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Dragon Oil upgraded by Davy after cash and reserves increased

Dublin based broker Davy has upgraded its valuation of Dragon Oil (LON:DGO) following an upbeat operational statement earlier this week.

Dublin based broker Davy has upgraded its valuation of Dragon Oil (LON:DGO) following an upbeat operational statement earlier this week.

The offshore oil producer, with operations in the Caspian Sea, revealed that production ended 2012 on a high, peaking at 73,500 barrels a day in December after it overcame the sand control challenges that had previously constrained output earlier in the year.

Dragon also revealed 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. The company said that it ended 2012 with US$1.7bn in cash.

Davy analyst Caren Crowley increased her net asset value (NAV) estimate for Dragon today to 736p a share from 712p – though she says this NAV is for Dragon’s cash and liquid resources only.

Trading at 580p a share the company’s share price is priced at a significant discount - about 20% - to the broker's NAV estimate.

“The current share price suggests that the market will not pay up for Dragon's $1.7bn in net cash although management commenced a dividend payment in 2011 and executed a value-accretive $200m share buyback programme in 2012,” Crowley said.

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

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 barrels of oil per day by 2015, and then maintain this level of output for at least five years.

The produced oil is currently exported via Azerbaijan, and yesterday it confirmed that it had secured access to this reliable export route for a further two years following an agreement with Socar Trading.

Chief executive Dr Abdul Jaleel Al Khalifa said the company has thoroughly analysed available export routes and it has realised that additional options can be available in two-three years, which may enable it to achieve higher realised prices.

Under the current marketing arrangement, via the Azerbaijan route, Dragon expects realised crude prices to be at a 14-17% discount to Brent.

Jamie Ashcroft
Jamie Ashcroft


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