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Abu Dhabi, UAETuesday 11 December 2018

Dana Gas Q2 profits rocket

UAE company reports a 71 per cent increase in earnings while looking ahead at new drilling

“The reduction in the sukuk profit rate will improve the company’s financial position and ability to fund future dividends,” said Dana Gas chief executive Patrick Allman-Ward.Amr Abdallah Dalsh / Reuters
“The reduction in the sukuk profit rate will improve the company’s financial position and ability to fund future dividends,” said Dana Gas chief executive Patrick Allman-Ward.Amr Abdallah Dalsh / Reuters

Dana Gas announced a profit in the second quarter on Tuesday, lifted by squeezing investments and operational expenses.

The company, with assets in the UAE, Egypt and the Kurdistan regional government (KRG), reported US$12 million in profits in the three months to June 30, a 71 per cent increase from $7m a year earlier.

However, numbers will probably remain the same for the rest of the year, according to the company’s chief executive, Patrick Allman-Ward. “Our production will remain flat, and revenues depend on what oil prices will be,” he said. “I’m not optimistic or pessimistic, but what we’ve seen for the first half of the year is likely what we’ll see for the remainder.”

He said that he expected oil prices to float between $45 to $55 a barrel.

Dana Gas’ gross revenue rose by 8.3 per cent to $104m for the quarter from $96m.

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The first six months of the year weighed positively on the company thanks to an increase in cutting operational spending by 7 per cent and an $8m decrease in financing costs by settling loans.

The company has struggled in the past to recoup money from Egypt and the KRG, which forced alternative plans and even halted investment.

Now a steady flow of payments from Egypt is boosting exploration with $135m collected this year. “We have plans to drill three exploration wells on Block 1 in Egypt in the fourth quarter as part of our concession activity commitment,” said Mr Allman-Ward, adding that another exploration well on Block 6 would be drilled in early-2018.

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It is not all positive as Dana Gas faces disappointing results from the Zora field in the UAE, and may back out of future well-drilling plans. The field’s daily gas production has nearly halved to 1,650 barrels of oil equivalent per day (boepd) compared to last summer.

Declining production and the potential of rising gas prices will not be economically viable. Mr Allman-Ward said: “We’re going to have to look at the consequences of not carrying out another well. It is extremely likely that there will be a write-down of the reserves reporting.”

Yet the major looming question revolves around Dana Gas’ $700m sukuk restructuring, which has shareholders in a bind. What began in May with a company announcement that the sukuk terms were not sharia-compliant, just ahead of the October maturity date, has resulted in a legal battle between the sukuk holders and the company.

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“The final outcome of the ongoing litigations in UAE courts would likely result in a significant liability for the sukuk holders to repay the company excess ‘on account profit payments’ based on a lawful reconciliation of the matter,” Dana Gas said.

Moving forward, it may be tricky to entice new investors to support the company as this is the second time there has been sukuk troubles for Dana Gas. But Mr Allman-Ward said: “The fact that share prices have increased significantly over the past three to four months is an indicator that people view Dana Gas positively.”

Equity investors will need to determine if there is any value in Dana Gas stock after its debt is repaid, and if the value can be realised within the next 12 months, said Sanyalak Manibhandu, the head of research at NBAD Securities. A risk to equity investors lies in sukuk holders proving the existing bond is lawful and successfully suing for collateral assets backing the sukuk.

NBAD raised its 12-month target price to 67 fils, up nearly 14 per cent from its previous 59 fils. “There is a scope for lifting the target price further in the rest of the year and into the first half of next year as events unfold,” Mr Manibhandu said.

Trading for the company was suspended on Tuesday waiting on the result of the board of directors meeting, with a 59 fils share price the day earlier.