The Hidden Value Dong Can Still Unleash After $2.6 Billion IPO

Europe’s biggest initial public offering of the year started with a 12 percent share gain on its first day of trading. But Dong Energy A/S has some unfinished business that can unlock even more value.

The energy conglomerate, valued at $15 billion after floating about 17 percent in an IPO, needs to sell its oil exploration and production unit to fulfill a goal of becoming a truly green utility company. Dong abandoned its efforts to find a buyer in January. But with a recovery in crude prices, selling the unit next year is now “definitely a possibility,” said Morten Imsgard, an analyst at Sydbank A/S.

When Dong gave up a divestment, crude hit a low of $28 a barrel. It’s now trading above $50. According to Imsgard, oil only needs to go up about $5-10 before the company revisits the whole idea of a sale.

According to Elchin Mammadov, an analyst at Bloomberg Intelligence, the E&P unit could be worth anything from $1 billion to $6 billion. The wide range is due to uncertainties over the oil and gas content of reserves, tax regime developments in Denmark, Norway and the U.K., as well the capex needed by a buyer when a transaction would occur.

Dong is likely to join the Stoxx Europe 600 Utilities index in September, according to Mammadov. He also notes that the company’s free float will exceed 20 percent if a so-called green-shoe option is fully exercised by July 8.

For a story on Dong Energy’s Copenhagen IPO, click here.

For now, Dong says it’s not in talks with anyone. Chairman Thomas Thune Andersen says the whole matter “is off the table because we’re not actively trying to sell.” Even though the division has “some attractive projects,” Dong is working to reduce its costs, he said in an interview.

“Obviously, as we progress into the future, situations will arrive where we will have the option to do things differently,” the chairman said. “We’ll look at that when it happens.”

Dong plans to starve its oil unit of cash as it focuses on operating offshore wind parks, an area in which the company boasts the biggest capacity in the world.

A deal will make Dong “a clearer bet for investors,” Imsgard said. It will “definitely strengthen the investment case.” And that may be true pretty much no matter what price Dong settles on. If the oil unit is sold at a bargain rate, “they may get a beating in the short run,” he said. “But in the long run it would benefit the case.”

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