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DNO Management Clarifies May 2011 Report


October 27, 2011 - London

Management of DNO International ASA wishes to correct the misuse and mischaracterization of an internal management report prepared in May 2011 providing a preliminary valuation of RAK Petroleum PCL's oil and gas assets which are now the target of a merger transaction.

The report was prepared based on presentations made by RAK Petroleum, and was intended as input to the initial negotiations with RAK. This report must be considered as an initiative in a negotiation process.

As part of a campaign of misinformation, disinformation and factual distortion, opponents of the proposed transaction have circulated part or all of this internal report to the press. The May report was based on a very cursory and preliminary review of RAK Petroleum's portfolio. To circulate this report without providing background and context does a disservice to shareholders who are faced with a decision on November 1st on whether or not to endorse a transaction strongly endorsed by DNO's management and its independent Norwegian directors.

To provide proper background and context, after presenting the May report to the board under its then chairman, Berge Gerdt Larsen, the board instructed management to undertake further work and obtain an independent review and appraisal of the RAK Petroleum assets from DeGolyer and MacNaughton, an internationally recognized petroleum evaluation firm. Before this work could commence, RAK Petroleum withdrew its offer to proceed with a transaction and discussions between the two companies were only resumed in June 2011 at the initiative of DNO's independent Norwegian directors and a Heads of Agreement signed by the parties that set forth an outline of a possible transaction and a roadmap for completion of a comprehensive valuation of both companies' oil and gas holdings.

DeGolyer and MacNaughton was re-engaged by RAK and given full access to all RAK Petroleum technical, contractual, fiscal and operational data. With the benefit of the work of the independent experts, DNO management and its advisors proceeded to exhaustively review and improve our understanding of the target assets and their future financial commitments.

The findings of this due diligence process have been incorporated in a 408 page prospectus equivalent document prepared, reviewed and approved in accordance with all applicable laws and regulations, including the Norwegian Securities Trading Act, and which has been made available to shareholders and the market through our website (www.dno.no). We invite all interested parties to review this material.

Since the prospectus was made available, several investment banks that closely follow DNO have carefully and extensively reviewed the proposed merger terms and conditions and each one has endorsed the transaction. These third party reports are available from Arctic Securities ASA, ABG Sundal Collier and First Securities AS.

Each one has produced a Buy recommendation for DNO shares and each one has concluded that the RAK Petroleum assets are accretive to DNO. 

First Securities, October 26, 2011: "There are two main reasons why we think investors should support the merger: Firstly, a merger will create a wider portfolio with lower political risk and better geographical diversification. Secondly, a merged asset base will most likely provide a more stable operational cash flow as the company's operational cash flows have been volatile in periods with exports from Kurdistan."

ABG Sundal Collier, October 11, 2011: "On the back of the release of the DNO/RAK Petroleum merger prospectus we raise our recommendation to BUY (from SELL) and our target price to NOK 7.5 (from 5.0). We believe the merger will offer substantial downside protection and view the enlarged regional footprint following the merger as adding value for the current shareholders.."

Arctic Securities ASA, October 21, 2011: "DNO/RAK merger creates significant MENA E&P Player. The merger is in line with DNO's strategy to grow assets and production in the Middle East and North Africa, while providing diversification regarding political and technical risk. The new board headed by Bijan Mossavar-Rahmani will strengthen DNO significantly both strategically and regarding corporate governance. RAK Petroleum's investor base and governmental relations in the Middle East will also strengthen DNO International in business development and contractual negotiations in the region..."

To further place the May report in context, we can add that given our limited time and access to information we did not fully appreciate the discretionary nature of RAK Petroleum's investment program or the manner and speed with which capital costs were recovered.

The RAK Petroleum working interest share of Block 8 drilling expenditure is estimated at approximately $64 million over a 12-month period. We did not fully appreciate at the time of the May report that these drilling costs are quickly recovered immediately as cost oil from revenue received from existing production with no time delay and would not pose a financial exposure for DNO post merger.

Also the capital cost exposure for the development licenses in the May report was not factoring in the staged development concept. As we have reported to the market the first well in the re-development plan is currently ongoing (Saleh-5) with a current estimated costs of USD 40 million. Further investments will be discussed and decided upon when the results from this well becomes available.

RAK Petroleum also holds an interest in five exploration licenses in Oman, the UAE and Tunisia. The portfolio contains a significant number of leads and prospects for which a cumulative drilling cost was estimated in May. Most of RAK Petroleum's exploration expenditure is in fact discretionary and DNO has considerable flexibility to review and prioritize the exploration portfolio following the merger. We now understand that none of the licenses has any financial commitments for exploration wells that have not been met in the current license terms.

DNO management underscores that the May report was a first step in what became an exhaustive due diligence process involving preparation of an independent Competent Persons Report.

DNO management reiterates its support of the proposed merger with RAK Petroleum on the proposed terms.

Oslo, 26 October 2011

DNO International ASA
Corporate Communications


This information is subject of the disclosure requirements acc. to §5-12 vphl (Norwegian Securities Trading Act)




This announcement is distributed by Thomson Reuters on behalf of Thomson Reuters clients.

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Source: DNO International ASA via Thomson Reuters ONE

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