News & Analysis » UK

Dragon Oil, Falcon Oil & Gas, Magnolia Petroleum, Rialto Energy news briefs

Contributed by Fox-Davies Capital

Dragon Oil: Spending Spree? - Todays Operational update details an impressive year for Dragon Oil, with strong production growth and cash generation. With so much cash, and a medium term hole in the outlook, and beyond, it is somewhat surprising that there was a $200mm share buyback; we couldn't help think that there was a better use of the proceeds that would have created a better return for investors. Given that there is ~$1.7bn in cash, and cash generation is strong, the potential for acquisitions is significant, and Dr Al Khalifa's statement that it is still intending to carry out corporate activity could be an indicator of what is to some; the Company certainly needs a fresh infusion of assets into its portfolio. Access to capital is not an issue. If needs be, a shareholder loan could be made available from Emirates National Oil Company ("EMOC"). The key question is where and what? We believe that there are a number of candidates that could transform the medium and longer-term outlook, companies such as Premier Oil and Gulf Keystone would be a perfect size and fit, especially the latter with the additional benefit of political top cover provided by its 51% shareholder, ENOC. In the longer term, however, the likes of Bowleven and Opir would make sense in terms of diversifying the risk in its portfolio.

In this news:

Key operational highlights
- Fifteen new development wells successfully put into production against an initial guidance of 13 to 15 wells;
- 10% increase in average daily production rate to approximately 67,600 barrels of oil per day ("bopd") in 2012 compared to 61,500 bopd in 2011; and
- Average daily production rate for the month of December 2012 was 73,500 bopd.
Key corporate highlights
- US$200mn share buyback programme undertaken to return further cash resources to shareholders;
- Impressive reserves replacement ratio of about 180% achieved, which is attributable to production performance of wells drilled in 2012;
- 2012 year-end oil and condensate reserves increased to 677 million barrels (December 2011: 658 million barrels) after accounting for the respective years' production; gas reserves and contingent gas resources remained at similar levels of c. 3 TCF;
- Dragon Oil within a consortium of companies was awarded an exploration contract for Block 9 in Iraq; and
- Dragon Oil in a consortium of companies was selected as the winning bidder for two exploration blocks in Afghanistan.
Key financial highlights
- Capital expenditure on infrastructure and drilling amounted to US$382 million for 2012 (2011: US$351 million); and
- Group's cash balance (net of abandonment and decommissioning funds) as at 31 December 2012 was US$1,737 million (31 December 2011: US$1,527 million).

Falcon Oil & Gas: A Major Step Forwards - Falcon disclosed overnight that it has signed an agreement with NIS, a Serbian oil and gas company, with a view to progressing its exploration acreage. This is a significant step forwards for the Company as it not only kick-starts the exploration programme, but also allows it to redeploy its share capital to other projects. In the wider context, we can't help think that the existing portfolio is too diverse for a Company of Falcon's size and resources. Still, if it keeps doing deals like today's, it will cease to become an issue.

In this news:

NIS to drill three exploration wells targeting the shallow "Algyo Play" reservoir

- Falcon to be fully carried on the drilling and testing estimated to cost a minimum of $20m
- NIS to make an immediate cash payment of $1.5m to Falcon
- Drilling preparations are already underway
- Falcon and NIS expect to commence drilling the first well by the end of March 2013
- Second and third wells likely to be completed by the end of Q3 2013
- NIS to earn 50% of any net production revenues from the 3 wells
- Falcon to retain 100% in the "Deep Mako Trough" potential below the Algyo

Magnolia Petroleum: Small, But Perfectly Formed - Today's update, outlining the initial production rates, will not move the needle, but it does highlight what the management team is trying to achieve, i.e. build a cash generating core around which more lucrative higher risk projects can be built. As such, and irrespective of the absolute size of the production, today's news should be reassuring to investors. What is needed, however, is a clear plan from Management as to what direction it is heading in strategically, and the steps it is taking to get there.

In this news:

- Commencement of production at the Basis operated Bowen 2-29 and Bowen 3-29 vertical wells in the Wilcox formation, Oklahoma
- Bowen 2-29 - Gross initial production rate above expectations at 65 boepd (1.13 boepd net)
- Bowen 3-29 - Gross initial production rate above expectations at 30 boepd (0.52 boepd net)
- Both wells expected to payout (recover costs) in less than 12 months

Rialto Energy: Resources Up, But Reserves are More Important - Management has today disclosed that its CPR has increased its resources across its Côte d'Ivoire blocks. While this is certainly good news, given the fact that the last wells were appraisal wells, the more important news will be when the Company can migrate the reserves into resources. On the back of this announcement, the preliminary results, or rather the outlook and programme for the next 18 months, has become the focal point.

In this news:

- RPS Energy Services Pty Ltd ("RPS") has completed an updated independent resources estimate for Block CI-202, offshore Côte d'Ivoire, which incorporates information derived from the 2012 drilling programme and Rialto's 2012 3D seismic survey.
- Prospect inventory increased to 21 with eight new prospects identified using the new high quality 3D seismic data, which has been fully processed and interpreted ahead of the planned 2013 drilling programme.
- Total Mean Prospective Recoverable Liquids and Gas Resource, assuming that all the prospects are successful, of 897mm bbl and 2,936bcf respectively (an increase of 75% for liquids and 65% for gas) demonstrating significant exploration upside.
- Total Mean Contingent Recoverable Liquids and Gas Resource of 40mm bbl and 270bcf respectively (down from 50mm bbl and 396bcf previously).