Oil Price Surge Can Trigger Writebacks, Dong Energy CEO Says

  • Writebacks in energy sector are rare: Bloomberg Intelligence
  • Chairman says oil unit now worth keeping after sale dropped

Oil’s 80 percent rebound from a January low is already supporting Dong Energy A/S’s valuation, which the company says may be as high as $16 billion in connection with its initial public offering.

But Chief Executive Officer Henrik Poulsen now says that a “very sharp” increase in the price of Brent crude could trigger a writeback at the company’s Exploration and Production unit. That would help reverse some of the $2.4 billion in writedowns Dong took at the division in January.

“We may come into a situation where we have to write back” the value of the E&P unit “if the oil price rises very sharply just as we wrote it down when it fell,” Poulsen said in an interview in Copenhagen on Thursday.

The comments come as Brent crude traded above $50 a barrel for the first time since November, helping to lift commodities companies and buoying the currencies of oil-producing nations such as Norway. As recently as January, a barrel of crude cost just $28. That marked a low point following a 76 percent slump from a June 2014 peak pf $115.

For a Gadfly commentary piece on Dong Energy’s IPO, click here.

It’s very rare that oil companies write back assets they previously wrote down, according to Philipp Chladek, senior oil & gas analyst at Bloomberg Intelligence.

“The oil price volatility is far from a level at which we could say that the market has settled,” Chladek said. “The situation is still very insecure, and if ever, you could only write assets back up if you had a far greater security regarding oil markets.”

For a Bloomberg Intelligence analysis on Dong’s IPO, click here.

Dong on Thursday invited investors to buy up to 17.4 percent of its shares at 200-255 kroner a piece, giving the company an implied value of 83.5 billion kroner ($12.6 billion) to 106.5 billion kroner. At that price, it would become the most valuable company ever to be listed in Denmark. Dong expects trading to start on June 9.

QuickTake Oil Prices

The IPO follows a lengthy preparation period during which Dong had tried to sell its oil unit. The company, which is already the world’s largest operator of offshore wind parks, wants to shift focus away from fossil fuels and toward renewable energy instead.

After failing to find a buyer ahead of this month’s IPO, Poulsen says he “can’t answer now whether we at some time in the future will have to look at selling” parts of the E&P unit. “Our focus is on reducing capex and costs on the unit.”

While Dong gave “serious consideration” to the goal of selling its oil business last year, it’s now “a rather healthy” business, Chairman Thomas Thune Andersen said in a separate interview.

“It’s geographically concentrated in the North Sea with average lifting costs that are attractive, so it’s a business that’s worth having,” he said.

The Danish state, which currently holds 59 percent of Dong, plans to keep just over half the company after the IPO. Goldman Sachs is the second-largest owner of Dong, with an 18 percent stake. The Wall Street bank has consistently underscored its commitment to being a long-term holder of the company.

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