Was There A Leak at Dana Gas?

A lot has already been said about the decision by Dana Gas to essentially rule $700mn or so worth of “shariah” borrowings unlawful. Whilst all the attention is on the Sukuk debacle, we’ve observed peculiar price action in the trading of Dana Gas equity on the Abu Dhabi Securities Exchange. The chart below plots recent price and volume for Dana Gas, with blue labelled letters indicating public disclosure announcements made via the exchange (note, each letter is associated to the immediate bar to its right).

A – 25-05-2017 – At 9:30am on a Thursday, Dana Gas announces results of its board meeting held the preceding day.  The minutes of the meeting are short, however reveal concern about liquidity pressures faced by the company.

The Board also considered an update report on the Company’s Sukuk Al Mudarabah maturing October 2017. The Board took note of the continuing high balance of receivables owed to the Company and agreed that precautionary measures needed to be maintained in order to conserve cash on the balance sheet.

As expected, Dana Gas equity responded negatively and traded down from 0.43 to 0.41 a -4.65% drop on higher volume of 43mn shares. Up until then, the 20 day average daily volume was 5.9mn shares.

B – 05-06-2017 – On no subsequent news between 25th May when board meeting minutes were released, and the close of the 5th June trading session, Dana Gas shares mysteriously moved from 0.39 to 0.47  a 20% increase. During this period volume also remained high, 31st May and 1st June saw 40mn and 36mn shares traded. These daily volumes are approximately five to six times those of pre-25th May. On 5th June alone, a massive 106mn shares traded hands. After market close at 2:14pm on the 5th June Dana Gas announced it appointed financial and legal advisors in connection with the Sukuk Al Mudarabah. So far, bad events and higher prices (the stock was made 3-4 month new highs).

C – 07-06-2017 – At 8:54am some positive news hits the wires. The Egyptian Government makes a $40mn payment to Dana Gas, reducing its receivables to $187mn. On this news the stock rips 13% higher from 0.46 to 0.52. Although receiving $40mn was a good thing, it was by no means unheard of. Dana Gas had previously received payments of $50mn and $20mn on the 18th and 21st May respectively and at those times the stock didn’t even budge. By the end of the 7th June the stock closed at 0.51, up 31% from its recent lows with two bouts of bad news (liquidity concern and appointing restructuring advisors) and one mildly positive ($40mn received from Egypt, with $187mn still outstanding).

D – 13-06-17 – at 11:17am Dana Gas announces the broad terms for the Sukuk restructuring, and drops the “unlawful” bomb on its creditors. It was only at this time that the public would have known there were questions about the validity of Dana Gas bonds. Only at this point would there be the notion that shareholders may face less dilution from the outstanding convertible bonds (an equity friendly development). However by this time the stock was already at 0.64 having moved up 64% from its recent lows on no real news. Right after the official announcement the stock managed to subsequently squeeze out a choppy advance to 0.76 before trading back down to 0.69 in recent days.

Question

We got from A to D with no public, materially positive news.

Why is it that Dana Gas stock made the majority of its move higher, and on such significant volume, before the market knew the Sukuk legality was to be called into question?

If anything, we’d expect equity weakness, with expectations mounting that bondholders (senior to equity in the capital structure) potentially getting converted into equity in event of a default, thereby diluting shareholders.

We hope our suspicions are wrong.

Perhaps it was uninformed retail investors chasing momentum and moving an illiquid stock.

Perhaps its was the infamous Goldilocks fund managed by ADFG building a position to try and muscle in on board decisions.

Who knows.

Either way, when regional markets seek index inclusion and foreign investors, we hope regulators are doing their job. As an aside, we’d like to see all regional exchanges and regulators be more transparent about both investigations and their outcomes. We never thought we’d say it, but look how active the Saudi Capital Market Authority is!