Message from the Chief Executive Officer
“Another successful year achieving a number of key operational and financial milestones.”
I am proud to report that Dragon Oil produced a strong set of results in 2008. The Group delivered an exceptional performance in spite of challenging economic conditions towards the latter half of 2008.
Following my appointment as CEO in May 2008, I have enjoyed working with an experienced and diverse group of people who are all as eager as I am to make Dragon Oil an even bigger success in the years to come. I would like to thank our employees for their hard work and drive in often difficult working conditions.
Developing and delivering
Dragon Oil has had another successful year achieving a number of key operational and financial milestones and its robust financial health places it in a strong position to weather the global economic downturn.
In 2008, we achieved 18% growth in revenue resulting in a 30% growth in operating profit. This was generated largely on the back of increased realised prices in 2008, despite a decrease in sales volumes. Net cash generated from operating activities was up 24% over 2007 and earnings per share was 21% higher than 2007. In addition, there was an increase of 36% in capital employed represented by higher expenditure in oil and gas interests and an increased cash balance at the year-end.
The Group’s cash and cash equivalents and term deposits at the end of 2008 were US$876 million. The increase in cash over 2007 level reflects strong realised oil prices, which more than offset a 14% decrease in sales volumes and a 32% increase in investing activities. Our exceptional balance sheet is a result of the management’s long-term strategy to reinvest in Dragon Oil’s growth and take advantage of favourable market conditions. In times of financial crisis, our unleveraged position and a considerable cash balance allow us to grow organically and seek out attractive targets to diversify our business.
One of the key performance indicators set for 2008 had been to raise the average daily rate of production by 25%. We are pleased to report that Dragon Oil exceeded this target with a 28% increase to 40,992 barrels of oil per day at the end of 2008. Dragon Oil also achieved an exit rate of 45,600 barrels of oil per day at the end of the year.
The reserves certification was completed in early 2009 by an independent energy consultancy specialising in petroleum reservoir evaluation. The results of the certification for the Cheleken Contract Area confirmed proved and probable reserves of 645 million barrels of oil and condensate and 3.2 tcf of gas resources as of 30 June 2008. This certification is different from those conducted previously as it incorporates the results of full field remapping for all the reservoir levels based on the 3-D seismic survey conducted from 2004 to 2005. This result confirms our previous interpretation and we can now continue to proceed confidently with developing the field.
Investing for the future
Capital expenditure for 2008 was approximately US$287 million. The expenditure during the year was allocated primarily to drilling and infrastructure projects in Turkmenistan. Of the total capital expenditure to date, 60% was attributable to drilling with the remaining balance spent on infrastructure projects.
Dragon Oil awarded contracts and has projects under way to refurbish the Dzheitune (Lam) 28 platform; construct the new Dzheitune (Lam) B platform; build additional tanks at the Central Processing Facility; and construct a new 30-inch, 40-km trunkline to bring all the oil and gas onshore. As of March 2009, the Dzheitune (Lam) 13 platform was refurbished and upgraded, and the Group’s own Rig 40 was refurbished.
Q&A
Your Questions Answered . . .
Do you have any intention to grow your activities in the Caspian region?
We have a 25-year PSA agreement with the government of Turkmenistan, an established and rapidly growing production, an excellent balance sheet as a result of our long-term strategy to reinvest in business. We are looking to capitalise on this valuable foothold in the Caspian region and as such we are looking at acquiring new opportunities to strengthen our portfolio further.
Phase 2 upgrade of export facility
completed increasing loading capability
Construction of 30-inch, 40-km trunkline
to bring oil and gas onshore
Phase 2 expansion of Central Processing Facility (CPF)
to handle 100,000 barrels of total liquid per day and up to 220 mmscfd of gas per day under construction
The Group has an estimated capital expenditure programme for 2009 of up to US$300 million for infrastructure, which will be internally funded. This includes the construction and refurbishment of platforms, the ongoing construction of the 40-km trunkline, the upgrade of the Central Processing Facility to handle 220 mmscfd of gas per day and 100,000 barrels of liquid per day. For the planning period of 2009–11, the total spending on infrastructure projects is expected to be around US$700–800 million. The level of capital expenditure is subject to approval of projects under the Product Sharing Agreement (“PSA”) and the availability of contractors in the Caspian Sea region. The amount of capital expenditure for drilling is mainly determined by the number of wells drilled. The progress of the drilling programme is dependent on availability of rigs.
Building and retaining a powerful team
Strengthening our staff base with skilled and experienced individuals remains a top priority for the Group. We have maintained a continuous recruitment programme throughout 2008, with the average number of staff increasing by 10% to 913. I am pleased to report that we now have 30 different nationalities in our Dubai head office creating a culture of diverse experience and skills to the benefit of the Group.
Our Corporate Social Responsibility team is currently assessing the possibility of introducing and implementing new community initiatives in the Cheleken area. I am particularly proud that, as part of our social responsibility programme, we will be building a 1,500 m3 desalination plant from which a large proportion of the potable water will be supplied to the local community in Hazar, Turkmenistan. As a founder member of the Industry’s Humanitarian Support Alliance NGO (IHSAN), I have a keen interest in such humanitarian efforts.
Overcoming challenges
On 26 February 2009, Dragon Oil announced that the Group’s Internal Audit Department (“IAD”) identified possible irregularities within both its Marketing Department and Contracts Department. As a result of these findings, Dragon Oil instructed KPMG (Dubai) (“KPMG”) to conduct an investigation into improper conduct by certain former senior managers. We are greatly reassured by the preliminary findings from the investigation, which confirm that there is no material impact on the Group’s financial position. I am also personally pleased that these irregularities were identified internally and that we commissioned the investigation promptly. We have already replaced the managers involved and appropriate steps have been taken following the identification of these irregularities.
How has the recent fall in the oil price affected your business?
Our share price has suffered
from oil price volatility similar to
other oil players’, however, our
business remains robust. Dragon Oil’s operations continue to be profitable and we benefit from increased competition in materials and services costs. Dragon Oil’s strong cash generation from its existing operations enables us to internally fund our development
programme over the next few
years. We are in exceptional
financial health, which allows
us to continue with the capital
expenditure programme set for
2009 and focus on monetizing
gas as well as diversifying
geographically.
You are a single asset company. How confident are you that any acquisition strategy that you follow will add shareholder value?
We are interested in companies
with existing underdeveloped
resources where Dragon Oil’s
expertise could add most
value. Our new ventures and
business development team has
been reviewing prospects and
opportunities with the objective
of adding production and
reserves to Dragon Oil.
Our strategy is not an aggressive acquisitions campaign but a measured approach to identify good quality assets within the MENA and Central Asia region, supported by good managerial
and operational capabilities.
Turning vision into value
Our long-term strategic approach of reinvesting cash into the business, as well as taking advantage of lower input costs, will stand us in good stead in the lower oil price environment that we are currently experiencing. We are now capable of funding from internal resources an expanded capital expenditure programme including the drilling programme, infrastructure and the gas project.
We will aim to take advantage of competitive prices for materials and services driven down by the current economic downturn, in order to secure future growth in a more positive market environment.
We plan to complete eight wells by the end of 2009. For the 2009–11 period, we intend to complete up to 35 development wells in total. In addition, we are committed to achieving an annual production growth of up to 15% on average in the period 2009–11.
In line with our plans to diversify the portfolio, our experienced New Ventures Team continues to assess numerous prospects. There is a steady stream of new and interesting potential opportunities in the current “buyer’s market”. We will continue to take a measured approach to identifying and securing good quality assets within the Middle East, North Africa or Central Asia in line with our diversification strategy.
I am pleased to report that the Board is proposing a corporate restructuring of Dragon Oil plc by creating a new holding company incorporated in Bermuda. This decision has been reached following an extensive review of the Group’s operating structure. This new structure more closely aligns the Group’s corporate interests with its legal and commercial status. Upon completion of the restructuring process, the Company will have a primary listing on the London Stock Exchange, while maintaining a secondary listing in Ireland.
We continue to maintain a positive working relationship with the Government of Turkmenistan built on many years of successful partnership.
I would like to thank the executive team and all our employees for their achievements during another successful year for Dragon Oil. I would also like to thank our shareholders for their support. We are confident that Dragon Oil’s strong cash position, unleveraged balance sheet, low cost operational model, experienced employees and clear strategic vision will enable us to take the Group to a higher level.
Dr ABDUL JALEEL AL KHALIFA
Chief Executive Officer