Dana Petroleum (DNX)
06/05/2008
The Discovery Channel With supply side shocks becoming more common than US rate cuts, Dana Petroleum's (LSE, DNX) graduation to the forefront of the junior oil and gas arena could not have been better timed. As the US dollar continues to weaken while global demand for oil outpaces production, last week's comments from Opec president Chakib Khelil citing the possibility US$200 have significant weight behind them. The recent two day strike at the Grangemouth refinery in Scotland caused disruption to oil output from the UK sector of the North Sea. With 89 percent of Dana's production emanating from the North Sea, are we concerned? In short, no. Dana's flourishing production profile and exploration prowess put paid to any concerns. Last year revenue at the independent oil and gas explorer/producer surged ahead with a staggering 45 percent increase on 2006, to a new record high of £311.5 million. This was supported by a 37 percent climb in output, with production weighing in at 30,514 boepd (barrels of oil equivalent per day). Just as encouraging, in our view, expectations were superseded as production reached approximately 45,000 boepd by the year end. Levels were boosted through a combination of accelerating output from existing cash cows, bringing on line new fields Enoch and Cavendish, and prudent use of investing capital through acquisitions of Ener Petroleum (Norway) and Devon Energy (Egypt). Looking ahead, recent developments look set to propel earnings forward onto a new plane. Most significantly, Dana's share price rocketed over 17 percent recently on the news of an oil discovery at the West Rinnes structure in the UK's Northern North Sea. Furthermore, last week the company announced that it has approved the development of the Babbage gas field located in UK's Southern North Sea in which it has a 40 percent interest. Encouragingly, Dana's planned capital expenditure programme for 2008 year is aggressive. The company earned £201.8 million through operating cash flows last year and expects to invest £200 million within its existing fields and exploration licences. Should any further bolt on acquisitions be deemed suitable, the £116 million bank balance as well as a new $400 million debt facility ensures the company will not to be caught short. And with net debt of £71.3 million, gearing is a manageable 17 percent. From a valuation perspective, we view the prospective price earning ratio of just less than 12 times as undemanding. And with Dana Petroleum having proved itself a star pupil in 2007, in our view management will have little trouble meeting this years target of averaging between 40,000 and 45,000 boepd. 
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