Dana Petroleum - companies that produce the black stuff are worth following

http://www.proactiveinvestors.co.uk/companies/news/13639/dana-petroleum-companies-that-produce-the-black-stuff-are-worth-following-13639.html

With oil demand set to grow for the first time in two years in 2010 companies that produce the black stuff are worth following closely.  The new trading range of crude oil appears to be between $70 and $83 and as such the background for oil and gas explorers is positive with oil recently reaching new yearly highs. This is particularly crucial for companies like Dana Petroleum as without any downstream assets, such as refineries or petrol stations, they exposed mainly to the oil price.

Over recent months, Dana’s stock price has fallen back from £14.50 to a current price of under £11. As oil has remained strong it is clear that the group’s stock has become somewhat disconnected from the price of its output.

The reason appears to be a change in sentiment towards the group on the back of slightly weak production figures and exploration results. However, it should always be remembered that companies like Dana have inherently volatile stocks anyway. Furthermore, the risky nature of the business means that there will be periods of strong operational performance and also weak periods often due to the luck of the draw.

For Dana the last couple of months of 2009 produced some worse than expected exploration results. The group also produced production forecasts of oil for 2010 which were slightly below analysts expectations.

On October 2009 the group produced mixed results from its Jetta oil exploration well off Norway as although oil was discovered it is not clear whether the well will be commercial. This was because the reservoir thickness was less than expected. There have been successes off Egypt though and Dana is also diversifying with the acquisition of an interest in offshore Guinea.
On the production side, full year output came in at 38.7 thousand after several downgrades during the year. This was followed up recently by a trimming of the 2010 production guidance shifting sentiment against the group.  Guidance is now for between 37 and 41 thousand barrels of oil per day in 2010 while prior forecasts were for as much as 42 thousand barrels per day.

Weak production appears to reflect an underlying trend of production decline as well as Dana’s explanation of ‘UK gas market dynamics’. The group often has stakes in projects so can have little operational control in the timing of investment and production.

Despite these setbacks, and the change in sentiment towards Dana, it must be remembered that 2008 was an exceptional year for the group. Therefore, it was always going to be hard to produce good comparatives in 2009. However, the clear focus on exploration and the strong management team give us cause for cheer in the longer run.

It should also be noted that exploration and production companies are increasingly seen as bid targets both by integrated oil companies and by emerging market oil firms. This is because firms like Dana provide an easy way to boost reserves and production.

Furthermore, the increasing crude price provides upside leverage to companies like Dana which generally sell their output at spot prices. In our view, oil prices are more likely to rise than fall in the medium-term as oil demand looks set to increase in the years ahead.