Saturday, February 28, 2015

Dragon Oil (LSE:DGO)

Dragon Oil is the largest oil producer in Turkmenistan. All their commercial production is from their Cheleken Contract Area in the Caspian Sea, consisting of the Zhdanov and Lam fields.  The contract lasts until 2025, with rights to negotiate a ten year extension.

In December 2014, oil was found in Iraq; expected to take 2 or 3 years to determine if commercially viable.

They are also performing exploration in Algeria and Egypt.

Revenue (Production Service Agreement)

Their Cheleken PSA entitles Dragon to 50% of the oil found over the life of the contract.  In the short term, that percentage varies depending on opex and oil prices.  Entitlement in 2013 was 44%, 2014 was 56%, and 2015 is expected to be 65%.  Dragon also has to pay some taxes on profit as part of the PSA.

I could not find any other details or a copy of the PSA.

The PSA seems to be frequently amended.  In December 2014, after the oil price fell steeply, taxes were reduced from 25% to 20%, to be replaced by an additional flat $10m to be spent on social and training projects.


The company only gives 2P reserves (50% confidence level of recovery).  Dragon Oil concentrates more on production than exploration - Over they long term reserves are flat:

But they have been decreasing in the two years: 93% replacement in 2013, and 60% replacement in 2014.  Their reserves may be fluctuating based o oil prices (?)

Costs and Breakeven

Look at their break-even costs per barrel.  Use all costs on the income statement, except for taxes (not required if making a loss):

In 2009, management stated (p11) they has break-even costs of between $25-30/bbl.  Cash costs consist of in-country operating costs of $4-5/bbl, G&A costs of $2-3/bbl, and marketing/transport at $2/bbl.  Add depreciation of $16-17/bbl.  The resulting $25-30/bbl cost is close to my numbers.

They sell at a discount to Brent, on an FOB basis.  In previous years the discount was typically 14-18% of the price.   In 2015, the discount negotiated is a flat $14/bbl.  So the final 'all-in' break even price, conservatively, is $44 Brent.

Balance sheet

At end 2014, net cash is use 1.9bn, or USD 3.93 per share (roughly 255p).

Management stated they hope to make acquisitions in 2015.  No special dividend is planned.


Assuming Brent $70 with some reasonable assumptions, I get a PE of 12:

Due to majority ownership by ENOC, this firm cannot be a takeover target.

Trailing dividend yield is 36c, or 23p, or about 4% at a share price of 550p.


Turkmenistan is a dictatorship and one of the worlds most repressive countries, with leaders that have built cults of personality around themselves.  Do you really want to invest money in a country that erected gold plated statues to Glorious Dear Leader?


Excellent numbers from a company generating free cash-flow from a low cost resource base.  Good valuation.  Limit any investment to 2% due to the geopolitical risk.

Wednesday, February 4, 2015

Bought IEO

Bought 300 shares of IEO, at $74.19 each this morning.  Total cost USD 22,311.

WTI was ~ $53 when I bought.  I guess its long term sustainable price to be $70 - seems to be the consensus view too.

Its 1/3rd of my intended position. In case this week's breakout was real.  I'm always uneasy buying on breakout, because it comes from fear.  Fear of missing out.  My old broker used to say "Never chase".

If this breakout is fake, and oil goes down to the forties again, then I hope to accumulate at better values.  If not, today's trade may give me a consolation prize.

Sunday, February 1, 2015

Oil ETFs

I believe oil is priced below its sustainable price.  Beyond buying a few barrels to store in my flat, how can I invest in it?  All the individual companies I've looked at are not at low enough valuations for me catch a falling knife.  What about ETFs?

Oil commodity tracker ETFs, such as USO, are synthetic, since its hard to physically store  oil.  They suffer from large tracking error when the market is in contago, as they have to regularly roll over their (cheaper) expiring near term futures into longer term (expensive) ones:

(Source - - Seeking Exposure to Oil and Gas prices?  Here is what you should not do.)

ETF tracking Oil companies are better.  But most common ones, XLE or VDE, are heavily weighted towards large caps (with 22% ExxonMobil 22%, and 12% Chevron).  Looking at Jim Chanos' recent short position in XOM, I'm hesitant to bet against him.

XOP, tracking the "SPDR S&P 500 Oil and Gas exploration & production index" may be a better choice to track the WTI.   It is split by equal weightings into 80 companies, each less than 2%.  Holdings are 100% US based, around 77% are E&P.  They are all small E&P companies such as Laredo Petroleum or Parsely.  The top ten holdings make up 15%.  The risk here is that a large number of these companies go belly up -  based on 1-2m bbl/d oversupply on the global markets, US shale production needs to drop by 10-20%.

IEO, the "iShares U.S. Oil & Gas Exploration & Production ETF" is another option, which holds mostly mid-sized companies such as EOG or Andarko, with 73% E&P, also 100% US based.  The top ten holdings make up 60%.  IEO behaves as a lower beta version of XOP - they both track WTI, but IEO rises and falls less.

I'm thinking of taking a third of my planned position by buying IEO at the WTI support of $44 - too bad I missed Friday night (morning in US). Later buy another third if WTI drops below $40 - hopefully by then, valuations are down enough for me to buy individual stocks.  And then I may swap my initial IEO position into a higher risk XOP one.