January 25, 2011 / 4:03 PM / 9 years ago

BUY OR SELL-Sitting on Iraqi oil, can DNO make money?

(For more Reuters Buy or Sell stories, please double click on BUYSELL/)

* Share up on compromise talk in Kurdish oil export row

* DNO’s revenue limbo to end if deal materialises

* Some analysts fear Iraq may slash DNO’s contract terms

* Others say export deal may pave way for buyout bid

By Walter Gibbs

OSLO, Jan 25 (Reuters) - Shares in Norwegian oil firm DNO (DNO.OL) have surged on signs of an end to the Iraqi political feud that has kept the company from exporting Kurdish crude to the west.

DNO says its Iraqi exports could go from zero to 50,000-plus barrels a day almost overnight if the regional administration in Kurdistan and the central government in Baghdad follow through on statements that an export deal is at hand.

A breakthrough could put this Norwegian small-cap in the buyout crosshairs of bigger companies. But the export terms it will have to accept from Iraqi authorities are anyone’s guess and analyst recommendations range from “buy” to “sell”.

“If you’re a believer in Kurdistan, you are probably already a shareholder,” said analyst Al Stanton at RBC Capital, who has a “sector-perform” rating on DNO. “Marginal buyers need to be convinced.”

So why invest in a small-cap with net losses in four of the five past quarters and oil reserves that remain locked in the sands of a country with no oil law?


DNO shares, which traded at 9.6 Norwegian crowns by 1302 GMT on Tuesday after swelling 21 percent since Dec. 1, rose 3 percent on last weekend’s announcement that Iraqi Prime Minister Nouri al-Maliki had agreed to let Kurdish exports flow by February.

Analyst Daniel Raavik at Handelsbanken thinks investors are overcome by wishful thinking. DNO remains in limbo and might see its projected take in Kurdistan slashed in accord with the lean service contracts that Baghdad has issued in southern Iraq.

“My thesis is that the current contracts will have to be renegotiated and we don’t know to what extent,” said Raavik, who has a “reduce” rating on DNO with a 7.2 crown price target.

Many foreign oil firms in Iraq expect tougher times ahead, with poor infrastructure a major concern. [ID:nRAS842954]


Investors who take profitable exports for granted have already shifted their focus to how much oil DNO secured in Iraq after the U.S.-led invasion of 2003. They’re guessing it’s more than the company has let on.

In 2007 DNO estimated its prize Tawke field at 1.3 billion barrels of oil and said 230 million barrels were recoverable. That’s an 18 percent assumed recovery rate in a country where the average is almost twice that, say analysts.

“Ultimately I expect it to be at least 400 million (barrels of recoverable oil),” Arctic Securities analyst Trond Omdal said, citing claims by Tawke partner Genel Enerji of Turkey.

He added that if upcoming exploration wells pan out DNO stock could blow past his target of 12 crowns, possibly to 20.

For now Tawke represents most of DNO’s $1.6 billion market cap. Unable to export, the company has maintained cash flow by selling Tawke oil inside Kurdistan at a painful discount.

Anders Holte of ABG Sundal Collier said that if Prime Minister Al-Maliki accepts the production-sharing contract DNO signed with Kurdish officials without Baghdad’s consent, the company’s shares could swell by 1.5 crowns on acquisition talk alone.

“The consensus is that once a contract is approved, RAK Petroleum may bid for the company,” he said, referring to an Emirates company that owns 30 percent of DNO’s shares.

Major western oil firms would also take a look, says Omdal.

Editing by David Holmes $1=5.777 Norwegian Crown

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