Dana Gas. Deep Rising. Company Report Initiation of Coverage 13 January Target Price (AED) 1.43 Market Price (AED) 1.02 Upside 40.

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1 Research Department Dana Gas UAE Oil & Gas Company Report Initiation of Coverage 13 January 2010 Deep Rising Kurdish operation is a key value driver with large reserve potential and good economics, but is significantly underpriced by market on political concerns. We believe the Egyptian operation could be partly or fully divested in the medium term to fund new upstream ventures. Alternatively, the company could implement a capacity increase, incentivizing bids for new concessions. We initiate coverage with a Buy rating and a price target of AED1.43/share (40% upside). Potential catalysts could add AED0.89/share to our valuation. We believe the Kurdish operation is a core value driver that is being heavily underpriced by the market mainly on political concerns. Pearl Petroleum, Dana Gas s 40%-owned Kurdish subsidiary, has strong reserve potential and good economics, supported by the implied valuation from the acquisition of a 20% stake by MOL and OMV. An ease in political tensions between Kurds and Arabs in Baghdad (possible with impending elections in March) and the resumption of exports by foreign oilfield operators are the key drivers for the Kurdish operation. Imminent drivers would be the announcement of the result of field appraisals, the receipt of payment for already commenced condensate sales by Pearl Petroleum (around USD40 million currently) and securing sales to local users (Phase II). We conservatively value the Kurdish operation at a 20% discount to the OMV-MOL deal-implied valuation and a 40% discount to value potential, yielding AED0.69/share. Dana Gas Egypt is the company s only relatively mature asset and could be considered for divestment in the medium-term to fund other ventures. Given recent successes on the exploration and production fronts, which the market has somewhat exaggeratedly reacted to, the company could get a decent price for its Egyptian operation to finance current and potential investments. Dana Gas is looking to expand and diversify its upstream assets, recently bidding (and losing) as part of consortium in Algeria s recent oilfield rounds. We value the Egyptian operation using a combination of NAV and scenario-weighted DCF, yielding AED0.75/share. Valuing Dana Gas Egypt solely at NAV (which gauges divestment value) would add AED0.13/share to our valuation. We expect the UAE Gas Project will eventually come to fruition, despite numerous delays, since most CAPEX related to the project has been spent by both the UAE and Iranian sides. Dana Gas s main shareholder Crescent Petroleum is in arbitration proceedings with the National Iranian Oil Company (NIOC), which could be a lengthy process. With limited visibility on a start date, we value the project at cost, yielding AED0.18/share. Assuming the project kicks off in 2011f, it would add AED0.22-AED0.30/share to our valuation. We initiate coverage on Dana Gas with a Buy recommendation and a sum-ofthe-parts (SOTP) price target of AED1.43/share (40% upside). We valued key operations separately and assigned SG&A expenses, working capital investments, net debt and investments at the consolidated level. Current price levels value the company slightly below the Egyptian operation s NAV plus investments, nearly ignoring all other ventures. Potential catalysts not reflected in our share price could add AED0.89/share to our valuation. These include: (i) the realization of the full value potential of Kurdistan (conditional upon successful reserve exploitation and an improved political climate), (ii) the commencement of the UAE Gas Project, and (iii) the possible divestment of or any other value-accretive development for the Egyptian operation (such as processing capacity expansion). Key Performance Indicators 2008a 2009e 2009c 2010f 2010c Net Revenue (USDm) EBITDAX (USDm) EBITDAX Margin 72.4% 69.8% 69.7% 76.4% 84.3% Net Income (USDm) EPS (USD) EPS Growth 10% 152% 106% -3% 158% P/E 50.53x 20.02x 24.59x 20.68x 9.52x EV/EBITDAX 17.55x 11.55x 12.63x 6.71x 4.43x Dividend Yield P/BV 0.85x 0.77x x - A = Actual; E/F = HC s Estimates/Forecasts; C = Consensus Estimates Buy Target Price (AED) 1.43 Market Price (AED) 1.02 Upside 40.2% Listed on Bloomberg Code RIC ADX DANA UH DANA.AD Enterprise Value (AEDm) 7,199 Net Debt (AEDm) 2,173 Market Cap. (AEDm) 6,120 Market Cap. (USDm) 1,668 Number of Shares (m) 6,000 Foreign Ownership Limit 49.0% Foreign Ownership Level 28.7% Daily Turnover (AEDm) 34.4 Daily Turnover (USDm) 9.4 Shareholding Structure Free Float 34.3% Crescent Petroleum 20.4% Other Investors 45.2% Price Performance Chart Hatem Alaa halaa@hc-si.com Mai Nehad mnehad@hc-si.com * Disclaimer: See page 22 Dana Gas Dana Gas ADX J F M A M J J A S O N D

2 Financial Statements USDm 2008a 2009e 2010f 2011f 2012f 2013f Income Statement Gross Revenue Royalties (130) (112) (141) (141) (141) (125) Net Revenue Cost of Sales (28) (34) (59) (77) (78) (74) Gross Profit (Ex-Depreciation) Gross Margin 84.5% 86.2% 83.4% 85.2% 81.4% 77.4% G&A Expenses (22) (40) (25) (27) (29) (31) EBITDAX EBITDAX Margin 72.4% 69.8% 76.4% 80.0% 74.5% 68.1% Exploration Expenses (6) (77) (6) (6) (6) (5) EBITDA Depreciation & Depletion (82) (83) (85) (103) (103) (103) EBIT Net Interest Income (Expense) (61) (43) (29) (44) (46) 15 Revaluation Gains (Losses) 32 (55) Other Income (Expenses) Pre-Tax Income Taxes (38) (54) (76) (76) (76) (68) Net Income Net Margin 18.2% 34.2% 22.7% 37.1% 56.0% 21.0% Balance Sheet Cash & Equivalents Trade Receivables Other Current Assets Total Current Assets Net Fixed Assets Intangible Assets 1,604 1,447 1,435 1,422 1,409 1,396 Investments Investment Property Total Non-Current Assets 2,531 2,671 2,685 2,608 2,178 2,073 Total Assets 2,946 3,173 3,326 3,565 2,822 2,921 Trade Payables Other Current Liabilities Total Current Liabilities Convertible Sukuk Other Non-Current Liabilities Total Non-Current Liabilities Total Shareholders' Equity 1,971 2,162 2,283 2,475 2,560 2,629 Cash Flow Statement Net Income Non-Cash Items Net Change in Working Capital (67) (4) (1) (3) (3) (3) Operating Cash Flow Net CAPEX (264) (190) (76) (45) (23) (16) Other Investments Investing Cash Flow (216) (6) (44) (11) Financing Cash Flow (112) (61) (50) (65) (932) - Change in Cash (295) (348) 172 *Numbers presented only include: Egypt (assuming no capacity expansion), Kurdistan Phase I and Ras Shukheir Dana Gas 2

3 Investment Case We initiate coverage on Dana Gas with a Buy rating as the stock is currently trading slightly below the Egyptian operation s NAV plus investments nearly excluding other ventures. Market price offers a 40% upside to our price target with potential catalysts (not included in our valuation) to add AED0.89/share. Kurdish operation has large value potential that is unrecognized by the market. Easing political tensions and recognition of Kurdish oil contracts by Baghdad (leading to foreign operators in the Kurdish region receiving payment) could alleviate long-term concerns. Field appraisal results, receipt of condensate sales payments, and securing local sales are likely near-term catalysts. We believe there are three possible scenarios for the Egyptian operation: (i) maintaining status quo, (ii) boosting processing capacity through pumping around USD100 million, which could entice bidding for new concessions, and (iii) fully or partly divesting the operation most likely at a premium to NAV. We believe the UAE Gas Project is bound to materialize, but could still take some time. Current price levels nearly discount operations ex-egypt We initiate coverage on Dana Gas with a Buy recommendation and a sum-of-the-parts price target of AED1.43/share (40% upside). Current price levels value the company slightly below the NAV of Dana Gas Egypt plus investments (mainly a 3% stake in Hungary s MOL), almost ignoring other operations mainly on concerns related to: (i) escalating political tensions in Kurdistan, home to Dana Gas s 40%-owned Pearl Petroleum, which we believe is an unexploited and unrecognized value driver, and ( ii) incessant delays in the delivery of gas supplies from Iran as per the UAE Gas Project. Share price performance has recently been mainly triggered by Egyptian discoveries in a somewhat exaggerated manner (see Chart 1 below) Chart 1: Dana Gas s Share Price Performancee Source: Dana Gas, Reuters, HC Brokerage Potential catalysts to add AED0.89/share to our valuation Our price target does not include the following potential catalysts, which would add AED0.89/share to our valuation: (i) the full valuation potential of the Kurdish operation, conditional upon the exploitation of reserves and securing local and export sales, (ii) the commencement of the UAE Gas Project and the implementation of a value-accretive capacity expansion subsequent to the start of gas delivery, (iii) the full divestment value of the Egyptian operation (as measured by NAV), which is likely in the medium term should the company opt to invest in less mature and more promising exploration and production prospects, and iv) other ventures with limited visibility including Gas Cities, the Sharjah Western Offshore Concession, and assets in Nigeria and Tunisia (we have no assigned values for these ventures due to limited information). Dana Gas 3

4 Chart 2: Dana Gas s Price Target Breakdown and Potential Catalysts Potential Catalysts (0.16) (0.30) Kurdistan (20% Discount to OMV-MOL Deal) Egypt UAE Gas Cost Ras-Shukair Enterprise Value SG&A and Working Capital Net Debt Investments Price Target OMV-MOL Deal Discount Kurdistan's Remaining Value Potential Start of UAE Gas Project in 2011 UAE Gas Project Increases Capacity Remaining Portion of Egypt's NAV Potential Value Source: HC Brokerage Pearl Petroleum (Kurdistan) Possesses strong value potential that is unrecognized by the market We believe the Kurdish operation is Dana Gas s value driver in the medium to long term, with large unexploited reserves and a production potential of 3 Bcf/day. The Kurdish assets valuation prospects were validated by the acquisition of a 20% stake in Pearl Petroleum by OMV and MOL last May in a deal that valued the company at USD3.5 billion. We conservatively value Pearl Petroleum at a 20% discount to the OMV-MOL deal-implied valuation, yielding AED0.69/share. We believe Dana Gas s Kurdish assets have a potential value of AED1.14/share, conditional upon the successful exploration of Khor Mor and Chemchemal wells and the successful commencement of Phases II and III that entail gas and byproduct sales to local industries and domestic users as well as exports. Key near-term catalysts are the announcement of field appraisal results, the receipt of payments by Pearl Petroleum related to commenced condensate sales (the first stage of Phase I) that currently stand at around USD40 million, and securing local sales contracts, which we see limited risk for given growing demand for energy in the country. The operation is being heavily underpriced by the market mainly on political concerns related to growing tensions between the Kurdistan Regional Government and the Iraqi Central Government that are raising questions on whether exports out from Dana Gas s Kurdish assets (Phase III) will materialize. Export concerns could be alleviated with a possible improvement in political climate following next March s elections and the receipt of oil export payments by foreign operators in the Kurdish region (Norway s DNO and Turkey s Genel Enerji). Dana Gas Egypt Priced-in but is divestment likely in the medium-term? The market has recently been reacting almost solely (and somewhat exaggeratedly) to discovery announcements related to Dana Gas s Egyptian operation, which is the company s only fully up-and-running operation. Given limited risks and an established presence in the country, we believe the Egyptian operation is fully priced into Dana Gas s share price by the market. We expect the share price to continue to react in an inflated manner to further exploration results in Egypt in the near term. What is in the cards for Egypt? Three possible scenarios in our view Scenario 1: Remaining as is Dana Gas could remain in Egypt and maintain its status quo, operating at a maximum production of around 42,000 BOE/day (compared to 40,000 BOE/day currently). We value this scenario at AED0.60/share and assign it a 25% probability. Scenario 2: Expanding processing capacity With production nearing a bottleneck, we believe capacity expansion is imminent. The company is currently studying the construction of a gas processing plant, reminiscent of its existing Wastani facility, which could add a processing capacity of around 27,000 BOE/day at a cost of around USD100 million. The possible capacity boost would increase the likelihood of bidding for more concessions in the country. We valued this scenario at AED0.65/share and also assign it a 25% probability. Scenario 3: Divestment We believe Dana Gas could opt for a partial or full divestment of its Egyptian assets in the medium-term to fund investments in more promising upstream ventures especially given the relatively mature nature of the operation. Another likely incentive is the near-term expiration of Dana Gas s umbrella agreement with Crescent Petroleum that mandated granting Crescent Petroleum the option to take part in all available investment opportunities on an equal basis. Dana Gas recently bid as part of a consortium but failed in Algeria s latest bidding rounds, signaling that Dana Gas is seeking to diversify its upstream assets. We believe a likely divestment would be at a premium to NAV Dana Gas 4

5 (based on recoverable reserves) to reflect the value of processing facilities and other assets. We conservatively value this scenario at NAV based on 2009e 2P reserves, yielding AED0.88/share, and assign it a 50% probability. UAE Gas Project Gas delivery will happen in our view but could take more time The UAE Gas Project, which was the driver behind Dana Gas s inception, has been plagued by an endless string of delays. We believe gas delivery out of Iran s Salman field will eventually take place, especially given the large CAPEX already spent by both the Iranian and UAE sides. However, the process could prove still lengthy especially with Dana Gas s largest shareholder Crescent Petroleum, the company that forged the deal with the Iranian side, currently involved in arbitration with the National Iranian Oil Company (NIOC). We thus do not expect a positive development on the issue in the short term. We value the project at cost for Dana Gas at AED0.18/share. Project commencement could add AED0.22-AED0.30/share to our valuation. The upper bound of the range reflects the implementation of a USD50 million capacity increase to handle 800 MMscf/day, compared to the design capacity of 600 MMscf/day. Downside risks Downside risks to our valuation include: (i) Severe delays in the receipt of payments by Pearl Petroleum related to Phase I sales of condensate and LPG; (ii) A worsened political situation in Kurdistan that could increase skepticism over the implementation of Phases II and III; (iii) Disappointing results of the ongoing appraisal of the Khor Mor and Chemchemal fields in Kurdistan; (iv) A prolonged deterioration in oil prices below our long-term assumed price of USD75/bbl. This would lower our valuation of Dana Gas Egypt since oil-linked byproducts represent 20-25% of the operation's output; (v) The inability to find new upstream investment opportunities or the lack of new concessions in Egypt, which could be problematic in the long run as reserves from existing concessions and assets are depleted; (vi) Disappointing results of the remainder of the exploration program in Egypt that is expected to continue until 2012f; (vii) Delays in the construction of the Ras Shukhair liquids extraction plan. Although more delays in the UAE Gas Project would hamper share price performance, we do not believe this is a major risk to our valuation as we value the project at cost for Dana Gas. In the worst of cases, Dana Gas could sell the project's infrastructure to recoup its costs. Dana Gas 5

6 Valuation Our SOTP valuation for Dana Gas yields a value of AED1.43/share (40% upside). Potential catalysts could add AED0.89/share to our valuation. No sensitivity to gas prices in the near term due to fixed price in Egypt. Sensitivity to oil prices is currently limited as oillinked byproducts are only 20-25% of Egypt s production. Repayment concerns related to convertible sukuk maturing in 2012f are not an issue even if UAE Gas Project and latter phases of Kurdistan don t start. Dilution is also not a concern as the conversion option is currently deep out-of-themoney. A well-integrated player We start coverage with a Buy Headquartered in Sharjah, Dana Gas is the first and largest private sector natural gas company in the Middle East. It operates in the Middle East, North Africa, and South Asia (MENASA) across the entire natural gas value chain through a number of subsidiaries. Chart 3: Dana Gas s Subsidiaries and Affiliates Dana Gas Upstream Midstream Downstream 100% Dana Gas Egypt (Centurion) Exploration & Production 100% Sajaa Gas (SajGas) [Sharjah, UAE] Gas Sweetening 50% Gas Cities Ltd. [MENASA] Gas Marketing 40% Pearl Petroleum Co. Ltd. (PPCL) [Kurdistan, Iraq] Exploration & Production 100% United Gas Transmission Co. Ltd. (UGTCL) [Sharjah, UAE] Gas Transmission 35% Crescent National Gas Co. Ltd. (CNGCL) (Sharjah, UAE) Gas Marketing 66% DanaGaz Bahrain WLL [Bahrain] Gas Processing 40% Egyptian Bahraini Gas Derivative Co. (EBGDCO) [Egypt] Gas Processing Source: Dana Gas, HC Brokerage We initiate on Dana Gas with a Buy recommendation and a sum-of-the-parts (SOTP) price target of AED1.43/share (40% upside to the current market price). We assigned a value to each key operation Egypt, Kurdistan, UAE Gas Project, and Ras Shukheir and attributed the following at the consolidated level: (i) selling, general, and administrative expenses, (ii) working capital investments, (iii) net debt, and (iv) the market value of investments (mainly a 3% stake in Hungary s MOL). We have excluded other ventures (Gas Cities, Sharjah Offshore Concession, and Nigerian and Tunisian assets) from our valuation due to limited information and visibility. We assume a sustainable price for oil of USD75/barrel and for gas of USD4.5/MMBTU, and priced byproducts (mainly condensate and LPG) as a multiple of our long-term oil price. Current share price levels value the company at slightly less than the Egyptian operation s NAV (AED0.88/share based on our numbers) plus investments (AED0.21/share), nearly ignoring the Kurdish operation (which we believe is a core value driver), the UAE Gas Project, and other ventures. Projects and potential catalysts not included in our numbers, which are detailed in each section below, could collectively add AED0.89/share to our valuation. Dana Gas 6

7 Table 1: Dana Gas Valuation Summary Operation Valuation Methodology Value/Dana Gas Share (AED) Contribution to EV/Share Dana Gas Egypt 50% NAV & 50% Scenario-Weighted DCF % Pearl Petroleum Kurdistan 20% Discount to OMV-MOL Deal-Implied Valuation % UAE Gas Project Cost % Ras Shukhair DCF % Enterprise Value % SG&A and Working Capital Investments DCF (0.16) Investments* Market Value on 8 January Net Debt Cost (0.30) Equity Value 1.43 Market Price 1.02 Upside 40.2% *Mainly a 3% Stake in Hungary s MOL Source: HC Brokerage No near-term sensitivity to gas prices; oil prices have some impact Dana Gas is not impacted by fluctuations in natural gas prices given that: (i) in Egypt, the company sells at a fixed price of USD2.65/MMBTU, (ii) Kurdish gas sales will only commence once the latter phases are up and running (our valuation for the Kurdish operation is deal-implied from OMV-MOL acquisition), and (iii) gas sold by Dana Gas as part of the UAE Gas Project (which we value at cost) will likely be at thin margins and therefore has a limited valuation impact. As indicated by Table 2 below, the sensitivity of our valuation to fluctuations in oil prices is not very significant. Byproducts (mainly condensate and LPG), which the company sells in all of its operations at international prices, are typically priced as a multiple of oil and thus the company s numbers are typically affected by oil price fluctuations. However, only 20-25% of the sales volumes of Dana Gas Egypt, which is the only real contributor to consolidated numbers at the moment, are in byproducts and the impact on numbers is thus moderate. Table 2: Sensitivity of Dana Gas s Valuation to Oil Price Assumptions Source: HC Brokerage Oil Price (USD/bbl) Dana Gas Price Target (AED/Share) Deviation from Base Case % % % % % % % % % % % Sukuk repayment and potential dilution should not be a concern Dana Gas issued in October 2007 convertible sukuk worth USD1 billion that mature in 2012f and pay a fixed interest rate of 7.5%. The company did this mainly to partly finance the Centurion (the Egyptian operation) acquisition earlier in the year. We are not worried about the repayment of the sukuk even if a worst-case scenario emerges where both the UAE Gas Project and the latter phases of the Kurdish operation do not commence. We believe repayment will be financed through a number of sources including: (i) full cost recovery from the Kurdish operation as we expect the company to recoup its Phase I CAPEX (in excess USD300 million) over f, (ii) ongoing cash flows generated from the Egyptian operation, and (iii) the company s investments (mainly their 3% stake in MOL), which currently have a market value of around USD330 million. Dilution concerns, should conversion take place, are also far-fetched at current price levels given that the conversion option is currently deep out-of-the-money since the conversion price is AED2.12/share (nearly double the current market price). Dana Gas 7

8 Pearl Petroleum Kurdistan Region of Iraq (KRI) Pearl Petroleum, Dana Gas s 40%-owned Kurdish asset, has significant hidden value in our view with a production potential of 3 Bcf/day. Key drivers at this stage are field appraisal results, receipt of payments for commenced condensate sales by Pearl Petroleum and securing local gas sales. Despite a strong vote of confidence by acquisition into Pearl Petroleum by Nabucco pipeline architects OMV and MOL, exports remain the primary overhang for the Kurdish operation. Possible changes in the political climate after next March s election and the receipt of export payments by other operators in Kurdistan could ease concerns. We value Dana Gas s Kurdish operation at a 20% discount to implied valuation by OMV-MOL deal (and a 40% discount to value potential based on our numbers) yielding USD1.12 billion (0.69/share). The venture into Kurdistan In April 2007, a 50:50 joint venture between Dana Gas and Crescent Petroleum (later named Pearl Petroleum), signed a Strategic Alliance Protocol with the Kurdistan Regional Government (KRG) of Iraq, granting the company a 25-year service contract to develop, process, and transport natural gas on a fast-track basis from the Khor Mor gas field and to evaluate the potential of the Chemchemal gas field. The two fields are preliminarily estimated to have gas reserves of 4-5 Tcf, around 3% of Iraq's 112 Tcf of reserves (based on latest available figures from the Iraqi government), but it is highly likely that actual reserves are much higher with affirmation provided upon the conclusion of field appraisal. The 25-year service contract allows for 100% cost recovery of both CAPEX and OPEX in addition to receiving an undisclosed share of revenue, which we believe to be in the range of 12% based on the presentation of the now scrapped merger between UK-based Heritage Oil and Turkey s Genel Enerji. Dana Gas s Kudistan project involves three phases (detailed below) with the first stage of Phase I already up and running. Chart 4: Map of Iraq s Oil and Gas Fields Source: Energy Information Administration (EIA) Phase I: Khor Mor Gas Field Development The initial focus of the project is to develop the Khor Mor field to provide steady natural gas supplies to fuel domestic electric power generation plants in the cities of Erbil and Chemchemal (in the province of Sulaymaniyah). Generation capacity in Erbil will be 500 MW and 750 MW in Chemchemal, supplying electricity to over 4 million Iraqis and saving the government around USD2.5 billion a year in liquid fuel import costs. The total investment cost for Phase I is estimated at USD650 million. Dana Gas 8

9 Stage 1: Pre-LPG Plant Production from the Khor Mor gas field started in October 2008 through early production facilities producing MMscf/day of gas, which are transported free of charge to the power stations through a 180 km pipeline, and 4,300 barrels/day of condensate sold to endusers at international prices. It is worth noting that Pearl Petroleum has not yet received any payments from the government for its condensate sales, which currently stand at around USD40 million. Stage 2: Post-LPG Plant (i) The second stage of Phase I involves the upstream development of a two-train LPG plant, which is set for completion in early Once the plant is complete, production is expected to increase to: 300 MMscf/day of gas, 940 tons/day of LPG, and 14,000 barrels/day of condensate. Like the first stage, natural gas is provided free of charge while byproducts are sold at international prices. (ii) The post-lpg plant stage also includes the continuation of field appraisal, tapping into the area s huge reserves. The company is currently extracting gas from only five wells in Khor Mor, and thus there is still substantial extraction potential in Khor Mor as well as the unexploited Chemchemal field, which is believed to have significant reserves. Should full exploitation of the Khor Mor field and the development of Chemchemal go through, the area can produce over 3 Bcf/day of gas in addition to substantial volumes of associated liquids. We valued Phase I at USD319 million (AED0.20/ share) by forecasting free cash flows over a 25-year horizon and applied a WACC of 15.3%. Our valuation is strictly based on the sale of byproducts and does not incorporate the possibility of sale of excess gas that is not utilized by the power stations, which is likely to happen once the LPG plant is fully up and running. Table 3: Valuation of Phase I of Dana Gas s KRI Project USDm 2009e 2010f 2011f f Condensate (bbl/day) 4,300 5,644 14,000 14,000 Condensate Sales LPG (tons/day) LPG Sales Total Khor Mor Revenue Dana Gas s Share EBITDA (Ex-SG&A Expenses) CAPEX (52) (1) (3) (1) Free Cash Flows (20) Phase I Valuation 319 Value/Share (AED) 0.20 Source: HC Brokerage Phases 2: Extending power to local industries The second phase of the Kurdistan project involves supplying gas and byproducts to a number of users within the Kurdish region including: (i) cement power plants and other industrial users, (ii) the Kurdistan Gas City, which is a gas-utilization industrial complex to promote private-sector investments in a variety of gas-related industries thus ensuring optimal use of the region's natural gas resources (see the Other Projects section for more details). Land has already been allotted and advanced negotiations are currently in place with potential anchor tenants, and (iii) the domestic sector for residential usage and as compressed natural gas (CNG). Phase 3: Gas exports the driver behind the recent partnership with OMV and MOL The third phase of the Kurdistan project will involve the eventual export of some of the fields reserves to Europe and the Middle East. This phase was the key driver behind with the recent partnership with OMV Upstream International GmbH (OMV), Austria s largest listed industrial company and a leading Central European integrated oil and gas group, and MOL Hungarian Oil and Gas Public Limited Company (MOL), Hungary s largest listed company and also a leading Central European integrated oil and gas group. Dana Gas and Crescent Petroleum signed in May 2009 an agreement with both MOL and OMV to acquire a 10% stake each in Pearl Petroleum, which valued the Kurdish operation at USD3.5 billion (USD1.4 billion or AED0.86/share for Dana Gas s stake). In return, OMV paid USD350 million, which will be reinvested in the Kurdish region s resource development, and MOL swapped shares with the original partners, granting both Dana Gas and Crescent Petroleum a 3% stake each in MOL. We believe this will generate dividend income of roughly USD6 million per annum for Dana Gas. The project partners will now push forward substantial investments in the Kurdish region, which are estimated at USD8 billion, to realize the fields full production potential of 3 Bcf/day. Dana Gas 9

10 Chart 5: Pearl Petroleum s Shareholding Structure Post the May 2009 Deal MOL, 10% OMV, 10% Dana Gas, 40% Source: Dana Gas, HC Brokerage Crescent Petroleum, 40% Partnership is a vote of confidence by OMV and MOL that exports will eventually happen We believe OMV and MOL s partnership in Pearl Petroleum is a clear attempt to secure further gas supplies (in addition to willingness pledges from Azerbaijan, Turkmenistan, Egypt, Iraq, and Syria) to the Nabucco gas pipeline and is thus a strong vote of confidence on their part that gas from the two Kurdish fields will eventually be exported. OMV and MOL own a 16.7% stake each in Nabucco and are the original architects of the project. The Nabucco project is a 3,300 km gas pipeline with an estimated investment cost of EUR7.9 billion that will link the Middle East and Caspian regions via Turkey, Bulgaria, Romania, and Hungary with Austria and further on with Central and Western Europe. The key motivation behind the project is to reduce Europe s dependence on Russian gas, which caters to roughly 40% of the continent s requirements. Construction of the pipeline is set to begin in 2011f, and the pipeline willl have a design capacity of 3 Bcf/day that will be fully up-and-running at least by the end of 2015f. The pipeline s first construction phase is expected to be completed by 2014f with an initial capacity of around 0.8 Bcf/day. Chart 6: The Nabucco Gas Pipeline Route Source: The Nabucco Gas Pipeline Ongoing conflict between Kurds and Arabs in Baghdad overshadows export potential The Iraqi Central Government does not seem supportive of the proposed Kurdish-Nabucco link, which will help secure sales from Khor Mor and Chemchemal upon their full development, partly because Baghdad hopes to supply gas to Europe from the Akkas gas field (reserve estimates range from 4.5 to 7.0 Tcf), in addition to the ongoing apprehension that Kurdistan achieves full autonomy. The Central Government and the KRG have been in a dispute since 2004 over Iraq s land and hydrocarbon resources (especially over Kirkuk, which Kurds consider their ancestral homeland).. Upon failure to pass a hydrocarbon law, the KRG started in 2007 to unilaterally sign exploration and production sharing agreements with a number of relatively small international energy firms, including Norway s DNO, Heritage Oil, and Genel Enerji. The central government deemed these agreements illegal. Kurdistan has been the fastest region in exploiting its hydrocarbon assets and, accordingly, the Iraqi government permitted Kurdish oil exports via its national pipeline that connects to Turkey with first exports on 1 June 2009 of around 100,000 barrels/day mainly from the Taq Taq oil field run by Genel Enerji and Canada s Addax Petroleum, and the DNO-operated Tawke field. Although the initiation of exports were a good signal for Dana Gas s potential for export from its Kurdish resources, the positivity was muted by international companies not receiving payment from Baghdad in return for their exports. Iraqi constitution stipulates a formula for distributing hydrocarbon revenue among its different regions by the central treasury, and, accordingly, Kurdistan is entitled to a 17% revenue share. Dana Gas 10

11 DNO halted its exports in September 2009 and ceased drilling in December 2009, focusing instead on sales to the local market until a clear payment mechanism for exports is in place. Output from the Taq Taq field has also been diverted to the local market. Additionally, the proposed Heritage Oil-Genel Enerji merger that partly aimed to consolidate their Kurdish assets was cancelled. Implications of the Iraqi bidding rounds The relative success of Iraq s second bidding rounds that took place in December 2009 raised questions on whether Kurdish exports will be allowed as skeptics believe that Iraq could now be more reluctant to reach a resolution with the Kurds as it finds itself with sufficient oil revenue. We believe that with an ability to export 250,000 barrels/day, which the central government is bound to benefit from, the Kurdish situation is unlikely to be neglected, especially since the newly-awarded fields will likely take a couple of years at least to start production. Also, the success of the bidding rounds affirms foreign interest in the country and signals that Iraq is becoming more and more conducive to foreign investments. Iraq held in June 2009 its first bidding round since the 2003 US-led invasion, offering 20-year service contracts for a number of oilfields. The bidding process was a failure as companies demanded higher remuneration fees than the average of USD2/bbl offered by the government, which retains ownership in all fields. Out of eight projects, only one was awarded to British Petroleum and China National Petroleum Corp., in addition to two that were awarded in preliminary deals subsequent to the failed auction. The second bidding round in December 2009 was more successful, with seven oilfields awarded. The contracts from the two auctions are expected to quadruple the country s oil production to around 12 million barrels/day, generating additional revenue of USD200 billion per year in six years, according to Iraq s Oil Minister. Table 4: Results of Iraq s 2009 Oil Field Bidding Rounds Contract Area Awarded Companies/ Consortia Plateau Production Target (bbl/day) Remuneration Fee (USD/BOE)* First Bidding Round (June 2009) Rumaila BP (Operator)/China National Petroleum Corp. 2,850,000 N/A West Qurna (Phase I) Exxon Mobil/Royal Dutch Shell N/A N/A Zubair Eni SpA N/A N/A Kirkuk No Bid N/A N/A Bai Hassan No Bid N/A N/A Akkas No Bid N/A N/A Mansuriyah No Bid N/A N/A Second Bidding Round (December 2009) Majnoon Shell (Operator)/Petronas 1,800, Halfaya CNPC (Operator)/Petronas / Total 535, East Baghdad (Central and North) No Bid N/A N/A Eastern Fields No Bid N/A N/A (Gilabat, Khashem Al-Ahmar, Nau Doman, Qumar) Qaiyarah Sonangol 120, (12.50) West Qurna (Phase 2) Lukoil (Operator)/Statoil 1,800, Garraf Petronas (Operator)/Japex 230, Badra Gazprom (Operator)/Kogas /Petronas /TPAO 170, (6.00) Middle Furat (Kifl, West Kifl, Merjan) No Bid N/A N/A Najmah Sonangol 110, (8.50) *Represents the maximum fee set by PCLD and accepted by the winner; the original bid is shown alongside in parentheses where available Source: Iraq Ministry of Petroleum Contracts and Licensing Directorate (PCLD), Reuters, HC Brokerage Limited risk for local sales What else to keep an eye out for? Despite the multitude of issues plaguing the Kurdish operation, we are strong believers in the region s prospects, and feel it serves as a strong value driver for Dana Gas. We also believe that after the full execution of Phase I, there is little risk for sourcing local industries and domestic users (Phase II), especially given the country s dire need for energy and dependence on hydrocarbon revenue (around 90% of the Iraqi government s revenue). Phase II will serve as a buffer should exports (Phase III) fail something that we see as highly unlikely in the long run. We thus believe the key things to keep an eye out for at this stage for Dana Gas s Kurdish operation are: (i) results of field appraisals expected in 2010f that would earmark the true production potential of Khor Mor and Chemchemal, (ii) the receipt of payments by Pearl Petroleum for already-commenced sales as part of the first stage of Phase I, and (iii) securing local sales contracts with favorable terms, which is likely to be dependent on developments relating to the Kurdistan Gas City. Despite the limited likelihood of exports starting anytime before 2014f, when development efforts bear fruit and the Nabucco pipeline is operational, the exports issue remains the primary overhang on Dana Gas s Kurdish operation. The two likely positive signals for exports to watch out for are: (i) the verdict of the Iraqi elections to be held in March 2010, which could eventually lead to a more conducive political climate to the resolution of the Kurdish situation, and (ii) the receipt of export payments by the likes of DNO, which will in turn lead to resumption of drilling activity and exports. Dana Gas 11

12 We value Pearl Petroleum at a 20% discount to the OMV-MOL deal valuation; 40% below value potential Given limited visibility on how the Kurdish operation will turn out and the lack of accurate reserve estimates, we believe the best value indicator for Pearl Petroleum at this stage is the valuation implied by the OMV-MOL deal, which valued the company at USD3.5 billion and, accordingly, Dana Gas s stake at USD1.4 billion. To be conservative, we applied a 20% discount to the deal-implied valuation, thus valuing Dana Gas s Kurdish interests at USD1.12 billion (AED0.69/share). To gauge the value potential of the Kurdish operation, we conducted a rough valuation exercise to assign value to Phases II and III of the KRI project. We assumed that Pearl Petroleum shareholders will pour investments of USD8 billion (USD3.2 billion by Dana Gas alone) to fully exploit Khor Mor and Chemchemal reserves over f and thus produce an additional 2.7 Bcf/day of gas plus associated byproducts by 2015f that will all be sold at international prices locally and/or in export markets. The valuation does not account for reserve depletion given the absence of accurate reserve estimates. We applied a WACC of 15.3% over a 25-year horizon. This yielded a value for Dana Gas s stake of USD1.55 billion (AED0.95/share). Adding to that our valuation for Phase I, the potential value for Dana Gas s Kurdish operations stands at USD1.87 billion (AED1.14/share). Table 5: Gauging the Value Potential of Dana Gas s Kurdish Interests USDm 2010f 2011f 2012f 2013f 2014f 2015f f Gas (MMscf/day) ,000 1,500 2,000 2,700 2,700 Gas Sales* ,643 2,465 3,287 4,437 4,437 Condensate (bbl/day) - 23,333 46,667 70,000 93, , ,000 Condensate Sales ,211 1,816 2,422 3,269 3,269 LPG (tons/day) - 1,567 3,133 4,700 6,267 8,460 8,460 LPG Sales ,321 1,783 1,783 Total Revenue from Fields - 1,757 3,515 5,272 7,029 9,490 9,490 Dana Gas s Share EBITDA (Ex-SG&A Expenses) CAPEX (533) (533) (533) (533) (533) (533) (8) Free Cash Flows (533) Phases II & III Valuation 1,549 Value/Share (AED) 0.95 Phase I Valuation 319 Value/Share (AED) 0.20 Value Potential of Pearl Petroleum 1,868 Value/Share (AED) 1.14 Discount 40% Pearl Petroleum s Assigned Value/Share (AED) 0.69 Implied OMV-MOL Deal Valuation 1,400 Value/Share (AED) 0.86 Discount 20% Pearl Petroleum s Assigned Value/Share (AED) 0.69 *Based on a long-term gas price of USD4.5/MMBTU Source: HC Brokerage Dana Gas 12

13 Dana Gas Egypt Since its acquisition of Egyptian assets in 2007, Dana Gas made major discoveries and boosted production by around 40%. A likely scenario could be a full/partial exit from Egypt in the medium term to fund new ventures. Dana Gas Egypt could also increase its processing capacity and then possibly bid for new concessions. We value Dana Gas Egypt at USD1.23 billion (AED0.75/share) using a combination of NAV and DCF based on two likely scenarios (maintaining status quo and increasing current processing capacity). The Centurion acquisition Dana Gas acquired in January % of Centurion Energy International (later renamed Dana Gas Egypt), which had previously been listed on the Toronto Stock Exchange and the London AIM, in a deal worth USD1.12 billion. The acquisition was funded from the company s cash resources and an Islamic Shariah-compliant facility from Citibank worth USD470 million, which was fully repaid on 31 October 2007 out of proceeds from the company s USD1 billion convertible sukuk. Dana Gas Egypt, which is currently the country s sixth largest natural gas producer, has a number of concessions and development leases in Egypt detailed in Table 6 below. Revenue is received based on a production sharing agreement (see Chart 7 below) that allows Dana Gas to recoup CAPEX and OPEX as well as earn a profit. Under the agreement, Dana Gas Egypt receives a maximum of 47.5% of the revenue pool in any year. Table 6: Dana Gas Egypt s Concessions Concessions Working Interest % of Production* Acreage Location Comments El Wastani 100% 59.0% 13,017 Nile Delta - South El Manzala 100% Non-Producing 16,055 Nile Delta - West El Manzala 100% 40.6% 476,216 Nile Delta Concession expires and non-productive land to be relinquished on 30 June Four development leases created to date. West El Qantara 100% Non-Producing 319,618 Nile Delta Concession expires and non-productive land to be relinquished on 30 June Three discoveries made over the past nine months. Kom Ombo 50% 0.4% 5,654,727 Upper Egypt Farm-out agreement with Kuwait International Oil & Environmental Co. (KIOEC). Dana Gas is the operator. Produces only oil. Oil transported via land trucks to Assuit refinery then sold out. *As of 30 September 2009 Source: Dana Gas, HC Brokerage Chart 7: The Production Sharing Agreement Natural Gas Sold at a fixed price of USD2.65/MMBTU (75-80% of Output) Byproducts (Condensate & LPG) Sold at international prices (20-25% of Output) Revenue Pool A maximum of 30% of revenue pool covers Dana Gas s CAPEX and OPEX. Uncovered costs (around USD200m currently) are carried forward to subsequent years. 30% 70% Cost Recovery Pool Profit Pool 75% 25% Egyptian government Dana Gas Egypt Source: Dana Gas, HC Brokerage Impressive Achievements Since the Acquisition Dana Gas announced in March 2008 the execution of an aggressive USD170 million drilling and development program that involved drilling 19 wells (15 exploration prospects and four development wells) with five drilling rigs acquired for the program. The program has managed to increase the Egyptian operation s 2P reserves by over 40% in 2008 and boosted production to around 40,000 BOE/day currently from 28,600 BOE/day at the time of acquisition. The company s exploration program is set to continue until 2012f when most of the existing exploration rights expire. We forecast CAPEX in excess of USD120 million over the next three years on further exploration efforts. Dana Gas 13

14 Table 7: Discoveries Since Centurion Acquisition (2007-Present) Well Concession Results Estimated Reserves Jun. 07 El Wastani West-2 El Wastani 9.5 MMscf/day (gas); >1,000 bbl/day (condensate) N/A Aug.07 Dabayaa-1 West Manzala 16.5 MMscf/day (gas); 330 bbl/day (condensate) N/A Sep. 07 Al Baraka-1 Komombo First commercial oil discovery in Upper Egypt 150 bbl/day (oil) N/A Dec. 07 Dabayaa-2 West Manzala 10 MMscf/day (gas); 240 bbl/day (condensate) N/A Jun. 08 Al Baraka-2 Komombo N/A N/A Oct. 08 El Basant-1 (El Tawil-1) West Manzala 23.5 MMscf/day (gas); 1,027 bb/day (condensate) 90 Bcf (gas); 4 MMBOE (condensate) Dec. 08 El Basant-2 West Manzala 10.5 MMscf/day (gas); 50 bbl/day (condensate) >130 Bcf Dec. 08 Salma-1 West Qantara 17.2 MMscf/day (gas); 415 bbl/day (condensate) >150 Bcf Feb. 09 Sondos-2 (West Manazla-2) West Manzala 11 MMscf/day (dry gas) 20 Bcf Feb. 09 Azhar-1 West Manzala 15.1 MMscf/day (gas); 444 bbl/day (condensate) Bcf May. 09 Tulip-1 West Qanatara 10.6 MMscf/day (gas); 252 bbl/day (condensate) 27 Bcf Aug. 09 Sharabas-1 West Manzala 7 MMscf/day (gas); 198 bbl/day (condensate) 28 Bcf Aug. 09 Sama-1 West Qantara 13 MMscf/day (gas) & potential to reach 20 MMscf/day 48 Bcf Aug. 09 Salma Delta-2 West Qantara 12.5 MMscf/day (gas); 352 bbl/day (condensate) >200 Bcf Oct. 09 Faraskur-1 West Manzala 12.2 MMscf/day (gas); 243 bbl/day (condensate) >73 Bcf Oct. 09 Marzouk-2 West Manzala 10 MMscf/day (gas) 13.4 Bcf Dec. 09 Orchid-1 West Manzala 12.6 MMscf/day (dry gas) Bcf Jan. 10 Baraka-4 Komombo 220 bbl/day (oil) with a maximum of 1,300 bbl/day N/A Source: Dana Gas, HC Brokerage A possible processing capacity expansion on the horizon Dana Gas Egypt currently has two processing facilities with a potential third under study. El Wastani Gas Processing and Liquid Extraction Facility Located to the West of the Nile, the plant has a capacity of 160 MMscf/day of gas and 7,500 bbl/day of condensate and LPG. It handles production from El Wastani, El Wastani East, Luzi, and Dabayaa Development Leases. Some of the discoveries from West El Manzala are tied to the plant. El Basant discovery, 17 kilometers away, is tied to the plant through a 12-inch gas pipeline and 6-inch condensate line. Azhar discovery will also be tied into this line. Accordingly, the plant is expected to operate above its capacity for a number of years. The company is studying whether to debottleneck the plant or expand its capacity (to around 200 MMscf/day), which is dependent on whether more gas reserves will be discovered around the area. South El Manzala Gas Processing Facility Located to the East of the Nile, the facility only handles dry gas. It generates production from the Sondos discovery, which lies on the pipeline route leading to this plant and started to contribute to production in mid Salma Discovery Could Lead to a Third Plant Located to the East of the Nile, the Salma field discovery, which is the largest single discovery since the beginning of the company s exploration program, is undergoing further exploration works to determine whether a new gas processing plant, presumably with LPG extraction facilities, can be built. This would replicate the El Wastani plant, and would cost around USD100 million. Valuing Dana Gas Egypt We value Dana Gas Egypt at USD1.23 billion (AED0.75/ share) using a combination of net asset value (NAV) and DCF (based on two scenarios). For our two DCF valuations, we applied a WACC of 14.3% and calculated a terminal value assuming that the company will be sold five years from now at a price tag based on the remaining 2P reserves. Table 8: Valuation Scenarios for Dana Gas Egypt Methodology Description Weight Valuation (AEDm) Value/ Share (AED) Prob.-Weighted Value/Share (AED) DCF Status Quo 25% 13, DCF Establishing New Plant 25% 14, NAV Divestment Value 50% 19, Prob.-Weighted Valuation 16, Source: HC Brokerage DCF Scenario 1: Status Quo The company could opt to continue with its exploration program and not invest to establish a new processing plant. Accordingly, the company will operate at a maximum processing capacity of 42,000 BOE/day for three years until 2012f, after which production will drop by an average of 12% per annum. Under this scenario, we assume the company will add 42 MMBOE in 2P reserves over the next three years. This scenario (25% weight) yielded a value of USD982 million (AED0.60/share) for Dana Gas Egypt. Dana Gas 14

15 Table 9: Dana Gas Egypt s Status Quo Scenario Forecasts and Valuation USDm 2009e 2010f 2011f 2012f 2014f 2014f 2P Reserves (MMBOE) Daily Production Rate (BOE) 35,316 42,000 42,000 42,000 37,278 33,177 Gas (MMscf/day) Gas Sales Revenue LPG (tons/day) LPG Sales Revenue Condensate (bbl/day) 3,524 5,236 5,236 5,236 4,660 4,147 Condensate Sales Revenue Gross Revenue Royalties (Inc. Taxes) (165) (217) (217) (217) (193) (172) Net Revenue EBITDAX (Ex-SG&A Expenses) CAPEX (53) (62) (41) (21) (15) (12) Free Cash Flows Reserve-Based Terminal Value 1,108 Value of Dana Gas Egypt 982 Value/Share (AED) 0.60 Source: HC Brokerage DCF Scenario 2: Establishing a New Processing Plant to Boost Capacity Given that production is nearing a bottleneck, it is highly likely that Dana Gas expands its processing capacity through adding capacity at El Wastani and/or building a plant similar to El Wastani. The company will have to invest around USD100 million on top of planned exploration and development, spending over two years boosting production to around 69,000 BOE/day by 2014f. Under this scenario, we assume the company will add 75 MMBOE in 2P reserves over the next three years as we believe the company is not likely commit to such an investment without reasonable reserve additions. Such capacity expansion would entice the company to bid for more concessions in the country. This scenario (25% weight) yielded a value of USD1.07 billion (AED0.65/share) for Dana Gas Egypt. Table 10: Dana Gas Egypt s Capacity Expansion Scenario Forecasts and Valuation USDm 2009e 2010f 2011f 2012f 2013f 2014f 2P Reserves (BOE) Daily Production Rate (BOE) 35,316 42,000 46,000 53,000 61,000 69,000 Gas (MMscf/day) Gas Sales Revenue LPG (tons/day) LPG Sales Revenue Condensate (bbl/day) 3,524 5,236 5,750 6,625 7,625 8,625 Condensate Sales Revenue Gross Revenue Royalties (Inc. Taxes) (165) (217) (238) (274) (316) (357) Net Revenue EBITDAX (Ex-SG&A Expenses) CAPEX (53) (124) (100) (26) (28) (29) Free Cash Flows Reserve-Based Terminal Value 1,184 Value of Dana Gas Egypt 1,068 Value/ Share (AED) 0.65 Source: HC Brokerage Net Asset Value (NAV): A Possible Divestment Value Our NAV for Dana Gas Egypt yielded a value of USD1.44 billion (AED0.88/share). It is based on estimated 2P reserves at the end of 2009 of 116 MMBOE net of liabilities directly attributable to the Egyptian operation. We believe our NAV valuation for Dana Gas Egypt is conservative as it does not assign value to existing processing facilities and other assets. Should Dana Gas opt to divest part or all of its Egyptian operation, it will likely sell it a premium to NAV. We do not view the divestment scenario as far-fetched in the medium term, and we accordingly assign a 50% weight to NAV in our valuation. Dana Gas 15