FAROE Petroleum has clinched a deal that will boost its production and held out the prospect of a payout to shareholders as it tries to fend off a hostile takeover bid.
The Aberdeen-based company has agreed to swap interests in development assets off Norway with stakes in four producing fields held by local oil giant Equinor.
The trade will allow Faroe to save cash that would have been spent on developing the assets while also increasing its production income.
Chief executive Graham Stewart said the increased cash flow, reduction in capital expenditure and cost benefits resulting from the transaction will further strengthen Faroe’s already robust balance sheet.
He added: “This will enable us to give careful consideration to a potential return of capital to our shareholders.”
Aim-listed Faroe unveiled the deal ten days after Norway’s DNO announced it planned to make an offer valuing the business at £608m following a war of words between the firms.
DNO said it planned to offer 152p cash for each share in Faroe Petroleum, noting the potential threat posed to its target’s valuation by volatility in commodity and financial markets.
Faroe’s board dismissed the bid as an opportunistic move that substantially undervalued the firm with its exciting growth prospects and urged shareholders to sit tight.
Directors said Faroe had a proven track record of successful exploration, sustainably delivering reserves and resource growth year-on-year, and effective portfolio management.
Faroe announced yesterday that it has started drilling a well on the Cassidy prospect in the Norwegian North Sea, which Mr Stewart said offers high value upside.
He said Faroe’s active exploration programme has delivered two commercial discoveries out of three wells so far this year. These include the Agar discovery it made off Shetland in November with Cairn Energy and Azinor Catalyst.
Mr Stewart said yesterday that the ‘significant’ swap with Equinor showed how the company could generate value for shareholders through active management of its portfolio which also includes interests in producing fields in UK waters.
Directors reckon the deal will allow the firm to achieve a better balance between development and production assets with no material impact on reserves.
Faroe has agreed to trade its interests in the Njord Hyme redevelopment project and the development of its Bauge find for stakes in four producing fields.
However, DNO said of the deal with Equinor: “While Faroe has asserted this is not designed to stop the DNO offer, we need to ask if this is good value for a company seeking growth: to swap out of its high quality, large scale, core growth hub, Njord, operated by the national oil company of Norway, Equinor, and to take on instead mature and declining production assets - in a deal with Equinor itself.”
Faroe said the deal had been under discussion with Equinor for several months and was approved by its board on November 23. The DNO bid for Faroe was announced on November 26.
Faroe expects to add 7-8,000 barrel oil equivalent per day (boed) production in 2019 following the deal.
It produced an average 12,402 boed in the first half of the current year. The assets it is offloading are due in production in 2020.
Analysts at Cantor Fitzgerald maintained a buy recommendation and 195p target price for shares in Faroe Petroleum.These closed down 0.2p at 156.8p yesterday.
DNO had wanted two of its directors voted on to the Faroe board but shelved the proposal in August after running into fierce opposition from the company.
DNO had said in April it did not intend to make an offer for Faroe after revealing it had acquired a 15.4 per cent stake in the firm, which it increased to 28.7% that month. It was barred from making a bid for six months under Takeover Code rules.
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