Saturday, December 10, 2016

Posted by November 8, 2016

DONG Energy to Exit O&G Business

Danish energy group DONG Energy plans to quit the oil and gas business to focus solely on offshore wind power, just five months after giving the impression it would maintain its presence in oil and gas when it listed in Copenhagen.

The company, the world's biggest operator of offshore wind power, had considered selling its oil and gas business in the past, but announced in January, prior its June 9 initial public offering (IPO), that it would not.

Last month it said it was reconsidering a possible sale. Its IPO prospectus had said its oil and gas business would focus on "a portfolio of low-cost, low-risk, long-term assets" but the company said by emphasising renewables, it had made clear that it did not see oil and gas as a long term strategic commitment.

Chief Executive Henrik Poulsen said on Tuesday DONG had spent the last 12-15 months restructuring its oil and gas business to "focus on high quality, low cost assets" and "a combination of a number of different factors" had made it decide to sell.

"We are still in a very early stage of exploring market interest, but it is our impression that there is interest in an asset of this kind," he said on a conference call, adding the company had not set a deadline for selling the business.

DONG said cash flow at its oil and gas business breaks even at $35 per barrel. Brent oil has recovered to around $46 a barrel since reaching multi-year lows below $30 a barrel in January.

"Today we probably have one of the lowest break even businesses in the entire North Sea area," Poulsen said. A more than two-year-old oil price slump means many oil and gas assets are already up for sale in the North Sea, where costs are relatively high due to the basin's maturity.

Analysts at Bernstein said the divestment was driven by a recent rise in the oil price and DONG Energy's better cost position in its oil and gas business, but said they were "surprised with shift in strategy so soon after the IPO".

DONG's shares were trading 1 percent higher at 256.5 crowns each by 1433 GMT, below its IPO price of 258 crowns.
 
European Trend
DONG's decision follows similar steps by European utilities E.ON and RWE, which have both divested their oil and gas business to try to become simpler structures, free up cash and remove conglomerate discounts on their shares.

DONG shares currently trade at 4.8 times EV/EBITDA, a discount to groups with a clearer focus on renewables such as Britain's SSE, Portugal's EDP Renovaveis SA and Germany's Innogy, which was split off from RWE last month.

DONG, which has built more than a quarter of the world's offshore wind farms and is a major operator in Britain and Germany, said last month it had hired JP Morgan to review its oil and gas assets with a view to possible sale.

Analysts at Sydbank said DONG's oil and gas assets could be worth up to 14 billion Danish crowns ($2.1 billion). DONG produced 89,000 barrels of oil and gas per day this year, down from 115,000 barrels of oil and gas daily last year.

Swiss utility specialist EIC said it recently sold its holdings in DONG at around 275 Danish crowns, after buying into the June IPO.

"We only see limited upside for the company compared with riskier assets," said EIC fund manager Andreas Schneller, adding that EIC had bought into power plant and energy trading firm Uniper during a recent power price rally.

Schneller sees it as positive that DONG is selling its oil and gas business, as "there's hardly any growth in this area."
 
Norwegian Interest
DONG has stakes in 24 fields off Norway, including a 14-percent stake in Ormen Lange, a gas field that can provide up to 20 percent of Britain's gas needs, and is the operator of two fields, Oselvar and Trym.

Statoil and AkerBP could be interested in Dong's Norwegian licenses. Both companies have been buying up assets from companies wanting to exit Norway and have both said they are on the lookout for more opportunities.

Generally, though, M&A activity in the global oil and gas sector, including the North Sea, has been slow over the last two years following the drop in oil prices.

DONG also has stakes in 14 fields in the Danish part of the North Sea, where it operates five producing oil and gas fields.

DONG's sale could also potentially open the door to a deal with Danish peer A.P. Moller-Maersk, which is also seeking a new home for its energy assets.

Mikkel Dencker, energy speaker for the biggest party in Denmark's ruling bloc, the Danish People's Party, said the Danish state receives substantial oil and gas revenue and expressed concern that a new owner of the assets would not invest sufficiently to maintain production. Energy minister Lars Lilleholt was not available for comment.

The wind business became DONG's biggest contributor to earnings in the first half of 2016, overtaking oil and gas with 42 percent of operating profit.

DONG said Tuesday it expects the oil and gas business to turn cash flow positive this year, one year earlier than previously guided. Reporting its third quarter results, the company maintained its full year profit (EBITDA) forecast for 20-23 billion crowns. 
 
(By Nikolaj Skydsgaard and Jacob Gronholt-Pedersen, additional reporting by Gwladys Fouche, Christoph Steitz and Erik Matzen)
StatoilSydbankBernstein