European E&P
UPGRADE RATING/INITIATION
Upgrading Premier Oil to Outperform, initiating
on Oilexco, Dana, Tanganyika
We upgrade Premier Oil to Outperform (from Neutral) as we believe it
offers an attractive six-month exploration programme with over 52%
unrisked upside potential. The stock is trading at a discount to the peer
group, at 0.88 times risked NAV compared with an average of 1.02. Our
1,160p/share target price suggests 14% potential upside.
We also initiate on three further E&Ps: Oilexco (Neutral, TP 727p/share),
Dana Petroleum (Neutral, TP 1,060p/share), Tanganyika Oil (Neutral, TP
SKr 129/share), increasing our European E&P coverage list to ten stocks.
Oilexco (Neutral, 2.5% upside potential): Deepwater rig capacity—a
competitive advantage. We think Oilexco’s access to rig capacity will enable it
to pursue further farm-ins, driving production growth and share-price
performance. Long-term semi-sub contracts allow it to offer licence farmors rig
capacity to drill otherwise neglected prospects. Oilexco currently trades in line
with the peer group at 0.98 times our risked NAV, but offers greater exposure to
catalysts over the next six months, with medium/low-risk North Sea exploration
and appraisal offering c20% unrisked upside potential, on our estimates.
Dana Petroleum (Neutral, 1% upside potential): Solid cash engine with
improving 2008 exploration potential: A sharp focus on capital discipline and
a deep appreciation of risk management has allowed Dana to build a stable and
growing cash-flow base of primarily non-OECD production. A broadening of its
exploration drilling pipeline and the establishment of two new core businesses in
Norway and Egypt should see a more regular flow of positive news for the stock.
However, despite the potential for a number of attractive 2008 exploration
catalysts, we see risks that some of these could slip into 2009—possibly
dampening near-term investor appetite, in our view.
Tanganyika (Neutral, 7% upside potential): Syrian heavy oil play with
sizeable resource base—near-term newsflow may disappoint. Tanganyika
offers up to 5bn bbls of heavy oil initially in place. Key risks for the company
include potential production and cash-flow shortfalls in 2H07, which may require
it to raise further capital to meet near-term capex commitments. Tanganyika
trades in line with recent Canadian heavy oil transactions at US$1.1/bbl versus
US$0.9–1.2 per recoverable barrel. We believe a discount is justified to the top
end of this range given near-term production concerns and Syrian political risk.
Tanganyika’s resource base may be of interest to cash-rich IOCs/NOCs looking
to add resource, but country risk is likely to limit the M&A premium, in our view.
Our top picks in the European E&P space are Lundin Petroleum (Outperform,
TP SKr 87/share), Tullow Oil (Outperform, TP 575p/share) and Premier Oil
(Outperform, 1,160p/share). We remain cautious on Venture Production
(Underperform, TP 630p/share) owing to our view of potential near-term
weakness in UK spot gas prices and a tight North Sea asset market.

Table of contents
Executive summary 3
Catalysts to drive share-price performance 3
Premier Oil – Upgrade to Outperform 4
Oilexco—Rig capacity provides a competitive advantage 4
Tanganyika—Syrian heavy oil play 5
Dana—solid cash engine with improving 2008 exploration potential 7
Evolution not revolution 7
Company-specific risks 9
Valuation and investment thesis 10
Sector stance 10
Sector valuation 10
Risked and unrisked NAV analysis 11
EV per boe metrics 13
Premier Oil—Upgrade to Outperform 16
Dana Petroleum 19
Overview 20
Strategy 20
Valuation 21
Reserves & Production 24
Exploration and appraisal 25
Asset overview 27
UK/Dutch/Norwegian North Sea 27
Faroe Petroleum 28
International 30
Board and management 30
Executive Directors 30
Dana Petroleum: Summary financials 32
Oilexco 34
Oilexco investment thesis 35
Oilexco asset detail 40
Core producing assets 40
Development assets 40
Exploration assets 41
Oilexco—Summary financials 43
Tanganyika Oil 45
Tanganyika Oil investment thesis 46
Tanganyika oil asset detail 51
Tanganyika: Syria 51
Tanganyika: Egypt 53
Tanganyika: North Africa 53
Enhanced Oil Recovery (EOR)—Increasing core value through recoverability 53
Tanganyika Oil: Summary Financials 55
Appendix 1: Macro outlook 56
Oil prices 56
Gas prices 58
Local gas markets—long-term pricing should be robust 58
Local gas markets—short-term pricing looks weak but 2007/08 winter could surprise 59
Cost inflation 61
Upstream tax rates 62
Upstream M&A market 62