Dragon Oil has announced its Interim financial results for the period ended June 30, 2009.
Outlook for 2H 2009
Dr. Abdul Jaleel Al Khalifa, Chief Executive Officer, commented, "We continue to build momentum towards achieving significant production growth in the coming years. We have contracted the Iran Khazar rig for another two years and are looking to secure another platform-based rig to ensure that we have three full-time rigs operating simultaneously before the end of the year along with an additional rig on a short-term contract. Our infrastructure upgrade and renewal program has showed progress, with the expansion of our export capabilities and the construction of the Dzheitune (Lam) B platform, which is currently being installed in the Western part of the Dzheitune (Lam) field.
"With the slowdown in the broader economy, we have been able to drive cost optimization by renegotiating contracts and re-tendering certain projects. Despite the slow start to the drilling program in 2009, we achieved an 11% growth in production compared to 1H 2008. While the overall production growth in 1H 2009 was below our expectations, we expect more wells to come on stream in 2H 2009 with the aim to complete up to 35 wells during the 2009-11 period. That will help us achieve our long-term goal of annual production growth of up to 15% on average for 2009-11.
"The first half of 2009 has been a challenging period for Dragon Oil, but the full support of the Board and the enthusiasm and teamwork across the Group have enabled us to move ahead confidently."
2009 Interim Results
During the first six months of 2009, the oil industry faced a challenging market environment due to the weak global economy and volatile oil prices. However, with almost ten years' experience of operating in the Cheleken Contract Area under the Production Sharing Agreement ("PSA"), Dragon Oil has accumulated significant knowledge of the fields and expertise that make us confident in our field development strategy.
Revenues in the period were 29% lower at US $263.5 million compared with the level achieved during the same period in 2008. This is primarily due to significantly lower realized oil prices, at US $50/bbl (1H 2008: US $108/bbl) only partially offset by a 40% higher quantity of crude oil sold and change in the lifting position at the period end. We maintained our debt-free position with a healthy cash balance of US $875.4 million as of June 30, 2009. This strong financial position will allow us to finance internally our aggressive capital expenditure programs to fuel the Group's organic production growth in the coming years.
We completed four wells in productive sections of the Dzheitune (Lam) field, and we expect to complete four more wells before the end of 2009. We are currently installing the Dzheitune (Lam) B platform in the Western part of the Dzheitune (Lam) field, which promises to be a productive area, and plan to commence drilling from this platform in Q4 2009.
A number of infrastructure projects were progressed during 1H 2009, including an upgrade of the Dzheitune (Lam) 63 platform and Phase 2 upgrade of the export facility at the Aladja Jetty in order to increase loading capacity.
On the gas development, the tendering for the FEED study is ongoing and simultaneously we have advanced the gas commercialization plans and intend to commence discussions on gas pricing soon. Meanwhile, we continue to look for acquisition opportunities focusing on good-quality right-fit assets to diversify our current portfolio.
On the Corporate front, in February this year we launched an investigation into irregularities detected in the Marketing Department and Contracts Department. The investigation has progressed substantially but remains ongoing. In March 2009, we announced the proposed restructuring of the Company by means of a scheme of arrangement by putting in place a Bermuda incorporated company as the new ultimate holding company of the Group. The corporate restructuring has been put on hold in light of the preliminary approach we received in June this year from Emirates National Oil Company Limited (ENOC) L.L.C. ("ENOC"), in relation to a possible offer for the entire issued and to be issued share capital of the Company that it does not currently own (the "Approach"). Dragon Oil has formed an Independent Committee of the Board to evaluate an offer should one be forthcoming.
Gross field production in the first half of 2009 increased by 11% compared to the level achieved in the same period in 2008. Dragon Oil produced 7.7 million barrels of crude oil; the average daily production rate on a working interest basis was 42,808 bopd for 1H 2009. During the corresponding period in 2008, the Group produced 7.0 million barrels of crude oil with an average daily production rate of 38,482 bopd.
Due to changes in the drilling program, with the first two new wells coming on stream only at the end of May 2009 and lost production from the Dzheitune (Lam) A/127 well, the average daily production for 1H 2009 was below our expectations and lower than the 43,787 bopd reported for Q1 2009. The production from the Dzheitune (Lam) A/127 well has been significantly reduced due to operational issues, which are expected to be resolved through a workover scheduled to take place later this year.
The entitlement production for 1H 2009 was approximately 65% of the gross production compared to 54% for the comparable period in 2008. The entitlement barrels are dependent, amongst other factors, on operating and development expenditure in the period and realized crude oil prices. In the first half of 2009, lower oil prices, than in 1H 2008, resulted in higher entitlement barrels.
The Group sold 4.9 million barrels of crude oil in 1H 2009 (1H 2008: 3.5 million barrels) and held a low crude oil inventory at the period-end. The quantity of crude oil sold during the first six months of 2009 is 40% higher than the amount sold during 1H 2008. This is due to higher production and entitlement than in the first half of last year.
The Group was in an underlift position of approximately 0.5 million barrels of crude oil as at June 30, 2009 (31 December 2008: 0.6 million barrels). The significant volatility of the oil prices, experienced in the first six months of 2009, resulted in a 54% decrease in realized crude oil prices. The average realized crude oil price during 1H 2009 was approximately US $50/bbl (1H 2008: US $108/bbl). The Group's realized crude oil prices achieved a discount of about 2% (1H 2008: 1.4%) to Brent during the first six months of this year. The Group continues to leverage its marketing experience to achieve low discounts to Brent.
In the first half of 2009, approximately 90% (1H 2008: 80%) of crude oil was exported via Neka, Iran. A new crude oil marketing contract via Baku, Azerbaijan was put in place in early 2009 and the sales of crude oil via this route resumed in March 2009. Dragon Oil continues to assess additional routes to market, including Makhachkala in Russia and the BP operated BTC (Baku-Tbilisi-Ceyhan) pipeline.
Dragon Oil completed two wells in 1H 2009, with two further wells coming on stream in July and August this year. All wells were dual-completion development wells.
Good progress was achieved during the first half of this year in securing rigs to support our long-term drilling program. In April 2009, Dragon Oil announced that we had reached an agreement to extend the contract for the Iran Khazar rig for another two years, commencing in May 2009. In June 2009, we announced that we had signed a six months' contract for the Astra jackup rig, commencing in November 2009; we expect to drill two wells during the term of the contract.
Later in 3Q 2009, we also expect to sign an agreement for another platform-based rig. In light of new information the management received during the initial tendering process, a re-tender for a platform-based rig is ongoing with the expectation of achieving better terms. We now anticipate that the rig will start drilling later than planned and the first well is expected to be completed in Q1 2010.
Limited supply of offshore rigs is one of the constraints to the Company's field development program. We constantly monitor the supply of rigs in the region and aim to secure long-term contracts on favorable commercial terms, while minimizing mobilization time and maximizing efficient drilling.
We maintain our target to complete eight wells before the end of the year through optimized drilling. Both the Iran Khazar rig and Rig 40 are expected to complete four wells each, including those wells already completed, by the end of 2009.
During the first half of 2009, our workover program included a rigless workover operation conducted on Dzheitune (Lam) 13/96 well, which resulted in incremental production of 783 bopd.
A number of infrastructure projects were progressed in 1H 2009. The installation of the Dzheitune (Lam) B platform commenced in July 2009 and the platform will be ready for drilling later this year. As part of our ongoing upgrade of the existing infrastructure, the Dzheitune (Lam) 63 platform was upgraded and Phase 2 upgrade of the export facility at the Aladja Jetty was completed. The latter will increase loading capacity and enable simultaneous loading of two tankers to accommodate future production growth. Additional slots on the Dzheitune (Lam) A platform were added as well as three more oil storage tanks were built at the Central Processing Facility, significantly increasing the storage capacity.
We have made slower progress on the construction of the 30" 40 km trunkline and Phase 2 expansion of the Central Processing Facility than expected, due to delays in project execution. As we progress through the second half of this year, we will mobilize internal and external resources to deal with the delays we have experienced with these projects.
Limited availability of qualified contractors in the Caspian Sea region remains one of the key risks to Dragon Oil's operations. We are actively addressing this risk by initiating contact with new contractors with a focus on rigorous due diligence process in light of the increased number of infrastructure projects planned over the next five years.
The average daily production on a working interest basis was 42,808 bopd in 1H 2009 (1H 2008: 38,482 bopd) and 27,782 bopd on the entitlement basis (1H 2008: 20,850 bopd). The Group's share of entitlement production is determined by reference to cost oil and profit oil, in accordance with the terms of the PSA. The entitlement barrels have been and continue to be determined by, amongst other factors, the level of development expenditure and realized oil prices.
In the first half of 2009, the Group's revenue was US $263.5 million compared to US $373.5 million in the same period in 2008. The 29% decrease was due to lower realized crude oil prices of US $50/bbl (1H 2008: US $108/bbl), which were only partially offset by a 40% increase in the volume of crude oil sold and change in the lifting position at the period end. The realized oil prices achieved a discount of about 2% (1H 2008: 1.4%) to Brent during the first six months of 2009.
The PSA includes provisions such that parties to the agreement may not lift their respective crude oil entitlements in full, and as such underlifts or overlift of crude oil may occur at period-ends. At the year-end the Group was in an underlift position of 0.5 million barrels, which is recognized as revenue and measured at market value.
The Group generated an operating profit of US$122.0 million in 1H 2009 (1H 2008: US $200.2 million).
The cost of sales increased by US $56.1 million to US $129.6 million (1H 2008: US $73.5 million). The cost of sales includes operating and production costs and depletion. The depletion charge of US $99.7 million (1H 2008: US $61.7 million) was higher by 62% than the charge in the corresponding period in the prior year due to increased production during the period and the upward revision in estimates of field development costs. The increase in the cost of sales during the period in comparison with the corresponding period last year was primarily due to an impact of a reversal of the 2007 overlift position in 1H 2008.
Administrative expenses (net of other income) at US $11.9 million (1H 2008: US $8.3 million) were higher by 43%, due to an increase in corporate head office costs and expenses incurred on the investigation into procurement irregularities reported in February 2009. Other losses in the current period, comprising movements in fair value of derivative financial instruments held for hedging purposes, are nil (1H 2008: US $91.4 million), since no hedges have been undertaken for the period beyond December 2008.
Operating profit was down 39% at US $122.0 million (1H 2008: US $200.2 million) as a result of lower revenues, which have been affected by lower realized oil prices and the higher cost of sales.
Profit for the period
The profit for the first six months of 2009, at US $105.0 million (1H 2008: US $166.9 million), includes finance income of approximately US $17.4 million (1H 2008: US $11.7 million) and a lower taxation charge of US $34.4 million (1H 2008: US $44.7 million). Finance income was up due to higher cash and cash equivalents and term deposits maintained during the first six months of the year.
In 2008, following the introduction of the Hydrocarbon Resources Law, the tax rate applicable to the Group's operations in Turkmenistan increased to 25% from 20%. The Group applies this tax rate to determine its tax liabilities. The Group is in discussions with the authorities in Turkmenistan regarding the applicability of the new rate to prior periods, but it does not currently believe that prior periods are affected by the new rule. Consequently, no provision has been made in respect of any additional tax that could become payable if the increased tax rate were applied to prior periods.
Basic earnings per share ("EPS") of 20.39 US cents in the first half of this year were 37% lower than the EPS in the same period last year (1H 2008: 32.54 US cents).
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