Lights illuminate the HC Orsted, a gas-fired power plant operated by Dong Energy on the outskirts of Copenhagen, Denmark. Dong Energy might be better off without its oil and gas exploration business, which has turned into a liability amid a plunge in petroleum prices, investors in the company’s bonds say.


Bloomberg/Copenhagen


Dong Energy might be better off without its oil and gas exploration business, which has turned into a liability amid a plunge in petroleum prices, investors in the company’s bonds say.
Dong this month hired JPMorgan Chase & Co to review its operations as it prepares for an initial public offering some time before 2018.
The announcement came in a response to a report that the Skaerbaek, Denmark-based company is considering spinning off or selling its exploration and production unit.
“I would overall welcome a streamlining of the company,” said Carsten Horn Nielsen, chief portfolio manager at Copenhagen-based BankInvest, which manages about 100bn kroner ($15bn) of assets, including 100mn kroner of Dong bonds. “It makes sense to focus on fewer less volatile areas.”
Dong, whose biggest shareholders include Goldman Sachs Group, is struggling to find the right balance between its operations in wind, thermal power and oil and gas amid lower energy prices. The company said last month it’s planning net investments of as much as $6bn in 2015 and 2016, about the same amount it spent in the past five years combined.
Ulrik Froehlke, a Dong spokesman, said the company doesn’t have a further comment beyond a statement on March 9.The E&P unit, which produces about 115,000 barrels of oil equivalent a day from mainly Norwegian and Danish offshore fields, has previously given Dong an advantage over other European utilities, according to Mikael Veno Munksgaard, a portfolio manager at Jyske Invest which has owned Dong bonds for more than five years.
“Diversification is a strength from a credit perspective, but it’s only a strength if it’s profitable,” he said. “With oil and gas prices at current levels, it could easily make sense for Dong to dispose of those activities.”
Dong’s bonds have risen amid speculation of a sale. The yield on its 4.875% hybrid bond due 3013 fell to a record 3.84% on March 9. Its spread relative to the government yield curve narrowed to about 260 basis points last week, from a 2015 high of 329 basis points on Jan. 21.
The E&P unit has been Dong’s biggest profit centre in four of the past five years, based on earnings before interest, tax, depreciation and amortization.
Yet in the fourth quarter, it made an 8.1bn-krone pretax writedown in the unit because of the falling oil and gas prices. The price of benchmark Brent crude is down more than 50% from a high last year.
“It would be surprising, but not completely unlikely if Dong Energy should sell the oil and gas exploration activities, or perhaps a part of them,” Jakob Magnussen, a credit analyst at Danske Bank in Copenhagen, said by phone. “We would see this as credit positive. Dong Energy would get rid of a risky part of the portfolio.”
Dong reported a slump in net debt to 4bn kroner at the end of last year from 25.8bn kroner a year earlier. The reduction came after a capital injection from Goldman and pension funds ATP and PFA, as well as higher cash flow and proceeds from divestments.
Goldman last year paid about $1.5bn for its 18% stake in Dong, which it bought through its European merchant banking unit in a company called New Energy Investment.
The Danish state still owns 59%. The other minority owners are five regional power companies.
Dong has promised its new owners it targets an IPO some time before 2018. The government pulled a planned IPO in January 2008 as the global financial crisis triggered a stock market slump.
“Dong now has another advantage in the form of a strong balance sheet after last year’s capital injection from Goldman Sachs and the pension funds,” Munksgaard at Jyske Invest said. Still, “Dong could benefit from a more focused approach and the IPO will probably help that. Stock markets are often good at keeping companies focused.”