For oil producer Dragon Oil (LSE, DGO) this year’s third quarter will live long in the memory for all the right reasons. The group improved its average daily rate of oil production, bringing new wells on line. The group also continued to strengthen its financial position and with further exploration success 2010 looks like being another stellar year.
Whilst gross oil production for the period averaged 46,400 barrels of oil per day (bopd), a marginal improvement on Q3 2009, Dragon Oil’s entitlement barrels rose to 71% in Q3 2010 compared to 54% in Q3 2009. The higher entitlement barrels were due primarily to Dragon committing a greater amount of development capital in Q3 2010.
Dragon’s share of production during the quarter was 32,944 bopd and the group sold 4.5 million barrels of crude oil, 45% more than Q3 2009. The significant step-up was primarily due to the improving economic background although the group’s realised pricing was marginally softer.
Drilling in the quarter saw Dragon complete four wells in the Dzheitune (Lam) Field. Best of the flows were 2,451 bopd and 2,311 bopd, with each of the other holes also flowed oil.
As a reminder Dragon is focussed on drilling off the Turkmenistan coast in the Caspian Sea. There are two fields Dzheitune (Lam) and Dzhygalybeg (Zhdanov) both of which have been proven oil producers from the late 1960’s. At 30 June 2010 Dragon’s reserves and resources stood at 609 million barrels of 2P oil (50% certainty of being produced).
For the remainder of the year Dragon will drill two additional holes in the Dzheitune (Lam) field, and is expecting these holes to come on stream as oil producers and contribute to production growth in 2011.
Dragon has also undertaken significant infrastructure projects to underpin production growth in the years ahead. Phase 2 expansion of the central processing facility (CPF) and associated in-field pipelines is nearing completion. By the year-end the trunkline and expanded CPF will be fully operational and will handle up to 100,000 barrels of liquids per day and up to 220 million cubic feet per day of gas. This facility will remove a major production bottleneck for Dragon while allowing for future growth in oil production.
Gas monetisation continues to be advanced. A 30" trunkline and Phase 2 expansion of the CPF are part of the infrastructure necessary to put Dragon in a position to deliver unprocessed raw natural gas to the Turkmen gas pipeline system. As part of the monetisation process, Dragon is currently evaluating a study to construct an onshore gas treatment plant and is in discussions with the Turkmenistan Government regarding the commercialisation of the natural gas resources. Without a direct market to sell into, this gas would other wisely be flared. Dragon has a resource of 3.1 trillion cubic feet of 2C natural gas.
Capital expenditure for the quarter came in at US$146 million. The cash and cash equivalents at 30 September 2010 were approximately US$1,267 million, which should be sufficient to meet Dragon’s infrastructure and drilling expenditures going forward.
The outlook for 2011-13, the company envisages the drilling of some 40 wells of which five will be appraisal wells. Dragon is targeting 10-15% annual gross field production growth over this period with total capital expenditure for infrastructure estimated at US$600 to US$700 million. Dragon is in an enviable financial position and a billion dollars might prove too tempting for a potential acquirer to ignore.