Specialist oil and gas exploration and production companies such as Dragon Oil (LON:DGO) provide greater leverage to the price of crude oil than fully integrated energy companies such as BP and Royal Dutch Shell. Earnings of the industry heavyweights have been hamstrung by weak downstream operations… something alien to Dragon Oil.
Instead, Dragon has been able to focus on what it does best boosting its production profile through its expertise with the drill bit. Indeed during 2009, the Turkmenistan focused company increased average daily output by 9% to 44,765 barrels of oil per day completing eight wells with two rigs in full time use.
Unsurprisingly 2009 revenue was hit by lower oil prices and came in 12% below the 2008 level at US$624 million. Pre tax profit for the year fell to $259 million in 2009 from 2008’s US$369 million from as the labouring price of crude oil (US$62 per barrel realised versus US$91 last year) outweighed a 40% increase in volumes of crude sold.
Given Dragon’s plans for the years ahead there is every chance that the share price rally of 2009 may well continue through 2010. The company is aiming to complete another 11 wells this year and for the period from 2010 through to 2012, Dragon anticipates completing up to 40 new wells to support its targeted production growth.
Dragon is also looking to beyond oil to when it comes to underpinning earnings in the years ahead. At present the company is producing a significant amount of gas as a bi product of its oil production however, due to a lack of infrastructure, remains unable to commercialise. With another fillip for earnings in the offing, the company is pressing ahead with the construction of a gas pipeline and will build an onshore gas treatment plant provided negotiations with the Turkmen government proceed as planned.
Whether this provides an immediate spur for earnings is doubtful. We remain bullish on the long term prospects for the price of natural gas however technological advances have opened up supply and with economic data remaining sketchy we may have to wait a little while before we see a recovery in gas prices.
Dragon is also actively looking to expand its geographic footprint beyond current territories with parts of Central Asia, the Middle East and Africa being targeted. The…
