Market Report: Dana surges as M&A spotlight falls on oil firms

Dana Petroleum, up 5.72 per cent or 73p at 1,350p, was strong yesterday as the market turned its mind to the potential for mergers and acquisitions in the oil and gas exploration and production space.

Following recent bid activity in other, undervalued sectors, traders focused on the severe de-rating in oil and gas E&P stocks following recent weakness in commodities prices. Dana, for example, has lost almost a quarter of its value over the past three months as the oil price came off record highs.

A note from Goldman Sachs, in which the broker added Dana to its conviction "buy" list, underscored the general feeling in the market. "Along with other companies in the E&P space, we believe that at these price levels, Dana could be a potentially attractive acquisition target for the right buyer," said the broker.

One market source highlighted Cairn Energy, up 73p at 2,728p, and Tullow Oil, up 8p at 741p, as other likely targets. "The broad sector is on a firmer footing because the oil price is better, but there are also very real possibilities for activity," said another market source, pointing out that as oil majors hold back from replacing reserves, they will be keener to buy developments "off the shelf" by acquiring E&P companies.

Meanwhile, the miners dominated the FTSE 100 leaderboard. "We ... believe [Xstrata's bid for Lonmin] will renew investor focus on potential [merger & acquisition] activity in the sector given the de-rating the sector has recently undergone during a time of record cash flows," said Goldman Sachs as the Eurasian Natural Resour-ces Corporation raced to first place on the senior index, up 100p at 1,117p. Antofagasta, at fourth place, was up 24p at 566.5p and Ferrexpo climbed to 276p, up 9.25p.

Lonmin too was firm, up 1p at 3,427p. The platinum miner told shareholders to "take no action" in respect of Xstrata's 3,300p-per-share offer. Traders said sentiment in the market was in favour of the bid while Credit Suisse, which weighed in on the approach last night, wondered why Xstrata, up 32p at 3,198p, had picked Lonmin. "We are sceptical of the Lonmin deal and struggle to see why management did not go after Freeport Copper instead," said the broker.

Overall, the FTSE 100 was down 8.6 points at 5,477.5 as early losses on Wall Street combined with a weak real estate sector to offset the impact of the strength among commodity stocks and in the banking sector. The Bank of England's decision to keep UK interest rates on hold at 5 per cent was in line with market expectations and had little effect on the session. Elsewhere, the FTSE 250 was down 42.8 points at 90,88.7.

On the FTSE 100, better-than-expected results from Barclays, up 6p at 375p, lifted the banking sector. Lloyds TSB, which was the focus of some vague stake building rumours, gained 4.5p to 318.75p and Standard Chartered climbed to 1572p, up 30p.

The insurance sector was mixed after Friends Provident, down 4.5p at 87.2p, issued disappointing results and said that it had failed to find a buyer for Lombard, its wealth-management business. Prudential was down 6p at 576p but Legal & General, in which traders cited a bear squeeze, was up 3.2p at 110.8p. Standard Life was up 4.75p at 248p.

Real estate stocks were hit by disappointing results from Hammerson, which was down 24p at 965p.

Liberty International, which was cut to "sell" by Deutsche Bank after its results from earlier this week failed to impress the broker, was down 48.5p at 851.5p. Marks & Spencer was down 1p at 283p as bid hopes faded after it emerged that instead of the Halley family or Warren Buffet's Berkshire Hathaway, the Wellcome Trust had picked up a 2.5 per cent stake in the retailer.

On the FTSE 250, Barratt Developments rose 7.5p to 119.5p and Persimmon climbed to 349p, up 9.5p. Traders attributed the strength to better sentiment in the broader market, noting that there was no specific positive newsflow around the leading stocks in the sector.

Around Debenhams, a downgrade from Altium Securities erased the impact of bid hopes. The retailer was weaker by 1p at 56.5p after the broker downgraded its rating for the stock to "hold" from "buy". "The share price appreciation of the past two days, driven... in part by bid rumours, has taken Debenhams beyond our price target," said Altium.

Among smaller companies, Collins Stewart was up 2.5p at 102.5p as traders speculated about the suitor's identity. The brokerage revealed an offer approach on Wednesday, which most market sources attribute to a foreign player keen to enter the UK market. Australia's Macquarie and Religare, the Indian financial services group which bought London-based Hitchens, Harrison & Co earlier this year, were pegged as likely predators. Traders said the final take-out price may be 130p or higher.