Valuation & Comparison with peers

4th Feb '10 by Cuthbert C

19 comments 3832 reads

I'd like to open a conversation/discussion about Dana's valuation, in both standalone/absolute terms and also on a comparative basis - ie Dana vs Soco.

I'll have to start with a confession that my own valuation model is woefully out-of-date and I have not been keeping on top of analyst/broker valuations for some time. Cartching up with the latter and gettingto grips with the former are both on my list of things to do but for personal reasons I'll not be able to put in the time for at least a fortnight and probably longer.

I trust that such a feeble opening contribution does not preclude my at least mooting the topic for discussion.

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Cuthbert C

Premium Member

19 comments

emptyend

4th Feb '10

Hi T,

You are welcome to moot it of course but, despite the fact that I have made such DNX/SIA comparisons myself in the past and I continue to hold both stocks, I don't really think such a comparison is especially useful at the present time. The reasons for this are more to do with SOCO's profile (close to finalising a valuation in VN and loading up on more pure explo opportunities in Africa) than Dana's - perhaps it would be better to compare DNX with TLW or PMO?

FWIW both DNX and SIA are cheap IMO - and indeed several of the analysts point out that they are amongst the cheapest stocks in the sector - even on their own figures! I don't bother to keep my own model of SOCO up to date now (no point, as (looking forward a few months) I see the valuations for their main assets to be considerably above that offered by all the analysts and the market) - and I have never even tried to model DNX (far too complicated for a PI).

Both SIA and DNX are likely, in my view, to do corporate deals this year - and both are also drilling what I believe to be prospects that will prove to be pivotally important for each company.......so I simply view both stocks as stocks that are likely to give above-market returns over the next 6-12 months....... which is a point of view that won't be changed by any amount of analysis and theoretical modelling, whether by me or anyone else.

rgds

Cuthbert C

4th Feb '10

The thing that has triggered my starting this thread is the simple and unscientific observation of the relative strength weakness of Dana and Soco share prices - these are my two biggest holdings - each representing somewhere around 30% of my total portfolio.

A couple of years ago the two companies share prices were exactly equal. (was that at £11 or was it £12?) . Both SP's then performed a random walk and wobbled about above and below that benchmark figure. As I remember it Dana was ahead for a while but then fell behind (don't know that one should characterise this as strength in one or alternatively weakness in the other). Then for no particular reason that I was aware of at the time, Soco moved into the lead and has stayed there. Until recently however, the gap between the 2 SP's was typically 100p or less, then it became 200p or less.

Now it has extended to almost 400p in favour of Soco. Which gives me pause for thought.

As I see it, Soco is undervalued and has signifiant potential for medium term transformative changes in reserves/asset maturity in both Viet-Nam and Congo. I share Emptyend's expectation of at least 100% return in the next year (or two taking account of SW10).

I also regard Dana as undervalued. Seems to me (without having done the detailed review mentioned in the thread header, so just Blinking here) that the extent of devaluation is at least as much as in Soco and probably more in relation to core producing assets and near term development. I do not see Dana's chances of transformative exploration/appraial as being anywhere near as great as Soco, but they have a substantial programme of work scheduled and this should add value..

So the question that arises is - given that Dana's SP has, I think, performed much more weakly than Soco's in the past 12-18 months, would it make sense to switch from Soco into Dana at current share prices?

I'm not thinking of a complete switch, just a change of weighting.......

-------------------------------------
Note 1 - please don't respond explaining that the price of an individual share is irrelevant. I know that. But the performance of two SP's over a period reflects the market's valuation of their respective companies.

Note 2 - What I want is a graph that just shows 2 separate SP's. Irritatingly tI find that sharescope charts cannot be configured to do that. the second SP is expressed in proportion to the first , so whenever you start the chart period they appear to start at the same value.

emptyend

4th Feb '10

In reply to tournesol (post #2)

A couple of years ago the two companies share prices were exactly equal. (was that at £11 or was it £12?) . Both SP's then performed a random walk and wobbled about above and below that benchmark figure. As I remember it Dana was ahead for a while but then fell behind (don't know that one should characterise this as strength in one or alternatively weakness in the other). Then for no particular reason that I was aware of at the time, Soco moved into the lead and has stayed there. Until recently however, the gap between the 2 SP's was typically 100p or less, then it became 200p or less.

I think your recollection is a bit selective on that point. See this chart since the March 2009 lows - showing that Dana outperformed SOCO for most of the last year and has only gone well adrift over the last two months.

In fact, I can tell you for a certainty that when Dana peaked at around 1530p towards the end of August (a day on which I sold a few at 1524p - rather unusually catching a high point), the SOCO share price was nearly £2 lower!! Since that point, Dana has had a very clear decline relative to the majority of stocks in the sector - but in fact only a little worse than the performance of Premier Oil.....which tells one, perhaps, that stocks that don't have much of a drilling story are the ones that have fallen out of favour. Rightly or wrongly (largely wrongly IMO) Dana is perceived to have a dull exploration outlook in 2010 by comparison with Tullow, SOCO, Cairn etc.

On the point about weighting, you make a fair point. I have in fact gone slightly more towards SOCO over the last year or two, because I've generally been a small seller of Dana from time to time when the share price has been higher than SOCO's......so I'm now about 5 times more in SOCO than Dana.

I'm still pretty comfortable with that weighting but if I were starting with no position in either and little knowledge, it would certainly be likely that I'd buy Dana before SOCO purely because of the extent of the recent fall. However, it is worth considering a couple of points:

a) what are the events that might cause one stock to outperform the other?

b) how dependent are the companies on matters outside their control?

I'd suggest that DNX is more exposed to near-term oil prices than SOCO and has less obvious, and less likely, "outers" of value. I think that both could double over the next year - but I think that SOCO could do significantly more than that, with some luck, and I also think that it is more likely than Dana to show a big return......

....so I'm still pretty happy that my own relative weighting is an appropriate balance in the light of the probabilities (as I see them).

rgds

ps...the other reason for DNX falling towards the end of 2009 was the dissipation of the RWE bid rumours and the lack of drilling success at Trolla and other prospects.......people simply concluded that there were other places to put their money, IMO, though I am personally surprised to see the fall in DNX has gone as far as it has (because I am much more optimistic than most on Anne Marie and I also don't discount the bid prospects).

kyu66

4th Feb '10

In reply to tournesol (post #2)

You are not alone in your thinking.

Having been a holder of DNX on and off over the past 5-6 years, about the middle of last year I sold out completely and re-invested the cash into SIA, making me VERY overweight SIA. After the run up in price of SIA at the end of last year, I revisited DNX and started to rotate funds from SIA back into DNX. I started buying at around 1180, and then continued slicing SIA at 1400+ and buying more DNX, unfortunatley all the way down from 1200+ to 1025.

In toto the trade is currently underwater as I didn't foresee DNX being hit so hard, part of which I blame on the TLW and SIA placings, so I hope the situation will unwind in my favour in due course.

Sorry for not providing and hard and fast analysis, but I think like you that DNX has been hit too hard, ok, production forecasts have been reduced, but as TC said, the HCs are still there.

I am still overweight SIA, but the DNX weighting is getting very close too it. I obviously think both companies are undervalued, but I am betting on a DNX rerating earlier than SIA. Hope I am right.

Cuthbert C

4th Feb '10

Morning EE - I guess you mean defective rather than selective...... I'll have to look again - my perception was that Soco and Dana SP's behaved as if they were tied together with a piece of elastic that stretched over time. So the gap varied but did not exceed £1 for a long time then the elastic stretched to £2. But the recent stretch out to £4 is outside the recent historic range.

I agree that both companies have the potential for something transformational - Soco has, I think, much higher chances of a sudden and major step-change revaluation. In contrast I think Dana is better placed for gradual incremental value growth which produces a slow but steady kind of revaluation.

Absent the sudden discontinuous step change thing, I am thinking that the gap is more likely to narrow than widen. Hence my musings about switching across......

I suppose basically I'm just thinking that Mr Market is behaving in a depressive way towards both cos. But his depression towards Dana is deeper than towards Soco.

PS - the problem with comparative charts is that the start and end dates change the outcome - start your chart a year or 6 months earlier and the comparison changes

emptyend

4th Feb '10

In reply to tournesol (post #5)

Absent the sudden discontinuous step change thing, I am thinking that the gap is more likely to narrow than widen. Hence my musings about switching across......

Aaah - but this is the crucial point!!

You know that:

a) Soco will be drilling in VN in Q2

b) Soco will be drilling in Nganzi in Q3 and

c) Soco is a willing seller of assets at the right price once someone will give them value for them

Put another way, the risk of being out of a stock when a transformational event occurs is far higher with Soco than with Dana, IMO. There is a significant risk in both cases of course (which is why I still hold both), but there are more obvious catalysts close at hand in Soco's case than in Dana's.

I think it is entirely possible (and even probable) that at some point this year the price of one stock will be 50-100% the price of the other stock and my holdings remain weighted towards Soco because I see it more likely that Soco's will exceed Dana's than vice versa.....though of course I cannot be certain about it (if I was then I'd have completely sold out of Dana).

my perception was that Soco and Dana SP's behaved as if they were tied together with a piece of elastic that stretched over time. So the gap varied but did not exceed £1 for a long time then the elastic stretched to £2

Oh yes that has indeed been broadly the case for a long while until recently. However, if you go back to 2007 you will see that Soco's share price was, for much of the second half of that year, around double that of Dana - so one might argue that all that is happening now is a slow reassertion of the relative values that were established at that time? ;-)

No-one pretends this investment stuff is easy! ;-)

cheers

marben100

4th Feb '10

Coming back to the question posed by this thread... that's the problem for the PI with Dana. It is nigh on impossible for us to value independently, due to Dana's opacity & selective information release plus the diversity & complexity of their portfolio. Here I have to say a big "thank you " to the various friends that have provided broker notes.

The most recent one I have is a Cazenove sector note released on 25 Jan 2010. That note gives Dana a "core NPV" for its producing & appraisal/development assets of 1424p/share. Of that, Melville/Rinnes is valued @ 663.5p/share comprising reserves of 37.4mmboe (net WI), valued at $26.9/boe. The other large components are GKA - 305.8p/share, 16.3mmboe & Babbage 224.1p/share, 14.9mmboe.

There is then a further 394p/share of risked explo/appraisal upside - 2,154p unrisked.... interesting: CAZ's breakdown of unrisked values is not what I had expected. Their largest prospects are St louis - Ibis, Senegal (457p/share); the two Mauriatnian prospects (442p/share combined); & Brandhaug PL 504, Norway (100p/share). They're only allocating 65p/share for Bamboo & 72p/share for Anne-Marie. [All figures unrisked].

I can't see what POO they're using for their NPV models but they do say that they're forecasting a $70/bbl price for 2010 & $80 going forward (so I guess that's what they've used).

Prior to that note, I have a sector note from UBS dated 18th December 2009. That note gives a "commercial" NAV of 1409p/share (+44p for "financial items"), using a $79 POO; they identify a further 513p of risked upside ($5,391m of unrisked EV upside). Unfortunately they only break the figures down at a country level.

So, Dana seems pretty good value to me at current levels - but is vulnerable to a POO slump unless it has some decent explo success. As I fear the risk of such a slump and explo success cannot be guaranteed, I have hedged my oily porty with some POO puts. I have been increasing my Dana position over the last few weeks (and slightly reduced my Soco one - but not by much). Subject to hedging, I am happy to hold Dana at these levels.

If anyone wants a copy of the mentioned notes, please send me a message.

Cheers,

Mark

kyu66

5th Feb '10

Well given DNX's fall today in line with the price of oil and SIA holding up much better, if one was thinking of a switch, now would seem as good a time as any.

I am happy with my SIA exposure so am not reducing further, but have added to DNX today, fingers and toes firmly crossed that this is not the start of another major market downturn

kyu66

emptyend

5th Feb '10

kyu66,

.....non-farm payrolls in the US will be crucial to near-term sentiment FWIW.....

But for those who can look through the next few weeks perhaps it looks a bit better?

The other massive issue, though, is the spectre of sovereign defaults in the Eurozone - and that worry won't go away in a hurry! I'm still all cash and bonds in the pension fund - though I think the E&Ps still have a decent chance of outperforming if they keep delivering on their plans......

...in which context it is a shame (and a slight surprise) that DNX haven't had much to say recently.

emptyend

5th Feb '10

http://www.iii.co.uk/articles/articledisplay.jsp?section=ShareDealing&article_id=10077155

...Edmond Jackson - reaching the same conclusions as the rest of us.

ee

Cuthbert C

8th Feb '10

I note the gap has risen to 467p - next stop £5?

emptyend

8th Feb '10

In reply to tournesol (post #11)

More than likely, IMO....though I'm not sure that "stop" is the right word!

Rather than obsess over the difference, why not focus on why DNX seems so out of favour right now?

IMO it is suffering because it is widely viewed as a reasonably liquid trading chip that is sensitive to oil prices....so when oil prices (and stock markets generally) are under pressure, then Dana seems to be one of the stocks that the institutions favour selling [and vice versa of course, if anyone can remember that far back ;-)]

Perhaps there are operational issues or concerns over gas....or well costs, given the lack of drilling news from Egypt etc? But, in the absence of any clues on that score, it does indeed seem to me that the stock is now in "overshooting territory".....though, whilst I'd certainly think it a "good bet" at current levels, it doesn't necessarily mean that it is the "best bet" - or even "better" than any other stock one cares to name.

I would guess that the move under £10 will have some analysts dusting off their models and some revisions to recommmendations on valuation grounds may not be far off?

kyu66

8th Feb '10

In reply to tournesol (post #11)

Given the kicking I have had over the past week I hope not; unless that's DNX @ 1300 and SIA at 1800 :-)

Cuthbert C

8th Feb '10

Kyu

quite!

----------------------------------------------

EE

not obsessing, merely observing.

T

ohisay

8th Feb '10

In reply to tournesol (post #14)

Just a matter of time before they "do " DNX then...

http://www.youtube.com/watch?v=HzmWefseY8s

Isaac

8th Feb '10

I would guess that the move under £10 will have some analysts dusting off their models and some revisions to recommmendations on valuation grounds may not be far off?

Any analyst dusting of their models and doing revisions are just foolish IMO. Why not just wait until the market sell of is done? Just as why bother buying until the stock finally stops selling off?

People can buy loads more shares if they buy closer to the bottom, not the precise bottom but close to it.

I don't expect Dana to bounce sharply anytime soon so there really is no rush to buy.

emptyend

13th Feb '10

What a difference a year makes.....not!

I've just been running an annual monitoring exercise of my assets. I notice that whilst most of my equity holdings are some 20-100% higher than a year ago, Dana's share price is exactly where it was 12 months ago. And this is DESPITE the (March 2010) oil price having risen from under $50 to $74 (and spot having moved much more).......

....who says that Dana trades in line with oil prices?

In fact the share price seems to be taking particular note of weak UK gas prices:

https://www.theice.com/marketdata/reports/ReportCenter.shtml?reportId=80&productId=236&hubId=377

....but is that remotely reasonable, given the fact that only 20% of Dana's production is actually gas?? I'm not sure that the market actually realises that Dana's production is 80% oil - what do others think?

And then, of course, this hoo-hah over lower production due to North Sea shut-ins seems to have been overblown too......because the shut-ins have really only affected the gas side - which is the less profitable side of the business anyway (at least at current prices, I'd suggest).

Finally, as others have noted, anyone minded to take Dana out will find the company substantially cheaper (compared to the price environment) than it was a year ago...... so I wouldn't be surprised at a bid in current circs.

Cuthbert C

13th Feb '10

I was struck by the way that Dana reported its recent licence award in Norway - seemed to be a very different mindset evident in the authorship of the RNS - like someone dressing a window display - would not be surprised if something is bubbling away there - some kind of JV/farm-in/expansion kind of thingy.

just a thought

nigelpm

14th Feb '10

Going back to the title of the thread it's quite clear to me that Dana is getting to be chronically undervalued in comparison with its peers (especially below £10) so there's only one way to put that right ;-)

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Cuthbert C

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