Dragon Oil’s new Tunisia acquisition is a good fit, says Davy analyst

Dragon Oil’s (LON:DGO) new farm in acquisition in Tunisia looks a ‘good fit’ as it delivers a possible near-term development project in water depths that Dragon is familiar with operating in, says Davy analyst Caren Crowley.

This morning the group revealed that it is acquiring new exploration acreage offshore Tunisia, through a farm-in deal with Australian firm Cooper Energy (ASX:COE).

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. 

The Davy analyst also highlighted that the deal also offers exploration upside in the medium term and that Dragon Oil has struck good terms for the acquisition. “Moreover, management has cleverly negotiated operatorship and a cap on Dragon's entry costs for a majority interest,” Crowley added.

While the analyst has taken a positive view on the deal she doesn’t yet see the new acreage being material, compared to the Cheleken assets.

“We are not changing our valuation without understanding the licence's fiscal conditions but at this time, we feel that any option value for the Tunisian acreage will be immaterial in context of its 600 million barrel Turkmeni asset,” she said.

This morning 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.