Dragon Oil is making the most of its robust cash position

Dragon Oil is an independent oil development and production company whose shares are traded under a dual primary listing on the Irish and London Stock Exchanges. Dragon Oil operates oilfields located in the Cheleken Contract Area Offshore Turkmenistan, in the Caspian Sea. Dragon Oil had proved and probable oil reserves at 30/06/08 of 644 million barrels (of which Dragon Oil’s share was 283 million barrels) and 3.4 trillion cuft of gas resources.

Dragon Oil is making the most of its robust cash position

by Fat Prophets

Back in July 2008 when oil was at US$147, the themes dominating the market were the burgeoning oil thirsty developing world, a dwindling US dollar, supply side disruptions and rising hostilities in the Middle East. As a result the share price of oil producer Dragon Oil (LSE, DGO) soared. Since then though, the fear of global recession of gargantuan proportions has played the primary role in steering the oil market as well as the company’s share price.

As for the recession that is currently gripping the Western world, US President Barack Obama US$825 billion’s fiscal package is one of several measures designed to drag the domestic economy up from the floor. With other governments to follow, there will be no quick fix. However when central banks are determined to spend their way out of a recession there is little that can stand in their way, eventually.

Whereas demand will take a little time to recover, the supply side problem of the equation is growing. Current price levels render many forms of oil extraction and many projects uneconomical whilst the credit crunch is affecting the ability of many companies to raise finance to fund projects.  
   
Meanwhile, OPEC Members seem to be abiding by their latest round of productions cuts and the US dollar looks like it may be running out of steam. We have stated on numerous occasions that in the US, a lack of fiscal restraint, loose monetary (interest rate) policy, ongoing trade deficits and a ballooning national debt have caused an increase in the supply of dollars now circulating through the global economy. The devaluing of the US dollar is something which is being engineered by US policy makers and when it arrives it will potentially inflate anything priced in dollars, oil included.

So for investors in Caspian Sea focused Dragon Oil, the future is bright, particularly given the Turkmenistan focused producer is laden with cash and has managed to increase output in 2008 and has its eyes on further gains in 2009.  

Despite the hysteria surrounding the world’s energy markets, Dragon announced a 28 percent increase in average daily production (41,000 barrels of oil per day) for 2008 when compared with 2007.  
Encouragingly, there is little sign of any let up as the group pursues a 15 percent increase for 2009. And given their track record to date, we have little doubt that the company will achieve their objective.

Meanwhile, any short comings in oil revenue will be offset by the commercialisation of Dragon’s vast gas resources (which amount to 3.4 trillion cubic feet) and a doubling in capital expenditure for 2008 (to US$600 million).  

The company is clearly making the most of its robust cash position (US$867 million in the bank compared to US$543 million from end of 2007) and is ramping up production when others are struggling to maintain their levels. In addition, management is keen to bolster the company’s portfolio whilst current bargains prevail.