Dana Petroleum - Bidding war begins?

The recent announcement that the Korea National Oil Company (KNOC) has entered into early stage discussions over a possible takeover of Dana Petroleum Plc (LON:DNX) has come after ongoing speculation and has been enthusiastically greeted by the market.  

Looking at Dana’s assets, the reasons behind KNOC’s interest soon become apparent.  The group had 223 million barrels of oil equivalent (boe) at the end of 2009 across 36 fields in the UK, Norway and Netherlands as well as further a field in Egypt. During 2009 the company saw revenue of £397 million and pre-tax profits of £56 million.

The strong exploration performance during the year meant that the reserves replacement ratio was 304% i.e. during that year the company replaced much more than the oil it produced. Looking at production, oil and gas output came in at 38,700 boe per day (boepd). There were 17 exploration wells drilled during the year and significant discoveries in the UK, Norway and Morocco.

In 2010, 18 drill wells are expected and the production year to date has averaged 38,700 boepd, in line with guidance.  In addition, the company has recently been awarded two further blocks in the Southern North Sea and has bid for licenses in the UK 26th round (results are expected in Q3 2010). Bids are being evaluated in Norway and the group is also pursuing exploration opportunities in Egypt.

Dana has also recently been involved in its own bid drama with a £270 million agreement to acquire Petro Canada Netherlands (PCN). Should it go ahead, the deal would be Dana’s biggest acquisition to date providing Dana with an additional 31 million boe and incremental production of 12,136 boepd, achieved in the year to April. This would increase Dana’s production guidance by 20-25%.

Dana’s financial position is also robust.  As of mid May, the group has cash resources exceeding net debt by about £5 million. As with all companies of this type, exploration remains pivotal.  On the 24th June exploration results were reported for two wells in Egypt. The first well produced an initial flow rate of 4,714 barrels of oil per day, exceeding expectations.  The second produced a flow rate of 600 boepd, a disappointment for investors.  Disappointments such as these are par for the course for explorers and are soon forgotten in light of such positive finds.  

For shareholders however the focus is very much on how keen the Korean’s are to buy the group and whether any other potential bidders are flushed out.  Dana’s stable production in a stable part of the world (the North Sea) and international acreage which, as the recent find in Egypt has demonstrated, gives potential exploration upside is sure to be gaining many admirers.