US Edition Dana Petroleum
£12.06 -39p
Questor says BUY
Like Sissy and Ada, Les Dawson and Roy Barraclough's chatty old women from the 1970s, City traders love to gossip. However, most of the time you have to treat market rumours with a good helping of suspicion.
There are some companies that will always be the subject of bid rumours – and North Sea and Egypt-focused Dana Petroleum appears to be one of them.
This week, there was once again speculation that BP was interested in buying the company in a knockout bid of up to £18 a share. Does Questor believe it? Well, it is as believable as the last time these rumours emerged – so the answer is no.
There is one thing that the subjects of these perennial stories have in common – they are great businesses with great prospects. That is why they become the focus of such talk.
Of course, it is entirely reasonable that major oil groups, faced with future production problems, may wish to snap up quality mid-tier assets, as was seen when Eni bought Heritage Oil's Ugandan assets last week. A bid could materialise at some point in the future, but that is not a reason to buy into a particular share.
The company's recent trading update was reassuring on the production front. The company is targeting average production of 39,000 barrels of oil equivalent per day (boepd) in the current year, and it looks as if this is on track. So far this year the group has produced 38,200 boepd, but total production has ramped up to 42,000 in the last month.
Over the past few months, Dana has had a mixed drilling programme. The group's first well in the Tornado prospect in the West of Shetland area discovered significant volumes of gas and oil. The group is considering drilling an appraisal well in 2010.
In Norway, an oil discovery was made on the Jetta prospect. This is important because the site is close to current producing assets owned by Dana where infrastructure is already in place. Should the Jetta discovery come to commercialisation, costs will be lower.
The drilling programme was not entirely successful – exploration wells at a prospect in the Gulf of Suez in Egypt and the Trolla prospect in Norway did not encounter hydrocarbons. This is, however, par for the course in the oil industry.
Quality mid-tier oil producers and explorers are good investments because their share price progression is generally independent of GDP growth. That is because each of their assets are valued on a risk-weighted basis by analysts. As each stage of the exploration, appraisal and production process is completed, a project is "de-risked". This means that analysts value the operation at a high level in their models as each stage is successfully finished, so it does not matter what is happening to GDP, although the oil price will obviously have some effect on valuation.
In Egypt, Dana is currently drilling the Papyrus exploration well, on the West el Burullus concession – news on this project should be coming at the end of the year. News from the potentially more significant Bamboo project in Egypt should follow early in 2010.
Also next year, the first production from its Babbage field development will come on stream and there will be the first full year of production from the fields purchased in the Bow Valley acquisition earlier this year. Dana should also hear about bids for a number of new licences in Norway.
The shares are trading on a December 2009 earnings multiple of 32 times but expectations of future production means this falls to 14.4 next year, then 12.2 in 2011.
Dana was first recommended at £12.00 on April 7 and the shares are up just 3pc compared with a market up 33pc. The stance on the shares remains buy.
Water sector
Questor says BUY
Thursday's decision by Ofwat was welcome. The regulator confirmed the level of investment required by each water company and the allowed level of returns from investors.
When Ofwat released its draft proposals earlier this year they were very harsh. If the original proposals had been confirmed, water companies would have had to cut bills significantly while still carrying on with investment programmes. This led to fears of rights issues and dividend cuts.
The regulator has given some ground and now British households will see their average bills drop £3 over five years, compared with the original proposal for a £14 fall over the period – although allowed investor returns of 4.5pc is a disappointment.
Questor has recommended two water companies in the past year – Pennon and United Utilities. Shares in Pennon were recommended at 435p on February 13. They are now 15pc ahead of their recommendation price compared with a market up 25pc. They are yielding 4.4pc and the stance remains buy.
United Utilities shares were recommended at 538.5p on May 29 and the shares are now 9pc below their recommendation price compared with a market up 19pc. The prospective dividend yield is 7pc, which implies that there are still concerns about a dividend cut in the market. However, Thursday's slight easing of its proposals by Ofwat has reduced the chance of this happening. The rating on the sector is now upgraded to buy from hold.