dana up, page-7

There's an off chance dana's rise is due to this article by Edmund Jackson on the front page of www.iii.co.uk (which is a popular uk shares site). Might also be a takeover premium with an announcement for them last night that Goldman Sachs now owns about 23% of Dana.

Or, more likely it's just that we've hit paydirt in Faucon and the uk boys had a bit of success in loosening up the tea ladies last night....lol

Cheers,
Butcherano.


Dana at the frontier
Edmond Jackson 19-12-05

Currently, the most tantalising story in oil and gas exploration is drilling Faucon-1 offshore Mauritania. Each Tuesday, shares in companies with an interest – Dana Petroleum (60%), Hardman Resources (18%), Tullow Oil (20%) and Roc Oil (2%) – twitch in response to reports initiated by Hardman, an Australian explorer listed on AIM that has prompted UK oil companies to follow its practice of regular updates.

This well is especially relevant to Dana because of its extent of interest and potential impact on reserves. Page 8 of the 2004 annual report (see www.dana-petroleum.com) cites scope for over one billion barrels of oil in place.

At about 950p Dana is capitalised near £800m and made a pre-tax profit of £24m in the first half of 2005 – yet analysts have pencilled in scope for £14/15 a share if the news on Faucon-1 is genuinely positive. As a holder I see scope for great variation. The evidence so far is not that inspiring but even so the shares remain well supported – most likely because Dana has a good overall risk/reward profile.


Hydrocarbons discovery
Even if Faucon-1 ultimately does not prove commercial, the discovery of hydrocarbons is interesting in context of Dana’s ongoing exploration in the area, which has some large prospects. My tactic is to take no action with my long-term investment in the company, but watch for announcements lest they improve.

Wait and trade
Recalling how Cairn and SOCO shares have re-rated dramatically in their history, from a risk/reward perspective it proved shrewd trading to wait for confirmation of a worthwhile discovery – then act promptly, at the market open, even if it meant chasing say a 10-20% mark-up. I am inclined to want to see firmly positive news, however, to consider buying more Dana.

An announcement on 6 December headed ‘discovery’ cited temporary suspension of drilling after encountering hydrocarbon-bearing sandstones, and the shares initially shot above £10. The price then drifted back to about 950p; on consideration this ‘discovery’ has yet to be proved commercial.

The news last Tuesday, 13 December remained inconclusive, locating light oil in about 10m of lower sandstone, and gas in about 4m of upper sandstone. Hardly fuel for speculators, yet frontier exploration often requires patience. Since Dana’s objective is for further exploration and on adjacent blocks, in an overall industry context this looks a fair start.

Other high-impact wells
I am content to maintain a holding and not sell if the near-term excitement fades, because Dana has other high-impact wells in a 20-well drilling programme to end-2007. In addition, there is a target to double production to 40,000 barrels of oil equivalent per day, by end-2007, from existing production/development assets. The recent tax rise on North Sea oil producers, where Dana continues to develop its production assets, has been well discussed and looks priced-in. So despite the uncertainty surrounding Faucon-1, the underlying risk/reward on this share is supportive.

Hybrid business model
This year’s rise from 423p has been helped by strong oil prices but Dana is an example of management making its own luck with a shrewd ‘hybrid’ business model that combines cash flow from low-risk production and high-impact exploration. Oil sales are un-hedged thus gaining the full benefit of current, high oil prices. This last week, Goldman Sachs has predicted the US oil price will average $68/barrel in 2006 and oil prices generally could reach $105/barrel within the next four years. Global demand continues to rise as supply growth slows.

So the macro outlook is benign so long as oil prices do not extend above $70/barrel and adversely affect economic growth.

FTSE 250 placing
In this scenario, institutions have been eager to get exposure to quality oil companies, and Dana’s promotion to the FTSE 250 has improved its standing and liquidity. Last November institutions backed a £34m placing at 870p to facilitate acquisitions in Algeria, the North Sea and Egypt.

Faroe Island exposure
Dana also offers a lower-risk way to get exposure to exploration offshore the Faroe Islands, via a 13.7% stake in AIM-listed Faroe Petroleum. Interest is growing among oil majors in the ‘Atlantic margin’ and Faroe shares have re-rated smartly this year capitalising the company at £66m. There is considerable potential but lacking profits Faroe shares must be rated as speculative.

CFD short possibility
In the short term there could be a trading opportunity in Dana, mainly if the news on Faucon-1 improves. I am disinclined to hedge my position with, say, a contract for difference, because the downside risk does not look substantive enough. You might disagree on the basis that sentiment could fester in the short term, hence the shares become a useful CFD-related short if the next announcement disappoints. That is your call.

This is a tricky trade to exploit, similarly on the long side if the next update is better. Quantifying a share price target would be premature, even on first reading news, but astute traders know that speculation can create a lot more interest in a share when the news is good.

Best to keep a close watch on the Regulatory News Service, especially at 7am Tuesdays. Faucon-1 may or may not produce a gush of excitement, yet major drilling events like this are quite infrequent in oil exploration. Keen players should pay attention!

Edmond Jackson owns shares in Dana Petroleum.

Companies

Dana Petroleum PLC
Hardman Resources
Tullow Oil
Roc Oil