Bank of America Merrill Lynch today upgraded its outlook on Dragon Oil (LON:DGO), increasing its price objective by 20 per cent to 805p a share.

This punchy target implies almost 40 per cent upside to the current price of 597p.

In a note to clients today analyst Eyad Faraj says Dragon’s production continues to deliver growth and its balance sheet supports further expansion via acquisitions.

Dragon made its first steps down the M&A route last month as it made an early stage approach to buy Cameroon focused explorer Bowleven before dropping its interest shortly after, without making a bid.

"With US$1.8 billion in cash on their books, Dragon Oil presents a healthy debt free balance sheet. Management continues to evaluate M&A opportunities with a target price of US$200-500 million and a minimum size of 50 million barrels of 2P reserves,” Faraj said.

“We highlight the company’s ability to make an acquisition, support development capex and pay out a dividend.”

Furthermore the recent appointment of a veteran exploration team also shows Dragon’s ambition to develop in-house expertise and grow the company further, he added.

Meanwhile Faraj believes Dragon is set to achieve its production growth targets with the asset it already has.

“Underpinned by strong drilling results in 2011, the company produced 61.500 barrels per day, up 30 per cent year-on-year,” he added.

“For 2012, management is looking towards a 12-15 well drilling campaign to deliver 15 per cent growth. 

“With improving drilling results coming from the western part of the Cheleken contract area and infrastructure debottlenecking, Dragon Oil is on course to reach 100kboe/d by mid decade.”

Dragon announced it was in early stage talks with Bowleven almost two weeks ago, but in a brief statement today, it said it was no longer exploring an offer, knocking more than a third off the share price at 88.75p.

Cash-rich Dragon has been on the acquisition trail for some time.

It is currently a single asset company producing over 70,000 barrels of oil a day from the Cheleken production sharing contract in the Caspian Sea.

A major expansion programme aims to grow production beyond the 100,000 barrel a day mark by 2015.

Its current balance sheet is very strong with around US$1.5 billion cash in hand.

Bowleven owns a portfolio of exploration assets in Cameroon and Gabon with 226 million barrels of oil in contingent (P50) resources.

The Cameroon assets are Bowleven’s most advanced. It operates three offshore blocks in shallow water in the Douala basin. 

Bowleven said today that no detailed discussions were held with Dragon Oil and that no due diligence information was provided.         

Dragon Oil (LON:DGO) today reported the completion of its latest development well, Dzheitune (Lam) 28/166.

This is one of many wells being drilled this year as part of Dragon Oil oilfield expansion programme in the Caspian Sea, offshore Turkmenistan.

The latest well was drilled to a depth of 2,810 metres. And it was tested with initial production of 1,975 barrels of oil per day.

Dragon Oil currently produces around 70,000 barrels of oil per day. The group’s major expansion programme is targeting 100,000 barrels a by 2015.

The drill rig has now skidded on to the next slot and it has started drilling another development well, Dzheitune (Lam) 28/169.

Meanwhile Dragon Oil said it is currently completing the Dzheitune (Lam) C/167 and testing results from that well are due in around two weeks time. 

Drilling is ongoing on the Dzheitune (Lam) 13/168 well and an additional perforation on the existing Dzheitune (Lam) 13/144B well is expected to deliver incremental production, Dragon added.

Earlier this month Dragon Oil revealed was mulling over the potential acquisition of Cameroon focused explorer Bowleven.

Bowleven owns a portfolio of exploration assets in Cameroon and Gabon with 226 million barrels of oil in contingent (P50) resources.

The Cameroon assets are Bowleven’s most advanced. It operates three offshore blocks in shallow water in the Douala basin. 

Last month City broker Investec told its clients that Bowleven may need outside help to monetise its resource potential. 

Dragon Oil (LON:DGO) today confirmed that production increased by 30 per cent in 2011 to an average of 61,500 barrels of oil per day.

Furthermore production reached the firm’s 70,000 barrel a day target by mid-December and Dragon achieved an exit rate of 71,751 barrels a day. As a result Dragon generated over US$1 billion in revenues.

This expansion was the result of the thirteen new development wells that were successfully completed in the year, compared to the eleven wells that were initially planned.

"2011 was an impressive year in terms of production and reserves growth,” said chief executive Dr Abdul Jaleel Al Khalifa.

“We succeeded in increasing gross field production by almost a third from the 2010 level thanks to an intensive drilling programme and strong results from the Dzheitune (Lam) West area. 

“Encouraging results from the Dzheitune (Lam) West area have been meeting and at times surpassing our expectations since we entered this previously undrilled area in 2007 and have led to a significant upgrade of our oil and condensate 2P reserves. 

“This year, we were able to achieve a 183 per cent organic replacement of produced reserves, a remarkable achievement.”

Dragon today revealed that year-end oil and condensate reserves increased by 41 million barrels to 658 million barrels. While gas reserves and contingent gas resources were maintained at around 3 trillion cubic feet.

The company spent US$351 million on infrastructure and drilling, compared with US$460 million in the previous year. And the company’s cash balance increased to US$1.52 billion from US$1.16 billion in 2010.

"As a result of strong oil prices and production growth, we have generated over US$1 billion in revenues,  the highest annual earnings ever,” Dr Abdul Jaleel Al Khalifa added.

“This further strengthens our financial position as we continue our growth towards the production target of 100,000 barrels of oil per day and actively pursue acquisition opportunities following the Tunisian farm-in of last year."

Dragon Oil (LON:DGO) today announced the successful testing of its latest development well, Dzheitune (Lam) 13/163.

This is the group’s third successful well this year so far and it is part of a major development drilling programme.

The well was drilled to a depth of 2,703 metres. In initial tests the well flowed at 296 barrels of oil per day. But following a re-completion in different reservoir intervals Dragon achieved an improved production rate of 1,584 barrels of oil a day.

"I am pleased to report that the flow rate from the Dzheitune (Lam) 13/163 development well has improved significantly after we added perforations at different reservoir intervals,” said chief executive Dr Abdul Jaleel Al Khalifa.

“We constantly seek to optimise production from existing as well as new wells using a range of techniques and it is satisfying to see an immediate positive impact on our production."

Dublin based broker Davy says Dragon Oil shares are cheap. Currently trading at 489p, the stock is priced at a 25 per cent discount to the broker’s 632p net asset value, analyst Caren Crowley explained in a note to clients.

“Dragon has a fit balance sheet with $1.35bn in cash at management’s disposal and no debt; and management has demonstrated great execution, delivering more than 25% growth in production in 2011,” the analyst said in a note to clients.

“For 2012 and 2013, Davy is forecasting production growth of 25% and 20% respectively. 

“This compares with management’s guidance of 10-15% growth per annum over the next three years.”

Crowley stressed that Dragon had already exited 2011 with production of 71,751 barrels a day, and it has added a further 5,000 barrels a day in since the start of the year. 

Last Friday Dragon released the results from the first two wells of 2012. 

The Dzheitune (Lam) 13/140A side-track produced at an initial rate of 2,123 barrels a day, while Dzheitune (Lam) A/165 well was completed as a dual producer and tested at a combined rate of 2,272 barrels.

Following that result Davy said that Dragon’s target of completing between 15 to 20 new wells each year looks increasingly comfortable.

The Dzheitune (Lam) 13/140A side-track produced at an initial rate of 2,123 barrels a day, while Dzheitune (Lam) A/165 well was completed as a dual producer and tested at a combined rate of 2,272 barrels.

The Iran Khazar rig has been mobilised to the Dzheitune (Lam) C platform and has spudded the Dzheitune (Lam) C/167 development well, Dragon said.

It also revealed it exited 2011 with a production rate of 71,751 barrels of oil per day.

Chief executive Dr Abdul Jaleel Al Khalifa said: "I am extremely pleased to announce a successful start to the 2012 Cheleken drilling programme. 

“We have already completed and tested one development well and one sidetrack well, and drilling from the Dzheitune (Lam) C platform has commenced on schedule. 

“We exited 2011 at the production rate of 71,751 bopd, ahead of our 70,000 bopd target, which was reached in mid-December. 

“The good news reported today puts us in a strong position to continue to deliver solid results from the Cheleken Contract Area as we progress through the year."

---Adds broker comment---

Dragon Oil (LON:DGO) today reached a significant milestone in its ongoing expansion as its latest well brings total daily production up to the 70,000 barrel mark.

This morning it revealed that the Dzheitune (Lam) 28/164 development well has now been completed. Testing showed an initial production rate of 3,018 barrels of oil per day.

"Having successfully put on stream the Dzheitune (Lam) 28/164 well, we reached the production rate of 70,000 barrels of oil per day,” said chief executive Dr Abdul Jaleel Al Khalifa.

“This solid progress gives us further comfort in achieving the target gross production growth of above 25 per cent for 2011."

This is part of the group’s multi-rig oilfield development which aims to increase production to over 100,000 barrels of oil per day (bopd) by the end of 2015.

The plan targeted a 25 per cent lift in production during the current year. In the coming years it expects to increase annual production by between 10 and 15 per cent each year until 2015.

“We like Dragon Oil,” said Davy analyst Caren Crowley.

“It is undervalued despite management having more than once revised upwards its production guidance in 2011.” 

The stock is trading at a 26 per cent discount to Davy’s 632p net asset value.  Furthermore the firm’s gas volumes, which are currently not being marketed, could be worth around 70p a share, the analyst added.

Crowley says the stock’s valuation looks cheap and Dragon’s balance sheet is strong. “More than one-third of Dragon's share price is net cash,” she adds.

“The strength of the balance sheet is very friendly for deals and further distribution of income to shareholders. 

“We expect more deals, and if the financial markets remain nervous, the opportunities should improve.”

This morning Dragon also reported that the NIS rig has now skidded to the next slot and the Dzheitune (Lam) 28/166 development well has been spudded.

Elsewhere the Iran Khazar rig is currently drilling the A/165 well. And the 13/163 well has encountered low oil producing zones and is being completed in shallower reservoir intervals. A sidetrack of the 13/140 well is currently being carried out by Rig 40.

This morning it revealed that the Dzheitune (Lam) 28/164 development well has now been completed. Testing showed an initial production rate of 3,018 barrels of oil per day.

"Having successfully put on stream the Dzheitune (Lam) 28/164 well, we reached the production rate of 70,000 barrels of oil per day,” said chief executive Dr Abdul Jaleel Al Khalifa.

“This solid progress gives us further comfort in achieving the target gross production growth of above 25 per cent for 2011."

This is part of the group’s multi-rig oilfield development which aims to increase production to over 100,000 barrels of oil per day (bopd) by the end of 2015.

The plan targeted a 25 per cent lift in production during the current year. In the coming years it expects to increase annual production by between 10 and 15 per cent each year until 2015.

This morning Dragon also reported that the NIS rig has now skidded to the next slot and the Dzheitune (Lam) 28/166 development well has been spudded.

Elsewhere the Iran Khazar rig is currently drilling the A/165 well. And the 13/163 well has encountered low oil producing zones and is being completed in shallower reservoir intervals. 

A sidetrack of the 13/140 well is currently being carried out by Rig 40.

"Production since the beginning of the year has been strong, having been supported by a significant number of wells already put into production this year, and is expected to continue to be solid with three more wells remaining to be completed in 2011,” said chief executive Dr Abdul Jaleel Al Khalifa.

“As a result, we anticipate this year's gross production growth to be somewhat above 25 per cent with a robust exit rate of approximately 70,000 barrel of oil per day.”

In the three months ended September 30, Dragon Oil sold 2.7 million barrels of crude. That was however 40 per cent lower than the same period last year, in which ii sold extra oil inventories through a temporary agreement with Iran. In the past quarter 95 per cent of the group’s oil production was exported via Baku, Azerbaijan.

The group’s major expansion programme on the Cheleken contract area continued, with US$99 million spent in the quarter and five production wells brought online.

Dr Abdul Jaleel Al Khalifa added: "Progress with infrastructure projects is gathering pace and more contract awards are expected in the next few years as we invest to maintain our broad medium-term objective of an average 10-15 per cent gross production growth per annum over the coming three years, 2012-14.”

Aside from the growing scale of Cheleken, Dragon Oil has also expanded its operations with the acquisition of a 55 per cent stake in the Bargou exploration permit, offshore Tunisia. And the group intends to seek further acquisition opportunities.

"The farm-in agreement for the Bargou Permit has added an interesting exploration play to our excellent producing Cheleken asset. 

“With this farm-in and the capital available to support such projects, we have sowed a seed to create a diversified and balanced portfolio of exploration and development assets. 

“We continue to search for other exploration and development opportunities in the regions of our interest, including Africa, Central Asia, the Middle East and selectively south-east Asia."

Through the deal Dragon Oil can earn a 55 per cent stake in the Bargou exploration permit, by paying 75 per cent of the drilling costs for the Hammamet West-3 exploration well which is expected to be drilled next year.

The acquisition is part of the group’s plan to diversify and build a multi-asset oil company.

At the moment Dragon Oil’s main focus is on its flagship assets, two oilfields on the Cheleken contract area in the Caspian Sea, where it is currently undertaking a major work programme with around 13 wells expected to be complete this year. 

Chief executive Dr Abdul Jaleel Al Khalifa said the deal offers the groups exploration ‘upside’ though a number of independent prospects and leads.  

 “This farm-in is part of our plan to build a portfolio of development and exploration opportunities in order to grow the Group into a multi-asset company,” said Dr Abdul Jaleel Al Khalifa

“We believe our experience offshore Turkmenistan with complex and challenging reservoirs will be useful in better understanding, appraising and developing the Hammamet West Oil Field.  We look forward to the opportunity of working in Tunisia,” he added.

"We continue to search for new projects where we can deploy our technical and operational expertise in key regions of interest, including Africa, Central Asia, the Middle East and selectively south-east Asia."

Bargou spans 4,616 square kilometres in the Gulf of Hammamet, Mediterranean Sea. It hosts a number of offshore exploration prospects and leads in shallow waters, depths of around 50-100 metres.

The first well will be drilled in the Hammamet West oilfield, in the northern part of the Bargou permit, where 3D seismic data has previously been gathered in 2009 and 2010.

Through today’s deal Dragon will pay 75 per cent of the initial well costs. If the well costs exceed US$26.6 million however the remaining costs will be split on a pro-rata basis.

Should the exploration work prove successful and the Hammamet West project moves into the development phase then Dragon Oil will become the operator and it will carry Cooper Energy for a further US$5 million of its costs.

Subject to the completion of the farm-in deal Dragon Oil will be the largest stakeholder in the project with a 55 per cent participating interest, while Cooper Energy will have a 30 per cent stake and fellow ASX listed oil firm Jacka Resources (ASX:JKA) will own the remaining 15 per cent.

Dragon Oil (LON:DGO) this morning announced the completion for its latest development well on the Cheleken contract area in the Caspian Sea.

The Dzheitune (Lam) 13/160 development well, which was drilled by Rig 40 to a depth of 2,900 metres, achieved initial test results of 1,257 barrels of oil per day.

"Dragon Oil has successfully completed and conducted initial testing of the Dzheitune (Lam) 13/160 well,” said chief executive Dr Abdul Jaleel Al Khalifa. “The results are in line with expectations and similar to rates seen from single completion wells on the Dzheitune (Lam) 13 platform. 

“Four more wells remain to be completed by the end of the year and we anticipate being able to publish results from the Dzheitune (Lam) 28/161 well drilled by the NIS rig within the next few weeks."

Next the rig will drill the Dzheitune (Lam) 13/163 well, after it was ‘skidded’ to the next slot on the platform. Meanwhile drilling work with the NIS and Iran Khazar rigs continues on the Dzheitune (Lam) 28/161 and A/162 wells, respectively.

The well was tested at an initial rate of 2,223 barrels of oil per day, the company said. This latest development well, which is one of thirteen being drilled this year, was drilled to a depth of 2,900 metres. 

"I am pleased to report that Dragon Oil has successfully completed and conducted initial testing of the Dzheitune (Lam) B/159 well,” said chief executive Dr Abdul Jaleel Al Khalifa.

“We anticipate being able to complete five more wells before the year-end given the recent addition of jack-up slots on the Dzheitune (Lam) A platform and availability of the Iran Khazar rig. 

“That will give us a total of 13 new development wells within the 2011 drilling programme, out of which eight have already been completed."

The Iran Khazar drill rig has now been mobilised from the Dzheitune (Lam) B platform to the Dzheitune (Lam) A, where a number of jack-up rig slots have recently been added.

The next well will be the Dzheitune (Lam) A/162 development well, which will be followed by a workover of the Dzheitune (Lam) A/127 well.

Meanwhile two other wells, Dzheitune (Lam) 28/161 and 13/160, are currently being drilled and they are expected to come online in the coming weeks.