Dana Gas Seller Turns Buyer on $2 Billion Iraq Kurd Region Award

  • SanctaCapital counts Dana bonds, shares as `core' holdings
  • $350 million of 2017 sukuk bonds yielding 19%, near record

Ghassan Chehayeb, who correctly bet that United Arab Emirates-based energy explorer Dana Gas PJSC would miss debt payments in 2012, says he’s now a buyer.

Chehayeb, who helps manage about $30 million of assets at Houston-based SanctaCapital Group, correctly predicted Dana Gas would miss payments on its Islamic bonds in 2012. Now, he says the $2 billion award that Dana Gas and partners won in November from Iraq’s semi-autonomous Kurdish region, along with a settlement of a commercial case the same month, will “materially change the balance sheet.”

“Dana Gas has had a liquidity dilemma for a very long time and we think that’s about to change,” Chehayeb said in a phone interview on Tuesday from Dubai, where SanctaCapital has a research office. “We believe that they received a substantial amount of money” from a settlement with RWE AG and from the Kurdish region. He declined to say how much SanctaCapital has invested in Dana Gas bonds and stock, other than that they are “core” holdings.

Low oil prices have compounded Dana Gas’s woes, hurting profits after delayed payments in Iraq and Egypt and disputes over rights meant the company failed to repay about $1 billion in Shariah-compliant debt in 2012. It restructured the debt and sought to sell assets while pursuing arbitration and overdue bills. In November, Dana Gas said it and partners were awarded $2 billion from arbitration against Iraq’s Kurdistan Regional Government. It also reached a settlement that month with RWE’s trading unit in which the German company will become a partner in Dana Gas’s Pearl Petroleum venture in Iraq.

Dana Gas convertible bonds due in October 2017, of which $350 million are outstanding, are yielding 19 percent, near the record reached last month, and are one of the cheapest dollar bonds in the Middle East, according to data compiled by Bloomberg. After reporting a third-quarter loss of 28 million dirhams ($7.6 million) in the third quarter, Dana Gas said it expected to be “financially challenged” in the fourth quarter. Results for the period are due to be released Feb. 14.

“Cash flow is still challenging,” Montasser Khelifi, a Dubai-based senior manager at Quantum Investment Bank Ltd. who specializes in Shariah-compliant assets, said by phone on Monday. “In normal market conditions, maybe the good news flow could have been positive for the price, but now investors are in risk-off mode and not eager to touch high-yield names.”

Dana Gas declined to comment, citing upcoming earnings. Chehayeb said he expects the company to report $300 million to $500 million of additional cash from the settlement and stake sale to RWE. Dana Gas may also get about $40 million from the Kurdistan Regional Government as part of the arbitration, he said. The explorer had $142 million in cash and bank balances on Sept. 30.

“This should allow the company to quickly de-lever, while providing it dry powder to take advantage of this environment,” Chehayeb said. That may include buying cheap energy assets, he said.

Dana Gas is still seeking to recover more than $1 billion in payments for past production in Egypt and the Kurdish region of Iraq. The amount it’s owed in Egypt rose by $19 million to $252 million at the end of September, and payments outstanding from Kurdish authorities increased by $58 million to $804 million.

Plans to recover cash Dana Gas is owed in Egypt will take longer than the company expected. In January 2015, Dana Gas said it had mapped out a plan to collect overdue payments for natural gas it sold in Egypt by 2018. Oil has tumbled about 40 percent since then, and in November, Chief Executive Officer Patrick Allman-Ward pushed that date back to 2019.