Sunday, October 03, 2004
Dana fair value: take II
My previous blog attempted to ascertain a fair value for Dana Petroleum, my second-largest holding. That initial approach suggested 677p, way north of the price the company trades at today.
Here's a second attempt, using similar heuristics. I shall continue to assume that for the 2005 year of account Dana achieves
The first half of 2004, saw production increase from 16,081 barrels per day to 17,895. The price achieved for a barrel of Brent crude rose from $23.14 to $31.33.
Multiplying crude price rises by production increases shows a 51% rise in crude oil revenue yielding a 32% rise in turnover. The increase in production resulted in a 30% increase in costs. At times of high oil prices, projects and prospects that were previously infeasible become economic. The upside potential of an exploration prospect is increased for the same sunk cost expense. Thus costs may be expected to rise with the price of crude, unlike my analysis in the previous blog, where I assumed costs would only rise with production.
If the relationship between crude revenue, turnover and costs holds, the proposed 71% hike in crude revenue enjoyed in 2005 would increase turnover 50% and costs 56%. With a tax rate of 51%, post-tax profit for the full year would be £28.5m.
This translates into a target price today of 436p, less than 10% off today's market value.
As ever in this sector, the price of crude oil is crucial. Oil at $45 would put a fair value on Dana of £5.73 and the price in the market today (Brent crude benchmark) of $46.19 gives a fair price of £6.16.
I shall continue to look out for broker forecasts (after all, they do have better access to management) on Dana, the current consensus of 21p is frankly risible.
Increasing my shareholding further should cash become available may prove prudent come 2005.
The Artful Dodger
Here's a second attempt, using similar heuristics. I shall continue to assume that for the 2005 year of account Dana achieves
- Production averaging 24,000 barrels per day
- Average price per barrel of $40
The first half of 2004, saw production increase from 16,081 barrels per day to 17,895. The price achieved for a barrel of Brent crude rose from $23.14 to $31.33.
Multiplying crude price rises by production increases shows a 51% rise in crude oil revenue yielding a 32% rise in turnover. The increase in production resulted in a 30% increase in costs. At times of high oil prices, projects and prospects that were previously infeasible become economic. The upside potential of an exploration prospect is increased for the same sunk cost expense. Thus costs may be expected to rise with the price of crude, unlike my analysis in the previous blog, where I assumed costs would only rise with production.
If the relationship between crude revenue, turnover and costs holds, the proposed 71% hike in crude revenue enjoyed in 2005 would increase turnover 50% and costs 56%. With a tax rate of 51%, post-tax profit for the full year would be £28.5m.
This translates into a target price today of 436p, less than 10% off today's market value.
As ever in this sector, the price of crude oil is crucial. Oil at $45 would put a fair value on Dana of £5.73 and the price in the market today (Brent crude benchmark) of $46.19 gives a fair price of £6.16.
I shall continue to look out for broker forecasts (after all, they do have better access to management) on Dana, the current consensus of 21p is frankly risible.
Increasing my shareholding further should cash become available may prove prudent come 2005.
The Artful Dodger
Comments:
Post a Comment
