Dana Petroleum
12/06/2004
 In the last two months, Dana Petroleum (DNX) has traded as high as 465p before falling back in sympathy with the price of oil. We understand that several oil majors are seeking to acquire some of Dana's key Mauritanian interests in exchange for North Sea producing assets. In our opinion the execution of such a deal would be positive, significantly increasing production and enhancing near term investment fundamentals.
In the first half to June 30, Dana produced 17,895 barrels of oil equivalent per day (boepd). We estimate this production will rise to approximately 27,000 boepd by the end of 2005 due to the inclusion of the new Gadwall field, and additional contribution from Hudson. Dana has acquired a further 28 percent interest in the Hudson gas field (North Sea) in exchange for Indonesian interests. We believe this deal may prove to be a template for future transactions.
In our opinion there is now a reasonable prospect of for a similar agreement whereby DNX swaps some Mauritanian assets in exchange for North Sea oilfields. Dana has huge exploration acreage in offshore Mauritania, in addition to a 63.9 percent interest in Block 7, which contains the massive 1 trillion cubic feet Pelican 1 gas discovery.
In the Pelican 1 well alone, Dana's reserve interest is approximately 116 million barrels of oil equivalent (boe). This compares with the company's entire proven reserves as at December 31, 2003 of 123 million boe. In addition Dana owns extensive acreage in one of the hottest exploration areas in the world - offshore Mauritania. In our opinion the prospects of a deal is heightened with none of the oil majors currently holding an interest in Mauritania.
In the company's Indonesian swap, Dana exchanged 10 million barrels of undeveloped oil equivalent for 5.6 million barrels of developed North Sea oil reserves. Hypothetically should Dana execute a similar deal for Block 7 at offshore Mauritania, the company could be the recipient of 65 million boe of North Sea reserves. Based upon an estimated 10 year field life, this equates to 17,800 boepd. Our understanding is that Dana is only seeking to divest up to half of the interest in the offshore Mauritania oil field. Under this scenario current production would be boosted by 8,900 boepd, or approximately 50 percent.
In our opinion a deal involving the partial swap of Dana's offshore Mauritanian gas development interests in exchange for North Sea production assets is a distinct possibility. We believe this is sensible because Dana has neither capital, nor the expertise to develop these offshore gas interests. The majors on the other hand are now actively targeting large oil and gas developments of 100 million barrels and greater.
One of the reasons the majors are exiting the North Sea is because production in the area is expected to decline from 3.7 million boepd in 2005 to approximately 2.5 million boepd by 2010. Although the majors are divesting to concentrate on larger fields there remains substantial opportunities for a nimble and experienced North Sea operator like Dana.
In line with a desire to concentrate on the North Sea and West Africa, Dana is selling down non-core assets. Recently the company sold a minority holding in Russian company Evikhon to Sibir Energy for US$28 million. We approve of this strategy, with the new funds enabling the company to reinvest in higher-growth areas.
The combination of high demand for oil, limited spare capacity and concerns over the Northern Hemisphere winter pushed crude prices to a high of US$55 a barrel in October. Although prices have since eased below US$45 a barrel, we believe the oil price will remain high due to robust demand and the persistence of Middle Eastern tension. Interestingly, CSFB recently raised their 2005 oil price estimate by 19 percent to US$43 a barrel, and 2006 forecasts by 12 percent to US$38.
Currently DNX trades on a modest 2005 price earnings ratio of 15 times, which is fair in our opinion considering the robust long-term earnings growth potential. We believe the shares are reasonably valued given the distinct possibility Dana will double annualised oil and gas production over the next 12 months.
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