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KNOC's Dana take-over is a sign of things to come

KOREA National Oil Corporation's (KNOC) hostile take over of UK independent Dana Petroleum succeeded in late September

KNOC's aggressive move was followed closely by analysts and its closure did not come as a surprise. A number of factors are driving state-owned companies and sovereign wealth funds to target small and mid-cap exploration and production (E&P) companies.

Aberdeen-based Dana has oil and gas operations in the UK, Norwegian and Dutch sectors of the North Sea, on and offshore Egypt, and offshore Mauritania. At the end of 2009, it reported proved and probable reserves of 223m barrels of oil equivalent (boe) and production of 38,700 boe/d – 81% oil and 19% gas.

Dana fought hard against the share offer, but by raiding the stock on the open market KNOC secured 64.2% majority ownership. South Korean executives moved onto Dana's board on 13 October and KNOC took the company private by de-listing at the London Stock Exchange on 28 October.

Asian state-owned firms, such as KNOC and China National Offshore Oil Corporation, mindful of their countries' growing industrial sectors and expanding GDPs, are looking to secure overseas energy resources through acquisitions. The South Korean government has given KNOC $6.5bn and a mandate to acquire oil and gas assets and resources. Last month, CNOOC entered A $7.1bn deal for 40% of Repsol's assets in Brazil.

At the same time, smaller independent E&P companies are having difficulty raising financing to bring prospects into production. This gap between equity-market valuations and the assets' value to long-term investors from fast-growing economies is what makes deals such as the Dana take over possible.

For instance, Dana rejected KNOC's £18 ($28.8) a share offer – which valued the company at £1.87bn – and sought third-party valuations, which came in at between £21.10 and £24.65 a share. This, of course, was a valuation ordered by the target. Some analysts maintain that KNOC's £18 a share bid was around 20% higher than the average of the cross-market valuation of Dana's stock.

A relatively stable oil price, making the valuation of targets more reliable, is another factor supporting take-overs by strategic investors. Unlike the 2008-09 period, when the price of crude collapsed from nearly $150 a barrel to around $40/b, apart from a recent uptick, resulting from devaluation of the dollar, oil has stayed roughly in a range between $70/b and $80/b in recent months.

These trends combine to make more deal activity likely. Some analysts are predicting that state-owned companies will search for targets active offshore West Africa, where recent oil and gas discoveries, plenty of small exploration companies and comparatively lax regulation make an attractive buying environment.

UK independents Tullow Oil and Premier Oil, which are active in the region, have been mentioned as companies that may receive bids in the coming months. Other targets could include Afren, Young Energy, Edison and Yams Petroleum, which hold acreage offshore Ghana and Ivory Coast. Many small companies that have been exploring in this area are said to hold 100% interests and will need investment to finance exploration. These two factors, added to the possible difficulty of finding the cash or farm-in partners needed to move to production, are what could make them prime targets for strategic investors.

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