Dana Petroleum double Crosses KNOC

Friday, Aug 27 2010 by
Dana Petroleum double Crosses KNOC

According to this morning's FT, Dana Petroleum Plc (LON:DNX) has neatly out-manouevred KNOC to give itself more time to mount its defence. KNOC was given confidential information about Dana's imminent deal to acquire a parcel of assets from Suncor. That made KNOC insiders and blocked KNOC from buying shares in the open market. Dana is scheduled to issue its half year results today (Friday) and had promised to provide what amounts to a defence document at the same time. It had been widely assumed that this would include details of the latest planned acquisition from Suncor. Once that news was released KNOC would no longer be restricted by possession of price sensitive info and was expected to launch an aggressive raid - buying shares in the open market which might have led to a quick victory.

However, in an ill judged move, KNOC posted its offer document direct to shareholders earlier this week - an aggressive gesture designed to ratchet up the pressure on Dana's management. That clumsy move has given Dana the right to issue a formal defence document and given them until September 8th to do so. Until then KNOC is barred from taking further action. According to the article in today's FT Dana is using the extra time to commission an independent 3rd party CPR on the quality and value of its assets. And is also holding off releasing the news of the Suncor deal until then. So KNOC can't do anything but wait. This breathing space will allow Dana time to engineer the best possible defence document. It might still not be enough to preserve Dana's independence, but it should certainly allow Dana to squeeze a higher price out of its leaden footed would-be suitor.

It's still all to play for.

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The author may hold shares in this company. All opinions are his own. You should check any statements that appear factual and seek independent professional advice before making any investment decision.

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7 Comments on this Article show/hide all

BrusselsLad 27th Aug '10 1 of 7

So do KNOC sit and wait for the third party CPR or do they act? Either they are very confident of having over 50% of irrevocable commitments - which seems highly unlikely or yet again they have been outmanouevred. It is now 2 months since KNOC first approached (24th June) and TC has bought 3 months of additional time through the various actions. ML seem to be playing a blinder!

I guess either way it will be sit and wait. Even if KNOC were to quietly indicate to the board that they would sweeten the offer I assume that TC would not accept it in advance of this valuation (8th September) .

After that when are the results  expected for Anne-Marie? The spud announcement talks about the drill rig remaining in operation for about 75 days. Does this mean results are expected in early October? I guess that this time include the period necessary for testing if the well shows. If so then early results could be just ahead of the 23rd deadline. Probably still inconclusive but maybe enough shareholders can become sufficiently optimistic on AM to hold off committing to KNOC.

Could be a very tight and nailbiting finish !




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emptyend 27th Aug '10 2 of 7

In reply to BrusselsLad, post #1

I assume that TC would not accept it in advance of this valuation (8th September) .

After that when are the results  expected for Anne-Marie? The spud announcement talks about the drill rig remaining in operation for about 75 days. Does this mean results are expected in early October? I guess that this time include the period necessary for testing if the well shows. If so then early results could be just ahead of the 23rd deadline.

The 75 days is a bit of a red herring, as it includes mobilisation and testing. Anne Marie is a 45 day well (plus any over-run of course) - I've been told that directly and seen it confirmed in Morgan Stanley's research. That means that it should TD in the week beginning 13th September - though of course it may be delayed.

At the time they TD, they will have all the daily logs and will have a very clear view on how many, if any, of the 4 zones of interest they are going to test. They will also have detailed indicators of the hydrocarbon types in each zone and they will know what intervals these shows cover.

Obviously they won't be sure about commercial prospects for the well until they test and can assess flow rates etc.....but they could easily be in the position to say: "we are going to test 3 zones with an estimated total of XXX feet of net pay and initial indications from the logs are that the hydrocarbons present are predominantly oil rather than gas; this result is substantially better than the pre-drill prognosis". I woudn't think that very many investors will rush to sell into the £18 KNOC bid if that were the case, especially against the backdrop of the Dana defence document that will emerge in the meantime with details of upgraded 2P reserves and a very full and exciting drilling programme for 2011.

But we'll see.


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sirlurkalot 27th Aug '10 3 of 7

It's true that Dana neatly bought time with the disclosing confidential Suncor info to KNOC gameplan - for which KNOC seems illadvised. The early release of KNOC's offer doc also appears illadvised. http://www.ft.com/cms/s/0/6fe2317e-b143-11df-b899-00144feabdc0.html This deal really all comes down to an interesting period in mid-Sept, after the Dana defence doc but before closure of the offer, when something might emerge to shift the SP up a bit. Until then there's a phoney war of nothing seen to be happening (except the AM drill bit) whilst the SP sits close to £18. IMO Dana as an independent is history, something might emerge to get the price up, and all we can do is wait.

Given that KNOC has apparently not signed a non-disclosure agreement, can't KNOC just publicly state what it knows about the Suncor assets in order to get itself out of the current insider situation and able to buy? There doesn't appear to be a contracted deal with Suncor, so isn't the Suncor detail largely public info anyway? It seems an odd situation for KNOC to involuntarily be in (normally you're asked beforehand whether you want to be made an insider), and perhaps there is detail yet to emerge on why KNOC can't get out of this situation.

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puneetk 27th Aug '10 4 of 7

Some comments on this on FT Alphaville
"Tom Cross is increasingly looking like a squatter in his own company.
and this non public info, which is stopping KNOC from buying it's plain stupid as everyone knows what it is"
From their perspective it seems £18 is a decent offer.

Also I found some interesting comments (no disrespect,). Didn't realize that ee was popular on the FT board also. Please excuse my ignorance as I am fairly new to this board.
BE Meanwhile, according to our report this morning, Dana's going to get a third-party valuation
BE To show it's worth more than £18
BE How does that work, then?
BE Is it worth more than £18ps? No-one thought so before the bid.
NH EmptyEnd did
BE EmptyEnd, with every respect, also thinks Dana's drilling record is average to good.
BE Many people seem to disagree."

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EdmondJ 27th Aug '10 5 of 7

These hacks really are casual numpties, one reason for the modest valuation pre-bid was little info on the 2011 drilling campaign; Goldman Sachs started to entertain it with a £20+ a share target, although the real issue is whether Morgan Stanley can attract another industry bidder by properly marketing it.

Much of the journalistic coverage reads as slanted PR.

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emptyend 27th Aug '10 6 of 7

In reply to puneetk, post #4

BE Is it worth more than £18ps? No-one thought so before the bid.
NH EmptyEnd did
BE EmptyEnd, with every respect, also thinks Dana's drilling record is average to good.
BE Many people seem to disagree."

Yes - I rather enjoyed that bit myself  (along with a few later exchanges)

I later pointed out that Dana had a more than 300% reserves replacement record via the drillbit in H1 - though I didn't twist the knife by asking how many other E&Ps could claim likewise!  :-)

I also pointed out to Bryce that I'd spent a large chunk of the last 12 years being "an outlier" (as he put it) relative to the consensus - and implied that it hadn't done me much harm.  ;-)

My expectation is still an agreed deal at 1920-1950p.. If Cross can get more than that by bringing Anne Marie into play then he will have done a great job.

As Edmond says, the Goldman/MS comments on the 2011 driling campaign could be pretty important - though I do think that they will actually struggle to get full "fair value" from that. I did a rough tot up whilst on Alphaville this morning - and the main 2011 wells listed by Morgan Stanley come to about £20 a share unrisked.....


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tournesol 27th Aug '10 7 of 7

In reply to sirlurkalot, post #3

Evening SirL

AIUI (don't remember sources) KNOC did sign a confidentiality agreement wrt the Suncor deal and possibly other short term initiatives/developments that were revealed to them during the meeting in Calgary - so K can't publish what they know - and also can't trade because they are insiders until the Suncor deal emerges into the daylight.

KNOC wanted to go into Dana and do a full due diligence review but Cross said they would have to sign a NDA first. They refused saying they would only do so and only start the DD AFTER the board agreed the bid. Problem being that KNOC said the offer price was fixed and immutable so could not alter regardless of what was discovered in DD. (Which seems v strange to me - what's the point of DD if you are already locked into a deal?

TC and Dana said no - sign up to a NDA then do the DD then let's revisit the offer price - then if we agree we'll have an agreed deal. Basically TC/Dnx were saying that when KNOC saw the books they would likely agree to raise the offer.

K got stroppy about this and said they would only do DD after the deal was agreed - and by the way the price is non-negotiable.

From then on the situation has got interesting.

From my perspective TC?Dana behaved absolutely properly. What are they supposed to do if they really/genuinely/sincerely regard the offer as too low but K refuses to budge? What are they supposed to do if K refuses to enter an NDA before Dana show then why they think the offer is too low?

IMHO Cross is playing a blinder whilst Knoc look like bumbling amateurs. It does not follow that Dana will defeat this bid, nor that they will stay independent. But for my money the odds of KNOC winning are dwindling.

Bravo TC I say. Well done that man.


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About tournesol


I'm an active private investor specialising in the oil and gas sector. I decided to focus on this area after having a disastrous experience 10 years ago when I naively delegated investment to a "professional" who subsequently lost most of my life savings and my pension. That experience taught me that it was foolhardy to invest in industries/companies you don't understand properly and that many "professionals" are doing just that, often based on the most superficial analysis and the most inadequate understanding of the underlying business. I decided that I'd take my financial destiny into my own hands.   I chose oil as a specialist focus partly because it was the industry I'd spent most of my career in over many years in >25 countries all over the world. That prior experience gave me a good  understanding of E&P from an operational perspective and I've subsequently leveraged that into an appreciation of the sector from an investment perspective - quite a different thing. But the one really helps the other.   I find that my background and my specialist focus help me get access to management and help me talk to them when I get in.  I've been seriously astonished at the open-ness and responsiveness of many top managers in this industry. Sensible questions, asked in a sensible manner almost always receive a very full response. (I have to single out Tom Cross of Dana for his readiness to go the extra mile to help small PI's understand his business).   Of course the other reason I chose to specialise in oil was that ten years ago it was very easy to figure out that the price was going to rise in a sustained manner over a long period. I still find it hard to believe that everybody else didn't see that coming at that time. I certainly can't claim any credit for doing so. It was just too obvious to miss - provided that is you looked at things from the right perspective. (there's an article to be written on this topic when I can find time........) more »

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