Funding secured
Earlier this week, Dragon Oil (DGO) confirmed that they had received a preliminary approach that could have resulted in a partial takeover offer. However, yesterday management confirmed that these discussions had been abandoned. These developments have done nothing to dampen our enthusiasm about Dragon's future prospects. We remain confident that the successful development of production and exploration areas offshore from Turkmenistan will underpin future earnings and reserves growth.
| "We remain confident that the successful development of production and exploration areas offshore from Turkmenistan will underpin future earnings and reserves growth." |
DGO has performed impressively since our last review with upward momentum returning. This week's preliminary offer propelled the shares to an all-time-high of 111p. As a result the shares broke out from a downward trend channel. The channel originated in late February and contained the stock throughout the recent correction.
The successful development of the Cheleken contract area is critical to Dragon's future growth plans. We are therefore heartened that DGO has secured the necessary funds to pursue this strategy following the completion of a US$167 million share placing in May. Separately major shareholder Emirates National Oil converted a US$40 million loan into equity.
Dragon is now free to press ahead with a field development plan which incorporates a continuous drilling programme through to 2009. This drilling programme is designed to exploit 108 million barrels of the proven reserves of the LAM field and involves the drilling of 38 wells from 4 platforms. The total cost of the plan is expected to be around US$248 million over the next two years. Dragon expects to finance the remainder of this total cost from existing facilities and operating cash-flows.
The field development plan forecasts that Dragon will double total daily production to approximately 40,000 bopd in 2008. In addition, Dragon plans to develop associated gas from the field.
Dragon's entitlement to reserves within the Cheleken Contract Area (CCA) stands at 315 million barrels of oil and 3.5 trillion cubic feet of gas. We expect that a 3D seismic survey in the area will facilitate a reserve upgrade later this year. The Stage 1 area has been surveyed and the data is currently being processed. As a result of the study, DGO expects to install a new production platform in 2006. Meanwhile the seismic survey in the Stage 2 area is now underway.
Dragon's well-workover program has continued to boost production. In April DGO completed the successful work-over of well LAM21/107, resulting in an additional 1,481 barrels of oil per day. The company now plans to extend work-over operations to the Zhdanov Field. Dragon has also made solid progress at the well LAM 10/110 with testing to date indicating the presence of substantial hydrocarbons.
In our opinion, management's development strategy of the CCA has proved a real success. We believe the continuation of this approach will, in combination with a strong oil market, underpin earnings growth. DGO remains attractively priced in our opinion, with a prospective price earnings ratio of just over 7 times.
Not surprisingly Dragon's shares experienced a correction in the past few days following the termination of offer talks. However with the upward trend intact, DGO will remain firmly held in the Fat Prophets Portfolio.
Disclosure: Interests associated with Fat Prophets declare a holding in DGO.
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