Tags: China, China Petroleum & Chemical Corp., Don Miller, Energy, Oil, South Korea, U.K.

South Korea Moves on U.K. Energy Assets as Competition with China Increases

By , Associate Editor, Money Morning •

Korea National Oil Corp. (KNOC) on Friday made a hostile bid for the United Kingdom's Dana Petroleum PLC, marking the first time a state-owned Asian company has gone directly to shareholders.

The move underscores South Korea's determination to double its oil output by 2012 and increase its energy security. It also shows that South Korea will not be denied energy assets, despite being outbid by Chinese companies in several instances.

KNOC took the $2.9 billion (1.87 billion pound) bid to Dana's shareholders after the oil explorer rejected KNOC's previous offer of 1,800 pence a share offer. In a filing with the London Stock Exchange, KNOC said it had support from 48.62% of shareholders, putting the needed 50% approval target within close reach.

The offer is a 59% premium over Dana's June 30 closing price, the day before Dana announced it had received a takeover offer from KNOC.

"It's a really full price and it's cash as well," Peter Hitchens, an analyst at London's Panmure Gordon & Co., told Bloomberg. "A lot of shareholders are sitting there thinking that if the bid doesn't go through it's going to be years before the shares reach these levels again."

Shareholders that have announced support for the deal include Schroder Investment Management Ltd., which owns about 15% of the stock, BlackRock Investment Management Ltd. and JPMorgan Asset Management.

"We believe that our offer of 1,800 pence per share fully and fairly reflects all of Dana's recently announced and ongoing developments, together with its exploration potential," Seong-Hoon Kim, senior executive president at Korea National, said in a statement. "We believe that we have no alternative other than to put our attractive proposal directly to shareholders given the inability to reach a private agreement with the board of Dana."

The deal values Dana's assets at about $12 a barrel of oil equivalent. Anything between $10 and $13 a barrel is appropriate, according to HMC Investment Securities analyst Cho Seung Yeon.

Dana released a statement urging shareholders and convertible bondholders to ignore the offer and that it would update its business outlook when it reports results on Aug. 27.

Asia's Oil Giants Hungry for Foreign Assets

Acquiring Dana would give KNOC access to reserves in the North Sea and northern and western Africa. Dana operates in nine countries and retrieves oil and gas from 37 fields.

"Dana gives KNOC critical mass in the North Sea," Hitchens said. "[I]t's a vehicle they can use to start buying assets that are up for sale from the majors."

Korea National plans to spend $6 billion on acquisitions this year to meet its target of doubling output by 2012, raising its daily oil production capacity to 300,000 barrels from 130,000.

South Korea is Asia's fourth-biggest oil importer and plans $12 billion in overseas energy projects this year. The government gave KNOC $6.5 billion to fund acquisitions and exploration projects, and to compete against China to nab global oil resources.

Chinese state oil company China Petroleum & Chemical Corp. (Sinopec) (NYSE ADR: SNP) last year beat out KNOC to acquire Swiss-based Addax Petroleum with a $7.2 billion bid.

"National oil companies, and in particular KNOC, are under pressure to buy up foreign reserves, but often the larger Chinese groups have outbid them," Martin Copeland, a managing director in oil and gas at Lexicon Partners, told the Financial Times.

India's oil minister said earlier this year the country's energy companies are falling behind the Chinese in acquisition activity, and urged them to more aggressively pursue foreign assets.

Advisers to national oil companies have said the increased competition with powerhouse China has made companies more sophisticated and thorough in their acquisition hunt.

"National oil companies have a different decision-making process and different drivers for transacting," said Jon Clark of Ernst & Young. "Depending on which NOC buyer this is, they can be looking at independent explorers based on reserves and production for long- term strategic goals, rather than being solely concerned about price or financial returns."

U.K.-based companies are attractive assets due to their relatively cheap prices. Dana and Premier Oil PLC (PINK ADR: PMOIY) have traded as low as 20% below their core value, according at Goldman Sachs Group Inc (NYSE: GS) analysts.

Selling to a national oil company is the preferred route for many independent oil companies and is often less complicated than negotiating a merger with another independent company. Analysts say U.K.-based companies that are pursued by Asian oil giants should seriously consider the offers because they might be winding down.

"The U.K. market is a different place to five years ago," said one oil and gas banker who has worked with Asian state oil companies. "The number of UK-listed explorers left big enough for the top NOCs to get out of bed for is now very small."

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