M&A

24 February, 2010

Dragon piles cash for oil and gas buys

By Miles Johnson

Published: February 24 2010 02:00 | Last updated: February 24 2010 02:00

Dragon Oil said it was ready to put a cash pile of more than $1bn (£648m) to work on acquisitions this year after falling energy prices caused a drop in full-year profits.

Abdul Jaleel al Khalifa, chief executive of the Turkmenistan-focused explorer, said that he was scouring for oil and gas assets in central Asia, Africa and the Middle East as the group seeks to diversify its assets.

"We are looking at Turkmenistan among other countries," he said. "It is a matter of finding a balanced portfolio in central Asia and the Middle East. We are not looking for frontier exploration, nor looking for risky developments. We are looking for sensible development opportunities."

In the year to December 31 pre-tax profits fell from $499m to $345m as sharply lower oil prices dented revenue, which slipped from $706m to $623m. The cost of sales rose 46 per cent year-on-year to $282m, primarily due to lower crude inventories at the year end.

Earnings per share fell from 71.6 cents to 50.2 cents. No dividend is payable.

Dragon also said negotiations with the Turkmen government over selling its gas in the country were expected to resume in the first half of this year after being delayed. Mr al Khalifa said Dragon had remained focused during the failed takeover attempt by its majority owner, the Dubai-based Emirates National Oil Company, last year.

Last December shareholders voted down a 455p a share offer made by ENOC, which owns 51.5 per cent of Dragon, after a campaign waged against the deal by Edinburgh-based investment manager Baillie Gifford - Dragon's second- biggest shareholder.

Shares in Dragon rose 3¾p to 466p.

* FT Comment

With the theatrics of ENOC's failed bid attempt having faded, attention falls on the core quality of Dragon Oil's business. While operational performance was robust, highlighted by a 40 per cent rise in sales volumes of crude, profits still dance to the tune of the oil price. On this basis, companies with greater exploration upside, such as Salamander or Heritage, rather than the steady production growth of Dragon, may be more attractive. Assuming a long- run oil price of $75 per barrel, with a discount rate of 10 per cent, Dragon trades on a net asset value of 514p a share - not a price that offers the high-octane potential rewards, and risks, many exploration and production investors crave.

Copyright The Financial Times Limited 2010.