Dragon Oil paying its first dividend

With a rising oil price underpinning profits it comes as little surprise that oil producer Dragon Oil has recently announced that it is paying its first dividend as it becomes a more mature business. Future plans include acquisitions to become more diversified, boosting oil production in the Caspian Sea and the commercialisation of the group’s gas reserves.  

With a cash balance of US$1.3bn, no debt and net profit of US $386m in 2010 it is clear that Dragon Oil has significant financial strength. This means that even with a significant capital investment commitment the group is able to start paying dividends.

For stock market companies that have developed from minnows such a move is a sign that they have made it to the ranks of established and credible listed firms. However, it is also fair to say that Dragon Oil still has a fair degree of risk attached to it given that it is solely focused on the Caspian Sea.

From this geographic base Dragon Oil managed to produce 47,211 barrels of oil per day in 2010 which was a 5% increase on 2009. Production at the end of 2010 came in at 57,000 bopd (a record) illustrating how output has grown throughout the year. 

Going forward the aim is to increase this with further with guidance for a 15% rise in 2011. The guidance over the period 2011 to 2013 remains for annual average production growth of 10%-15%.

In 2010 capital expenditure came in at US$460m (compared to US$317m in 2009) with 55% of this spent on infrastructure and 45% spent on drilling. Despite this expenditure cash balances rose by 17% due to strong cashflow of $595m which was up 29% on 2009. 

2010 featured eleven wells which compares to an eight wells in 2009.  In 2011 the plan is to complete 11 wells and then between 2011 and 2013 the aim is for 40 development wells which include five appraisal wells. Between 2011 and 2013 capital expenditure is set to come in between US$600m and US$700m with around US$250m of this scheduled for 2011.

A key objective for Dragon Oil is gas monetisation to avoid flaring gas and to supply unprocessed gas directly to the Turkmen system. However, this is dependent on the completion of compressor facilities by the Turkmenistan Government. Discussions with the Government on gas monetisation opportunities are continuing.

On the marketing front the Caspian Sea presents its own challenges as although oil rich it is not easy to get the resource out. Previously Dragon Oil had looked towards Iran but is increasingly looking to export through a pipeline going through Baku, Azerbaijan. In 2009 this route took 10% of output but this has risen to 60% in 2010 and is currently at 100%.

Turning to the financials and unsurprisingly 2010 was a robust year for the group with profits up by a half. Turning to revenue first, though, and this rose by 25% as crude oil prices rose 17% and sales volumes rose by 3%. 

Operating profits rose by 55% as the sales boost filtered through and costs remained under control. Lower financial income due to low interest rates and a higher tax charge meant that net profit rose by 49% to $386m.  With production at Dragon set to see good growth in 2011 and crude oil prices looking buoyant revenues are likely to see another robust gain in the current year.

This report was produced by Senior Research Analyst, Andrew Latto