Dragon Oil’s performance vis-à-vis the FTSE 350 Oil and Gas Producers Index has been impressive to say the least and with drilling activity building in the 4Q09, investors are giving the share price support ahead of what is expected to be good news flow before the end of the year.
During the opening half of the year Dragon completed two wells, with another two completed during July and August. Four more wells are scheduled before the year end and the final quarter of 2009 is going to be a busy one for Dragon with the addition of two more rigs, a platform-based rig and the Astra jack-up rig.
In terms of operating performance for this years opening half, management’s original target of a 15% increase in production is unlikely to be met. However the company remains confident that annual growth in oil production of 15% for 2009-2011 will be achieved and over this period, Dragon plans to complete 35 development wells.
Average gross production for the opening half of the year of 7.7 million barrels (42,808 barrels of oil per day (bopd)) was 11% higher than the previous corresponding period and the entitlement rate increased by 65% to 5.0 million barrels.
The cost of sales on a per barrel basis for the same period was US$26.45, a modest reduction on the adjusted cost of sales figure for the opening half of 2008 of US$27.85. In terms of operating costs, the cost per barrel came in at US$6.10 which represented a significant decrease over 2008 when the production cost was US$10.22 per barrel.
Higher production levels help lower costs. Depletion and depreciation charges are the lion’s share of cost of sales. For this year’s opening half these charges were US$20.25 per barrel, higher than US$17.63 of the corresponding period in 2008.
Not surprisingly a fall in the price of oil was damaging to Dragon’s bottom line. Net profit fell by 37% to US$105 million however, cash generation remained solid and cash reserves increased by US$156 million to US$875 million leaving the company in a solid financial position. At the current rate of entitlement oil production, reserves of recoverable oil are sufficient for around 30 years.
Dragon is delivering against its strategy in as much that it is accelerating development of the contract area and exploring for new prospects within the contract are. A strategy is being implemented to produce sales gas and new infrastructure has been built to handle the increase in oil production. It is important that the company move forward to meet its objective to diversify its asset base through farm-ins, successful bidding for new blocks, and to seek value adding corporate opportunities. A step increase in the size of the business would reward shareholders.
Clearly bid developments continue to underpin healthy interest in Dragon and we will be following the situation closely. However, even should ENOC pull back on their desire to buy other shareholders out, Dragon retain enormous value as a long play on higher energy prices.
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