RAK Petroleum and DNO International, a Norwegian oil company operating in Iraqi Kurdistan, plan to merge their regional operations in a deal that could lead to a new stock listing in London.
The deal, announced yesterday, sent DNO stock surging up to 21 per cent and is expected to provide a lifeline for the company, which has been steadily losing money on its Kurdistan operations.
Because of revenue-sharing disputes between Erbil and Baghdad, the Iraqi government has been reluctant to pay DNO, which two years ago became the first foreign company to pump oil in Iraq since the 1970s.
"The company is short-term on a very bumpy ride," said Bijan Mossavar-Rahmani, the chairman and chief executive of RAK Petroleum. "If it hadn't been on this bumpy ride it would have been out of the reach of RAK Petroleum to take a share in this company."
The agreement comes two weeks after Mr Mossavar-Rahmani took control of DNO's board in a surprise vote and represents a coup for RAK Petroleum, which has steadily increased its stake in the company despite being rebuffed in 2009. It now holds a 30 per cent stake, making it the largest shareholder.
Under the proposed deal, DNO is to issue shares to RAK Petroleum equal to the value of the UAE company's assets, estimated to be between US$250 million (Dh918.2m) and $300m. RAK Petroleum's operations in the UAE and Oman would be transferred to DNO, leaving it with a 40 per cent stake in DNO and an estimated $500m in cash for other potential investments.
Mr Mossavar-Rahmani is the chairman of both companies, overseeing a merger in which the share price is a delicate matter. "I will bend over backwards to have fair treatment on both sides and a transaction that both sides can feel good about, and that doesn't reflect a predatory move but that reflects a link-up," he said yesterday. "I view this link-up more as a partnership and as an alliance, rather than a takeover from this side or that side."
The deal, which must be put to a vote by shareholders in both companies, would transfer DNO shares at a price between 8.25 and 10 Norwegian crowns, a 35 per cent premium over DNO's price at the time the deal was struck.
"This will diversify DNO's portfolio," said Teodor Sveen Nilsen, an analyst at First Securities in Norway. "A smaller portion of the asset base will be exposed to political risk in Iraq."
DNO said it was evaluating listing the newly created company, which would be structured as its own unit on the London Stock Exchange. That would allow it to raise more capital to cover its losses in Kurdistan, where it pumps 70,000 barrels per day and sits on an estimated 500 million barrels in reserves, but received its first export payment of $103m only in May.
The company also pumps oil in Yemen, where political stability has also threatened revenues.
"That Yemen production has basically been the cash flow of the company, allowing it to weather the storm in Iraqi Kurdistan," said Samuel Ciszuk, the senior Middle East and North Africa energy analyst at IHS Global Insight in London. "With RAK Petroleum, some more stable revenue generation is brought in.
"The joint company has a much more solid footing when it comes to cash flow. If there will be a deal in Iraqi Kurdistan, they will need some money to do some proper large-scale development."
DNO plans to refocus itself as a Middle East exploration and production company, shutting down its business in Mozambique and unloading assets in Equatorial Guinea, Mr Mossavar-Rahmani said. It is now evaluating expansions into its home base of Norway, and in Tunisia, where RAK Petroleum holds a 30 per cent interest in an offshore licence.