Friday, October 01, 2004
Dana - a new fair value
An investor mustn't plan too far ahead. News and economic events can make an investment change from attractive to repulsive - Cinderella to Barbara Windsor. Following news or results we must update our fair value. I've finally got around to this today for Dana Petroleum.
Using Dana's interim results, recent management announcements, the price of crude oil and current interest rates I'm going to arrive at a figure I will use in deciding if Dana shares should be bought (again), sold or held.
Dana's product is crude oil. The more of this Dana can get to it's market and the higher the prevailing price the better for my investment.
Just prior to the results, Dana made another announcement, highlighting the prospect of higher production:
Dana is pleased to announce that the UK Department of Trade and Industry ('DTI') has given its approval for the development of the Gadwall oil field...Commenting on the news, Tom Cross, Dana's Chief Executive, said:
'DTI approval of the Gadwall development achieves an important milestone in driving forward the Greater Kittiwake Area. Gadwall will add significant production to Dana in 2005 and increase the Company's total number of producing fields to ten.'
On Tuesday's interim results day, Tom Cross mused further on the company's production prospects for 2005, in an interview he told Reuters:
We estimate that our production should rise from 18,000 barrels a day to 21,000 barrels at the start of 2005, and 27,000 barrels by the end of 2005..We're looking at rising earnings for the next couple of years..we're extremely busy organically. We would prefer to buy assets rather than companies.
Taking the average 21,000 and 27,000 barrels per day of production, I'm estimating average production for 2005 of 24,000 barrels per day. The interims reported average production for the first six months of 2004 at 17,895 barrels per day. 2004's production was sold at an average price of $31.33. This produced a turnover at the interim stage of £48.7m.
With higher production over a full year, this figure rises to £130.6m.
Adjust again the expected higher price of crude oil, I'll use $40, my estimate for 2005 turnover amounts to £166.8m.
From the interims, Dana's cost of sales was £27.4m. Scale this for a full year and assume costs rise in tandem with production, this suggests full-year costs to Dana of £73.5m.
Turnover - costs = £166.8m - £73.5m = £93.3m
Double interim administration expenses to £2.2m for the full year.
That gives profit before tax of £91.1m, projected for 2005.
Apply the same 51% tax rate, leaving us with profit after tax of £44.6m.
This implies diluted earnings per share for 2005 of 59p. Discounting this to it's present value and using my heuristic of twelve times earnings for a company operating in Dana's sector gives a target price of 677p, almost twice today's closing price on the stock exchange.
Was there something wrong with my analysis, or do I genuinely know something Mr Market and the masses have missed?
I continue to hold.
The Artful Dodger
Using Dana's interim results, recent management announcements, the price of crude oil and current interest rates I'm going to arrive at a figure I will use in deciding if Dana shares should be bought (again), sold or held.
Dana's product is crude oil. The more of this Dana can get to it's market and the higher the prevailing price the better for my investment.
Just prior to the results, Dana made another announcement, highlighting the prospect of higher production:
Dana is pleased to announce that the UK Department of Trade and Industry ('DTI') has given its approval for the development of the Gadwall oil field...Commenting on the news, Tom Cross, Dana's Chief Executive, said:
'DTI approval of the Gadwall development achieves an important milestone in driving forward the Greater Kittiwake Area. Gadwall will add significant production to Dana in 2005 and increase the Company's total number of producing fields to ten.'
On Tuesday's interim results day, Tom Cross mused further on the company's production prospects for 2005, in an interview he told Reuters:
We estimate that our production should rise from 18,000 barrels a day to 21,000 barrels at the start of 2005, and 27,000 barrels by the end of 2005..We're looking at rising earnings for the next couple of years..we're extremely busy organically. We would prefer to buy assets rather than companies.
Taking the average 21,000 and 27,000 barrels per day of production, I'm estimating average production for 2005 of 24,000 barrels per day. The interims reported average production for the first six months of 2004 at 17,895 barrels per day. 2004's production was sold at an average price of $31.33. This produced a turnover at the interim stage of £48.7m.
With higher production over a full year, this figure rises to £130.6m.
Adjust again the expected higher price of crude oil, I'll use $40, my estimate for 2005 turnover amounts to £166.8m.
From the interims, Dana's cost of sales was £27.4m. Scale this for a full year and assume costs rise in tandem with production, this suggests full-year costs to Dana of £73.5m.
Turnover - costs = £166.8m - £73.5m = £93.3m
Double interim administration expenses to £2.2m for the full year.
That gives profit before tax of £91.1m, projected for 2005.
Apply the same 51% tax rate, leaving us with profit after tax of £44.6m.
This implies diluted earnings per share for 2005 of 59p. Discounting this to it's present value and using my heuristic of twelve times earnings for a company operating in Dana's sector gives a target price of 677p, almost twice today's closing price on the stock exchange.
Was there something wrong with my analysis, or do I genuinely know something Mr Market and the masses have missed?
I continue to hold.
The Artful Dodger
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