Specialist oil and gas exploration and production companies such as Dragon Oil (LON:DGO) provide greater leverage to the price of crude oil than fully integrated energy companies such as BP and Royal Dutch Shell. Earnings of the industry heavyweights have been hamstrung by weak downstream operations… something alien to Dragon Oil.
Instead, Dragon has been able to focus on what it does best boosting its production profile through its expertise with the drill bit. Indeed during 2009, the Turkmenistan focused company increased average daily output by 9% to 44,765 barrels of oil per day completing eight wells with two rigs in full time use.
Unsurprisingly 2009 revenue was hit by lower oil prices and came in 12% below the 2008 level at US$624 million. Pre tax profit for the year fell to $259 million in 2009 from 2008’s US$369 million from as the labouring price of crude oil (US$62 per barrel realised versus US$91 last year) outweighed a 40% increase in volumes of crude sold.
Given Dragon’s plans for the years ahead there is every chance that the share price rally of 2009 may well continue through 2010. The company is aiming to complete another 11 wells this year and for the period from 2010 through to 2012, Dragon anticipates completing up to 40 new wells to support its targeted production growth.
Dragon is also looking to beyond oil to when it comes to underpinning earnings in the years ahead. At present the company is producing a significant amount of gas as a bi product of its oil production however, due to a lack of infrastructure, remains unable to commercialise. With another fillip for earnings in the offing, the company is pressing ahead with the construction of a gas pipeline and will build an onshore gas treatment plant provided negotiations with the Turkmen government proceed as planned.
Whether this provides an immediate spur for earnings is doubtful. We remain bullish on the long term prospects for the price of natural gas however technological advances have opened up supply and with economic data remaining sketchy we may have to wait a little while before we see a recovery in gas prices.
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Dragon is also actively looking to expand its geographic footprint beyond current territories with parts of Central Asia, the Middle East and Africa being targeted. The company is certainly not constrained by its finances in this regard… cash at the year end stood at a cool US$1.2 billion.
Another factor which could provide the catalyst for a higher share price would be further potential takeover activity. Majority shareholder Emirates National Oil Company (ENOC) recently sniffed out a potential bargain, offering shareholders 455p per share.
The offer though was rebuffed and, as Dragon’s current share price suggests, the group’s net asset value will only increase and possible suitors will have to sharpen their pencils before making any future approach. ENOC’s £2.36 billion offer for a company with Dragon’s cash pile and a rapidly escalating, highly profitable production profile, is somewhat chancing it. Despite ENOC's seemingly emphatic claims to the contrary, the M&A game is such that a higher offer could well be on the cards... we will continue to watch the space with interest.
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Dragon Oil plc is engaged in exploration, development and production of oil and gas in Turkmenistan, Yemen and Tunisia. The Company holds a 100% interest in the Cheleken Contract Area, offshore Turkmenistan. The Cheleken Contract Area covers approximately 950 square kilometers (235,000 acres) and comprises two offshore oil and gas fields, Dzheitune (Lam) and Dzhygalybeg (Zhdanov). As of 31 December 2011, the contract area contained oil and condensate 2P reserves of 658 million barrels and contingent resources of 88 million barrels, 1.5 trillion cubic feet of 2P gas reserves and 1.4 trillion cubic feet of gas contingent resources. During the year ended December 31, 2011, it completed 13 wells, and installed a third wellhead and production platform, the Dzheitune (Lam) C. In October 2011, Dragon Oil signed a farm-in agreement with a wholly owned subsidiary of Cooper Energy Limited for a 55% participating interest in the Bargou Exploration Permit, offshore Tunisia. more »
1 Comment on this Article show/hide all
a very optimistic report.