Dragon Oil (LON:DGO), the Turkmenistan based oil and gas production and exploration company - which is 51% owned by ENOC (The Emirates National Oil Company) - has today released their Interim report for the year, showing profits have rocketed due to a higher oil price. To go through the report, for the period they have reported on a comparable basis with H1 2009 that:
- Average gross production has increase 8% to 46,420 bopd
- Revenue has increased 4.9% to $276.3m
- Profit has increased 31% to $137.6m, and
- Cash flow has increased 66.1% to $197m
But these figures do not tell the true story for Dragon and may seem a little strange to some. For example, some may ask why - when the average oil price received has increased from $50 to $75 per barrel (50%) - have they only increased revenue by 4.9%? When production has increased, why has the volume sold decreased from 4.9m barrels to just 3.7m? To answer these questions you must look at Dragon’s Production Sharing Agreement (PSA) with the Turkmenistan government.
First to explain Dragon’s PSA, Dragon has never really issued much detail on this agreement but, in its simplest form, it works as a variable tax, with the factor that defines the rate being the margin they make per barrel, i.e. the larger the margin the higher the tax, the lower the margin the less the tax. This is where part of the answer to the second question comes from, as for this period due to the increase in the oil price, on a comparable basis with H1 last year Dragon’s allowance has dropped from 65% to 55%. This means that net production for the period was approximately 25,531 bopd, which would equate to a volume produced for the period of 4.6m barrels. This is versus last year’s net production which was approximately 27,825 bopd, meaning that they produced a volume of approximately 5m barrels. You can see this in the balance sheet where inventories have increased from $43m to $100m, with the crude oil portion of these inventories increasing from $12m to $68m. So if you add this to revenue for the period, it would come $344m which is an increase of 31%, which makes more sense.
In terms of the likely reason why they have sold only 78% of the oil they produced this period,…
