Market Report: Oil groups plunge on Dana's Mauritania misery

The oil exploration sector, which has been one of the UK market's best performers this year, suffered a major shake-out yesterday.

The retreat was prompted by disappointing drilling updates from Dana Petroleum, down 106p to 914p, and Tullow Oil, off 1p to 267p, which hit confidence towards the wider sector. Burren Energy slumped 36.5p to 900p, BowLeven lost 17.5p to 287p, Hardman Resour-ces retreated 2.25p to 73p Soco International fell 5p to 818p and Venture Production gave up 4.25p to 512.75p.

Dana said it had plugged and abandoned its Faucon-1 well, offshore Mauritania, after the group found only small amounts of oil there. Dana joint-owned the well with Tullow Oil and Hardman Resources. Separately, Tullow warned it had been forced to abandon two of its wells offshore Angola after failing to strike oil.

The severity of Dana's share price drop yesterday showed that many in the market were betting on Faucon being a winner for the group. Meanwhile, Bridgewell Securities warned that investors were starting to lose their appetite for the sector. "We are seeing a waning of investor interest in the sector. We believe this reflects the premium ratings of many stocks in that universe, the recent run of poor results, the UK tax hike and fund raising fatigue."

In the FTSE 100, BAE Systems dropped 2.5p to 347.75p on the back of a downgrade by Merrill Lynch. The US broker cut back its stance on the defence group to "neutral" from "buy" to take account of troubles at the company's commercial aerospace division. The blue-chip index finished 8.1 points higher at 5,547.9.

Daily Mail & General Trust gained 10p to 756.5p on word that a series of publishing and private-equity houses will on Tuesday submit first round bids for the media group's Northcliffe regional newspaper unit. Dealers reckon among the bidders will be the private-equity firms Lion Capital, 3i, and Kohlberg Kravis Roberts, along with the publishers Trinity Mirror and Gannet of the US. Given the long-term decline facing the regional newspaper industry, analysts believe it is key for existing players to consolidate.

ICI, 1.25p lower at 329.75p, was hit by bearish comments from Citigroup. Downgrading the stock to an outright "sell", the broker warned that operational improvements at the company are likely to be eaten up by rising pension liabilities. Citigroup calculates that ICI's deficit could rise by about £250m in the years ahead. Such a scenario will result in the group taking a hit of £25m at the pre-tax profit line. To account of this factor, the broker has downgraded its earnings forecasts for 2006 and 2007 by 7 per cent.

Jardine Lloyd Thompson rose 21.5p to 506p on rumours the group is considering a merger with its rival Lloyd's insurance broker Benfield, 8.25p higher to 352.25p. Gondola Holdings hit a new high of 345p, up 9p, thanks to Deutsche Bank which started coverage of the recently floated restaurant group with a "buy" stance and 385p price target. It is convinced that the significant discount at which the group trades when compared with its nearest rivals, Mitchells & Butlers and Restaurant Group, is unwarranted. M&B, unchanged at 410p, was once again talked of as a takeover target.

In the retail arena, Matalan dropped 0.5p to 174p as Seymour Pierce suggested that the discount retailer, along with Woolworths, 0.25p higher to 38.25p, and JJB Sports, up 0.5p to 174.25p, are likely to be among the biggest losers in the sector this Christmas. The broker said: "We are hearing from our spies that, although Matalan has had one or two positive weeks due to the cold weather and increased advertising, in general like-for-like sales for the second half are still running at down 9 per cent."

As for Woolworths, Seymour Pierce said it believes the group has been trading below expectations in the run-up to Christmas, and predicted that like-for-like sales are down by about 4 to 5 per cent during this key period. On JJB, the broker warned investors that the sportswear retailer is "still being taken to the cleaners" by its rival Sportsworld.

Homestyle improved 4.75p to 105.75p on hopes that Steinhoff International might take the company private next year. The South African furniture firm ended up with a 60 per cent stake in Homestyle after backing this summer's £100m rights issue at the retailer. The fundraising was done at 55p a share and stopped the company from falling into the hands of its bankers. But since then, Homestyle stock has nearly doubled.

Lower down the pecking order, Virotec rose 0.25p to 27.75p after John Catling, the chief executive of the waste-management firm, purchased 33,000 shares at 27.75p.