DNO offers to buy Gulf Keystone, at 111 for notes, 18 for convertibles

By Susanna Moon

Chicago, July 29 – DNO ASA said it has proposed to pay $300 million to acquire all of the shares of Gulf Keystone Petroleum Ltd. after its planned restructuring.

DNO’s proposal reflects a 20% premium to the share price of $0.0109 and a 20% premium to the stock issue price in the proposed restructuring, according to a company announcement.

For Gulf Keystone’s guaranteed noteholders, the DNO terms reflect 111% of par, compared with 99% under the restructuring, the release said. For convertible bondholders, the DNO terms represent 18% of par, compared with 15% for the restructuring.

As reported July 14, Gulf Keystone has reached an agreement with a majority of its creditors on restructuring its balance sheet.

Under DNO’s plan, by offering $120 million in cash, about 40% of the price, the company is offering to “provide an early exit for those noteholders and bondholders who may be unable or unwilling to hold equity for an extended period.”

The additional offer of 170 million DNO shares, about 13.6%, of the DNO shares post-transaction “would provide Gulf Keystone investors with continued exposure to the Shaikan field in addition to DNO's wider portfolio of assets, significantly larger market capitalization, more robust cash flow, stronger balance sheet and proven operating and management capabilities.”

"Combining these two companies will create further scale and unlock operational synergies that will reinforce DNO's already formidable presence in Kurdistan," Bijan Mossavar-Rahmani, DNO's executive chairman, said in the release.

"We understand Shaikan's challenges and opportunities and we are well positioned to focus financial, technical, commercial and logistical support to maintain and then grow production at this field to the benefit of both Kurdistan and our investors," he added.

Restructuring plans

As announced July 14, Gulf Keystone inked an agreement with holders of 66% of its $250 million of 13% guaranteed notes due 2017 and of 50% of its $325 million of 6.25% convertible bonds due 2017.

Also part of the agreement are the company’s largest shareholders, Capital Research and Management Co. as adviser to New World Fund, Inc. and Smallcap World Fund, Inc.

Under the proposed restructuring, the convertible bonds will be converted into 22.2% of Gulf Keystone’s equity, or 20% after a $25 million open offer of stock to existing shareholders, and $150 million of the 13% notes will be converted into 72.8% of the company’s equity, or 65.5% after the open offer.

The conversion to equity includes accrued interest.

Holders of the guaranteed notes will be able to either convert their claims into $100 million of reinstated notes or into equity. Elections will be scaled back as necessary so that the amount of reinstated notes will be $100 million.

The reinstated notes will have the same terms as the existing notes except that the maturity date will be Oct. 18, 2021, subject to a par call at any time, and interest will be 13% paid in kind or 10% in cash until Oct. 18, 2018. Starting Oct. 19, 2018, interest will be 10% in cash.

The $32.5 million debt service reserve covenant will be removed.

Gulf Keystone will be allowed to raise up to $25 million of additional debt on market terms to fund capital expenditures and operating expenses.

The open offer of stock will support the company’s previously announced near-term investment plan to maintain production at 40,000 barrels of oil per day in the Shaikan field in Kurdistan with the potential to increase to 55,000.

If the open offer is not fully subscribed, Capital Research has agreed to subscribe for up to $20 million.

The shares will be issued at $1.09 each. Existing shareholders will be entitled to 20 new shares for each nine that they currently hold.

Existing shareholders will own 5% of the equity following the restructuring, to be reduced to 4.5% after the open offer. They can add a further 10% through participation in the open offer.

Gulf Keystone said it is carrying out the restructuring because the current low price of oil and “adverse geopolitical developments” have “severely impaired” its ability to service, refinance and repay its existing debt.

The restructuring will be carried out through a U.K. scheme of arrangement.

“Without the restructuring and the improved liquidity delivered by the transaction, the company cannot avoid insolvency or capture the significant future potential of the Shaikan field,” warned chief executive officer Jon Ferrier in a news release.

Shareholders will be asked to authorize the restructuring at a special general meeting.

If the plan is not approved, then the company’s business will be transferred to holders of the 13% notes and holders of the convertibles who entered into the restructuring agreement by Aug. 1. If that happens, Gulf Keystone warned, shareholders and holders of the convertibles who have not supported the agreement will receive nothing.

Gulf Keystone previously missed the interest payment on the 13% notes and the convertibles that was due in April.

Perella Weinberg Partners UK LLP is the company’s financial adviser, Paul Hastings (Europe) LLP is its legal adviser and Memery Crystal LLP is legal adviser for the open offer. DF King Ltd. is information agent.

Gulf Keystone is a Bermuda-based oil and gas company operating in the Kurdistan region of Iraq.

DNO is an Oslo-based oil and gas operator.

© 2015 Prospect News.
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