Dragon Oil released its FY 2013 trading update. The operational and financial update were more or less in line. The outlook was positive as daily production is expected to improve due to the acquisition of additional rig capacity and encouraging results from production enhancement measures. The statement reiterated the company medium term target of a 100k bopd production in 2015 and to maintain that for two years.
<b>Production</b> – FY 2013 average daily production at 73.8k bopd was up 9.1% YoY, lower than management’s 10 to 15% target but in line with our forecast of c. 74k bopd. FY 2013 production was affected by a delay in the acquisition of additional rig capacity. As a result, 10 wells were completed during the year vs 13 wells in FY2012. The company also reported improved well productivity after the introduction of water injection and artificial lift. Water injection has seen sustained reservoir pressure while artificial lift has resulted in a significant 500 – 700 bopd increase in production per well.
<b>Reserves </b> – The company achieved a reserve replacement ratio of 93% partly due to encouraging results from artificial lift. Year end reserves were independently assessed at 675mmbls vs 677mmbls at end FY 2012.
<b>Marketing </b>– There were no changes to marketing arrangements with 100% of exports sold through Azerbaijan. The current arrangement expires at the end of FY 2014. The average price achieved was a 17% discount to Brent. The share of production was 44% vs 48% in FY 2012. The lower share was mainly due to lower capex mainly due to a delay in acquiring rig capacity.
<b>Financial </b>– Revenue at $1bn and capex at $328m was in line. The year end cash balance at $1.9bn was also was slightly higher than our forecast if $1.8bn.
<b>Outlook </b> – The Company expects to grow average production by 10% to 15% during FY 2014 based on the completion of 14 to 16 wells. There will be two additional rigs in Q1 2014 (bringing the total to 4) with a further rig expected later in the year. It reiterated its aim to achieve 100k bopd production in 2015 and maintain that for five years.
The addition of rig capacity in FY 2014 and the improved productivity due to water injection and artificial lift is encouraging and should see the company achieve its medium term target. We are forecasting a 14% YoY increase in production for FY 2014 to 84k bopd.
We value adjusted our valuation for the company to reflect a higher cash balance and better reserves. As a result, our valuation moves from 770p per share to 799p per share. At current levels the share is trading at 79% discount to our valuation and c. 7x to our FY 2014 EPS of 128USc per share. Given the stable outlook and that 42% of market is in cash and cash equivalents, we view the current share price as presenting good value.
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