Dragon Oil: solid balance sheet underpins increasing profile in London

Dragon Oil Plc (LSE: DGO) is an innovative international oil and gas development and production company. Dragon holds 100% interest in and is the operator of the Production Sharing Agreement for the Cheleken Contract Area (‘PSA’) which is in the Caspian Sea, offshore from Turkmenistan in Central Asia. The PSA has a 25-year term, expiring in May, 2025, with the exclusive right to negotiate for an extension of not less than ten years.

Approximately 52% of Dragon Oil’s equity is held by the Emirates National Oil Company (ENOC) LLC, a company ultimately owned by the Government of Dubai.

Based on the latest reserves certification on the Cheleken Contract Area by an independent energy consultant, the remaining proved and probable recoverable reserves as at 31 July 2009 on a working interest and entitlement basis were 625 million barrels and 282 million barrels respectively, based on assumptions including extension of the terms of the PSA for the additional ten years. In addition, there is an estimated gross contingent gas resource of approximately 3.1 trillion cubic feet in the Cheleken Contract Area. The development and commercialization of gas resources from the Cheleken Contract Area remains a top priority and Dragon Oil expects discussions with the Turkmenistan government regarding the gas sales agreement to progress during 2010.

In January 2010, Dragon Oil reported an average daily production rate increase of 9% in 2009 over 2008 and landmark production of 50,000 bopd achieved at the turn of 2009/2010. Dragon Oil plans to complete up to 11 wells in 2010 for a total of up to 40 development wells, including five appraisal wells, during 2010-12, targeting an annual production growth of 15% in 2010 and 10% to 15% on average in 2011-12. It is also anticipating a bullish outlook for the next three years due to:

1.    Strong commodity prices;
2.    A cash balance of more than US$1.1 billion;
3.    No corporate debt.

While Dragon Oil is confident of the long-term potential and value of its existing Cheleken asset, the plans for the future also include looking at other projects to expand and diversify Dragon Oil's asset base. In line with this strategy, in December 2007, Dragon Oil purchased their minority interests in Blocks 35 (10%), 49 (up to 10%) and R2 (10%) in the Republic of Yemen from Virgin Resources Limited.  Dragon Oil’s stated strategy is to find assets that add competitive advantage and provide a strategic fit with the group and this will be a key activity during 2010.

Financial

Despite weaker crude demand, Dragon Oil achieved a 40% increase in sales volumes in 2009. For the full year 2009, lower oil prices reduced revenues 12% to $623.5 million versus 2008, while profits declined 30% to $259 million and earnings per share slid to $50.3 cents from $71.8 cents. Oil prices had hit five year lows at the end of 2008.

Capital expenditure on infrastructure for 2010-2012 is estimated at $600-700 million, including $250 million allocated for 2010 projects, which will include building platforms and upgrading the central processing facility. Expenditures on drilling and infrastructure projects in Turkmenistan for 2009 was $317 million, of which 50% was attributable to drilling and the remaining balance spent on infrastructure.

Two Turkmenistan fields

Until 1991, Turkmenistan was a constituent republic of the Soviet Union. Of the five nations surrounding the Caspian Sea  – Azerbaijan, Kazakhstan, Iran, Russia and Turkmenistan, the hydrocarbon riches of Turkmenistan remain the last great prize, sought and fought over by Russia, China, Iran and Western investors.  Western energy companies attracted to Turkmenistan will need to do their homework before jumping in, which gives Dragon Oil a competitive advantage as a long established player.

Dzheitune (Lam) is one of Dragon Oil’s two oilfields in the Cheleken Contract Area in the Caspian Sea, offshore Turkmenistan. Recent drilling results include the Dzheitune A/142 well was drilled by the Iran Khazar rig, to a depth of 3,961m. The well tested at a combined rate of 2,103bopd with the short string contributing 1,180bopd and the long string contributing 923bopd. Rig 40 drilled the Dzheitune (Lam) 13/143 well to a depth of 3,450m. The well tested at a combined rate of 2,168bopd with the short string and the long string contributing 1,144 bopd and 1,024bopd respectively.

The Iran Khazar rig has been repositioned to work-over a well on the same platform in order to enhance its production, while Rig 40 will shortly commence drilling the Dzheitune (Lam) 13/144 well, from slot 1 on the  Dzheitune (Lam) 13 platform. Dragon Oil expects to further develop the value of its assets in Turkmenistan through gas monetization, CEO Jaleel Al Khalifa of Dragon Oil stated in a recent press release.

Summary

Dragon Oil has come through the economic crisis of 2008 & 2009 virtually unscathed.  A failed takeover attempt by the company’s largest shareholder in 2009 was a distraction for investors, but the company’s management has remained committed to extracting maximum value from its prized assets in the Caspian Sea with a focus on growing production and plans to monetize its considerable gas resources.  In 2010, Dragon Oil will be keen to diversify further to build a balanced asset portfolio. Dragon Oil has the firepower to expand through acquisitions thanks to its strong cash flow and exceptionally strong balance sheet carrying $1.1 billion of cash.