The collapse in the crude-oil price has seen this Aberdeen-based, oil-and-gas producer’s share price tumble around 50% from last summer’s high of £19.72. But now could be a good time for long-term investors to buy in.
Dana Petroleum (LSE:DNX), rated a BUY by ABN Amro
In an upbeat trading statement last Friday, the group reported record production of 39,400 barrels of oil equivalent per day (Boepd) for 2008 from its stakes in 31 fields spanning Britain, Egypt, Norway and the Netherlands. Output is expected to stay broadly flat this year, but the board hopes to add to its already substantial ‘proven and probable’ (2P) hydrocarbon reserves. There is also a very active exploration unit focusing on Africa and Australia, which is set to drill another 17 wells in 2009 at a total cost of £235m. This is one of Dana’s main attractions – it is well balanced in terms of exploration (ie, future growth) and production (ie, being able to pay the bills). Its growing collection of long-life assets, offering recurring cash flows on top of its £43m cash pile, should be enough to meet its immediate funding needs.
So what about valuation? As a rough rule of thumb, recent deals in the industry have been pitched at around $15/barrel for 2P reserves. That would give Dana an enterprise value of about £2bn – more than £20 a share. Or put another way, investors who buy the stock at around £10 a share are getting a diverse spread of high-quality fields for less than 50p in the pound (assuming a takeover), while pocketing the rest of the group’s lucrative exploration blocks for free.
Of course, there are risks. The volatile oil price means Dana isn’t for the faint-hearted. If crude stays low for longer than expected, Dana may need to raise fresh capital – although I suspect that with oil cartel Opec (which controls around 40% of the world’s supply) slashing output to restore stability, oil will recover over the next 12 months. In fact, futures contracts are already predicting $55 a barrel by the end of this year. Other potential problems include foreign exchange, wind-fall tax and geopolitical issues. However, for value investors, Dana has one of the busiest and most promising exploration pipelines in the sector – and given its desirable British gas assets, it could readily be gobbled up by one of the large European gas utilities looking to improve the security of its supply.
Recommendation: LONG-TERM BUY at £9.87