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UPDATE: Dragon Oil shares advance after encouraging production update

Caren Crowley, analyst at Dublin based broker Davy, described it is as a strong update revealing a better-than-expected cash position, the re-iteration of production guidance and reserves growth.
UPDATE: Dragon Oil shares advance after encouraging production update

---Adds broker comments and share price details---

Dragon Oil (LON:DGO) shares advanced over 2% this morning as it revealed that its operations in the Caspian Sea ended 2012 on a high.

Over the course of the year the company had to overcome operational challenges, mainly constrained production due to sand control issues in the wells, but it was still able to mark up a 10% increase in daily production.

This morning it said that average production for the whole year was 67,600 barrels of oil per day (versus 61,500 barrels of oil per day in 2011), but by December the rate peaked at 73,500  barrels of oil per day (bopd).

The improvement is a result of Dragon’s extensive drill programme, which continues this year. In 2012 it drilled 15 wells.

The drilling also led to a significant uplift in reserves - with 180% reserves replacement in the year - as it ended the year with 677mln barrels of oil and condensate reserves.

Dragon’s capital expenditure bill was US$382mln for the year and it ended 2012 with US$1.7bn in cash.

"Every year brings new challenges. In 2012, it was the sand control issues that we had to handle on an immediate basis,” said chief executive Dr Abdul Jaleel Al Khalifa.

“However, having mobilised all the necessary resources, procured and installed the required sand screens, we were able to restore production to normal levels and achieve a credible 10% increase in the average gross production.

“We have learnt from this experience. It is a success story for us to have been able to deal with the problem and to grow production beyond that impact.

Dragon also expanded its asset portfolio in 2012 with the addition of exploration projects in Iraq and Afghanistan.

With the group’s continued expansion it expects to increase production again in 2013, by an estimated 10-15%, based on plans to drill a further 13-15 wells this year.

But over the course of the next three years it plans to drill up to 55 wells. As a result it aims to establish total production of around 100,000 bopd by 2015, and then maintain this level of output for at least five years.

Caren Crowley, analyst at Dublin based broker Davy, described it is as a strong update.

“There are positive surprises in this morning's statement, including a better-than-estimated cash position and growth in reserves while the re-iteration of production guidance is pleasing as are year-end production rates.

“These positive surprises, coupled with the possibility of further share buybacks, should help the stock trade up this morning with a marketing agreement expected shortly.”

Meanwhile Oriel Securities’ analyst Arpit Harbhajanka is expecting Dragon Oil share price to improve with future updates as the company shows it is on-track to achieve production targets, thus narrowing the current discount to asset value.

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