Sukuk payback haunts Dana Gas

When Dana Gas shareholders meet on Thursday to elect a new board, personnel issues are likely to be overshadowed by the company's financial affairs.

Long-suffering equity investors have seen the value of their shares decline by more than 90 per cent from their peak soon after Dana listed with much fanfare on the Abu Dhabi bourse in 2005.

The initial promise shown by the gas producer soon dissipated over stalled projects and payment issues in Dana's key markets - Iraqi Kurdistan and Egypt - where disputes with the central government in Baghdad and political turmoil in Cairo have interfered with revenue. Exploration activity in the company's native Sharjah has also disappointed.

The holders of the stock who paid nearly Dh5 per share at the top of the market have been dismayed to see Dana's share price dragged down further by the debt issued to fund the company's expansion. A US$920 million (Dh3.37 billion) sukuk, placed in the market in 2007, has weighed on Dana like a millstone, and has looked increasingly threatening as its maturity approaches.

Dana is unlikely to muster the necessary funds to repay the principal on the Sharia-compliant security without selling assets. The spectre of a default in October, when the repayment is due, has haunted equity investors and creditors alike. The bond trades at 70 per cent of its face value, while the stock languishes at about 40 fils per share.

Crescent Petroleum, which holds 21 per cent of the equity, has not come to the rescue, making it clear last month that it would not provide a cash injection.

Dana Gas responded two weeks ago by publishing a strong hint alongside its quarterly results that it was seeking to restructure its debt. It hired Deutsche Bank, Blackstone Group and Latham & Watkins, a law firm, to advise it on ways to address the debt.

Even as its first-quarter net profit doubled on higher hydrocarbon prices and production in Iraq, Dana pointed to a challenging economic environment and uncertainty surrounding some of its operations as factors affecting its ability to raise new funding.

It said it was "committed to finding a consensual solution that is equitable to all stakeholders". Deutsche, Blackstone and Latham & Watkins were hired to "advise on various options for discussions with the sukuk holders and their advisers", Dana's statement said.

The company had $143 million of cash and cash equivalents on hand at the end of the first quarter, according to its financial statements.

At the end of the first quarter, trade receivables stood at Dh825m in Egypt and Dana's trade receivables from its Kurdistan project were Dh1.04bn.

By issuing new debt to refinance its sukuk, the company should be able to buy time while it diversifies its operations, and wait for payment bottlenecks to ease.

As the holder of some prime gas producing concessions, the outlook for the Dana is less gloomy than the numbers suggest, according to some investors.

"In the medium to long term, the situation will eventually resolve itself and improve," said Gus Chehayeb, the director of research at Exotix.

Once the repayment of the principal has been pushed back, the company will have time to accumulate funds to meet its obligations further down the line.

"It will take a lot of pressure off the share price, because fears [over the sukuk] reflect in a drop of at least 30-40 per cent," said Mohammed Ali Yasin, an independent analyst.

If a default is averted, experts believe, Dana's stock could rise.

"The period after a restructuring is usually an opportunity for investors to benefit from any risk that has been taken out of the picture," said Marwan Shurrab, the chief trader at Gulfmena Investments.