Kurdistan region of Northern Iraq, it is not unfamiliar to London’s oil investors.
In Kurdistan, DNO generated some US$347mln of revenue in 2017 (up 72% from the preceding year) and it made a US$521mln operating profit in the year. At the end of December, the company had a cash balance totalling US$430mln. The group’s working interest production in Kurdistan amounted to 73,700 barrels oil equivalent per day.
The oil business in Northern Iraq certainly has its attractions, though it is not without geopolitical complexity.
Faroe is growing its production base
Plainly, Brexit aside, UK and Norway provide a more placid operating environment.
In 2017, Faroe marked average production of 14,349 boepd and, in keeping with its good track record for exploration and appraisal, the company increased its proved and probable reserves by 20% to 98mln barrels.
Production volumes are expected to be consistent this year, with guidance pitched at 12,000 to 15,000 boepd, meanwhile, the company is ramping up investment with several oil field development projects underway - it is fully funded to grow output up to 35,000 boepd.
“Not making an offer”
In regards to its interest in Faroe, the Norwegian oiler said it had decided to build a long term strategic shareholding in the company.
DNO said it intended to “support Faroe Petroleum management's growth focused North Sea strategy.”
Faroe issued its own statement saying that it had not had any discussions with DNO, nor had it had any talks with Delek prior to the share sale. Moreover, it told investors that the 1.25p per share transaction price “substantially undervalues” the company and its prospects.
Oil expert says DNO has bought cheaply
Oil companies analyst Malcolm Graham Wood, in a note, described Faroe as “one of the sectors finest explorers” and suggested that DNO would have to pay much more for the rest of the company (if that’s DNO’s intention).
DNO has secured a base camp “very much on the cheap”, he added.
“It is perfectly possible that DNO will keep their word and not go hostile in this respect but it has made a canny move in getting the first lump (presumably 29.9% after other loose holders are removed) at this price,” Graham Wood said.
For the time being at least DNO’s denial, backed up with a regulatory declaration in the form of a “no intention to bid” statement, will have to be taken at face value, nonetheless, the stake building makes for an engaging narrative for speculative investors.