Dragon Oil: Record profits, maiden dividend and still plenty left in the tank

THE step change in Dragon Oil’s (LON:DGO) daily production has yet to be fully appreciated by the market, according to the company’s chief executive, Dr Abdul Jaleel Al Khalifa.

Dragon’s maiden dividend of 14 cents a share hogged the early headlines, while its impressive blue-print for future growth had all the analysts chattering. 

It includes an aggressive drill programme, which will entail the company spending as much as US$700 million in the next three years.

This tended to overshadow the more workaday news as over the space of the year Dragon has raised output by almost 10,000 barrels of oil a day to 57,013. 

“At the production level we had in January and December – this is quite a leap which hasn’t been fully appreciated by the market,” Khalifa told Proactive Investors. 

“It definitely sets Dragon Oil at a different level than before.”

Another development that could push Turkmenistan-focused Dragon higher up the value chain is a significant acquisition. 

Reports suggest the company could afford to spend as much US$500 million adding to its already sizeable reserve base, and that it is targeting assets in west Africa.

The Dragon chief executive wouldn’t be drawn on the exact location of the assets being sought, though he described the US$500 million as an artificial valuation “cap”.

With US$1.3 billion of cash on the balance sheet, Dragon could actually afford to be more ambitious than has been reported.  However, Khalifa wouldn’t actually reveal how much he has to spend.  

“It (the $500 million figure) has been picked up because if you have a balance sheet of one billion dollars plus you can easily take 500 (million), you can easily finance with additional money,” the Dragon chief executive explained. “500 (million) is not a cap. I don’t want to cap it with a money value.”

He said a material addition to the reserve base would be in the order of 50-100 million barrels of oil, and revealed the company was also assessing opportunities in south-east Asia and the Middle East.

So far the company has failed to come up with a method of monetising its huge gas reserves which are put at 1.6 trillion cubic feet. 

It is currently flared rather than sold and Dragon Oil has been seeking an agreement with the Turkmen government to sell its gas. However Khalifa was not optimistic of a deal any time soon.

“We are meeting with them, we are trying to finalise a position with them (the government). It doesn’t seem to be easy. It will take some time,” Khalifa said.

Earlier Dragon reported a major uplift in profits, boosted by rising production and strong crude oil prices.

Net profit climbed 49 per cent to US$386 million on the back of a 25 per cent rise in revenues to US$780 million. 

“This is a very good set of numbers for what was a trying year for the group,” said Caren Crowley of Irish broker Davey.

In the period it generated almost US$600 million, providing it with more than enough cash to cover the payout.

However, Khalifa is maintaining a flexible dividend policy. “It depends on acquisition size and the cash and of course other parameters,” he said. “We don’t want to commit to growth or an increasing yield at this time.”

Looking ahead, Dragon plans to sink 11 wells in 2011 and a total of 40 by the end of 2013, including five appraisal holes.

However there may be an acceleration in the rate of drilling if the company is able to secure an additional rig.

Through this expansion programme it hopes to increase production by 10-15 percent in 2011 and by another 10-15 percent in each of the subsequent years.

The company will also carried out infrastructure projects, with estimated cost (capital expenditure) of around US$600 to 700 million, US$250 million of which is earmarked for 2011.

“It is an ongoing expansion process that ensures the steady growth of production that will hopefully meet our targets if not exceed them,” Khalifa said.

The shares  were up 18.5 pence at 577 pence by 2pm. They have advanced almost 30 per cent in the last three months giving the company a market value of £2.9 billion and putting it in the running for promotion to the FTSE 100.

“Despite plenty of background activity, there was no real visible progress on gas monetisation and asset diversification,” concludes Vugar Aliyev, oil and gas analyst at City broker Matrix. 

“In general, these numbers are positive, and we would expect the shares to be stronger today, primarily driven by the dividend announcement and strong production performance in January 2011.”