Petroceltic in Dragon's jaws

Petroceltic International has confirmed recent rumours that Dragon Oil wants to buy the Middle East and North Africa-focused oil and gas company. They are in "detailed discussions regarding a possible offer" at 230p a share in cash, and a deal here looks highly likely. A round of industry consolidation could be underway.

Dragon Oil has already completed "an extensive confirmatory due diligence exercise" and Petroceltic chiefs have given their backing for a deal that values the business at almost £500 million.

They'll need appropriate approvals from the Algerian government regarding the Algerian assets of Petroceltic, and Dragon Oil must get approval from its shareholders, too. Talks with its biggest investors who between them own 54% of the company have begun.

Dragon's interest will be welcome news for Petroceltic shareholders who have suffered a real rollercoaster ride over the past few years. Not only has the share price been a nerve-wrecker, but the involvement of activist shareholder Worldview Capital Management - which owns a 20% in Petroceltic - has created uncertainty, too.

The company only completed a $100 million (£62.58 million) placing at 157p in the summer because it agreed to sit two non-executive directors put forward by Worldview on the board.

However, an offer at 230p would be the best levels since early 2012 and represent a 40% premium to the average Petroceltic share price of the past three months. It’s also 5% ahead of Westhouse Securities' core net asset value (NAV) of 217p, but at a 4% discount to the broker's target price of 240p.

"We believe that the offer, if made as proposed, will be recommended by the PCI board and likely accepted by PCI shareholders as we believe that the major PCI shareholders (including Worldview) are likely to have been involved in engineering this proposed deal," writes Westhouse.

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"We do not believe that a competing offer will emerge, however, we would suggest that this news will foment further M&A speculation in the sector. PCI's most directly comparable peer is Circle Oil (Buy, Target Price 37p) with operations in MENA and our core NAV for COP is 35p."

Only five weeks ago, broker Investec Securities beefed up its risked exploration net asset value for Circle by 20p to 70p following the potential discovery in EMD-1 offshore Tunisia.

Circle chairman Stephen Jenkins called it "a potentially game-changing event in Circle's development," estimating 100 million barrels of oil recoverable.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.