Fat Prophets take profits
Dragon Oil (DGO) recently announced the completion of another well in the current work-over programme. Since our last review (FAT55) the company has also made solid progress with current drilling activity, and is nearing completion on a seismic survey of the company's primary production and exploration area offshore from Turkmenistan. We believe recent successes are an endorsement of the company's active exploration program, which is bolstering reserves, and underpinning future production growth.
| "We believe recent successes are an endorsement of the company's active exploration program, which is bolstering reserves, and underpinning future production growth. " |
Over the past two months DGO has traded in a range between 50p and 59p. This period of consolidation follows a powerful advance during October which saw the stock reach a six and a half year high of 60p.
Dragon's primary exploration and production area is the Cheleken Contract Area offshore of Turkmenistan in the Caspian Sea. The company estimates its entitlement to reserves in the area at 356 million barrels of oil and 3.44 trillion cubic feet of gas. In addition to these strong reserve numbers, DGO remains on target to increase production by the end of this year to 20,000 barrels of oil per day (bopd). We believe these figures underlie Dragon's significant leverage to robust oil prices.
Earlier in the month, Dragon completed the LAM 21/106 well despite encountering technical problems in the first quarter of the year. We were pleased to see that the well was tested at a rate of 2,652 bopd. This follows the previously announced completion of the LAM 21/109 well which tested at 5,330 bopd.
Immediately after the completion of LAM 21/106, DGO moved their jack-up rig to the refurbished LAM 10 platform to begin further exploration. We are encouraged by these results as they offer a low cost methodology to increase production in the naturally declining Cheleken area.
We are eagerly anticipating the results from Dragon's 3D seismic survey in the Cheleken area. The findings are expected to be available in the first quarter of 2005, and will allow Dragon to identify additional undersea drilling targets. We expect the survey will facilitate a reserve upgrade in an area where DGO is already enjoying much success.
Dragon recently named Mr Essa Almulla as the new Chief Executive Officer. Previously, Mr Hussain M. Sultan had been acting as both chairman and CEO, however we are pleased that these roles now being split - a sign of sound corporate governance. Mr Almulla has been with Dragon since 1999 when he joined as an advisory consultant to the then CEO. He later became an executive director in March 2002.
In our opinion Dragon's active exploration, anticipated year-end production target and completion of the Cheleken seismic survey all bode very well for short term earnings growth. We remain confident that the company can double production to 40,000 bopd in the next five years. We also believe that the strong oil market will continue to underpin strength in the oil and gas sector providing additional support to DGO. On this basis we consider Dragon's prospective price earnings ratio of 7 times as undemanding.
However, although the company's longer-term outlook remains positive, we are mindful that DGO has risen by as much as 50 percent over the past four months. As such, further consolidation cannot be ruled out while the stock develops a base and regains upward momentum. With DGO now trading near recent highs, we believe it is prudent to reduce exposure at current levels. Accordingly, we recommend Members sell half their holding around 58.5p. Over the longer-term we still believe that Dragon has value to offer, and the stock will continue to be covered in the Fat Prophets Portfolio.
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As at the date at the top of this page, Directors and/or associates of the Fat Prophets Group of Companies currently hold positions in Avexa (AVX), Evolution (EVN), Cerro Resources (CJO), Energy Action (EAX), Mt Isa Metals (MET), Telstra (TLS), Woodside Petroleum (WPL), ANZ (ANZ), Austar (AUN), Carsales.com (CRZ), Gold Road (GOR), IOOF Holdings (IFL), Magellan Financial group (MFG), Paladin Energy (PDN), QBE Insurance (QBE), Platinum Australia (PLA), Datasquirt (DSQ), Hodges Resources (HDG), Newcrest Mining (NCM), Oil Search (OSH), Zambezi Resources (ZRL), Auroa Minerals (ARM), Billabong (BBG), Pioneer Resources (PIO), Runge (RUL), Westpac (WBC). These may change without notice and should not be taken as recommendations.