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Dragon Oil PLC
06 August 2013
 



6 August 2013

 

DRAGON OIL PLC

(the "Company" or together with its subsidiaries "Dragon Oil" or the "Group")

2013 Interim Results

 

Dragon Oil plc (Ticker: DGO), an international oil and gas exploration, development and production company, today announces its interim financial and operational results for the period ended 30 June 2013. These results are prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

 

Financial highlights

(US$ million, unless stated otherwise)

1H 2013

1H 2012

Change

Revenue

491.6

588.4

-16%

Operating profit

324.1

404.2

-20%

Profit for the period

241.4

308.9

-22%

Earnings per share, basic (US cents)

49.25

60.47

-19%

Interim dividend per share (US cents)

15.00

15.00

-

Capital expenditure

149.3

207.9

-28%

Net cash generated from operating activities

219.9

483.7

-55%

Cash and cash equivalents and term deposits, excluding A&D funds

1,651.1

1,666.5

-1%

 

Operational Performance

·            Average gross production growth of 15% to approximately 73,600 bopd (1H 2012: 64,200 bopd)

        achieved in 1H 2013;

·            Six development wells completed to-date;

·            Water injection pilot project commenced at the Dzheitune (Lam) 75 area;

·            Artificial lift system successfully introduced in two wells;

·            Revenue was lower by 16% due to lower realised crude oil price of US$86/barrel;

·            Testing of the Hammamet West-3 well in the Bargou Exploration Permit is due to commence imminently.

Corporate and Commercial Developments

·            Interim dividend of 15 US cents per share announced;

·            Marketing route secured via Baku, Azerbaijan until 31 December 2014.

Outlook for 2H 2013

·            Production growth target for 2013 re-iterated at the lower end of the medium-term range of 10 to 15%;

·            Further six wells, including one sidetrack, expected to be completed by the year-end to drill a total of

        12 wells, including two sidetracks;

·            Drilling from the Dzhygalybeg (Zhdanov) A platform expected to commence in 4Q 2013;

·            Award contracts for construction of a number of wellhead and production platforms, the Gas Treatment

        Plant and expansion of the crude oil storage capacity;

·            Negotiations with the Afghanistan Ministry of Mines and Petroleum for activities in two blocks expected

         to conclude in 3Q 2013.

Outlook for 2013-15

·            Maintain the target of average annual production growth in the range of 10% to 15% over 2013-15 with

         growth rate in 2014 and 2015 of around 15%;

·            The Dzhygalybeg (Zhdanov) B platform expected to be installed in 2014;

·            Award contracts for the construction of wellhead and production platforms and another 30-inch trunkline;

·            Consortium in Iraq's Block 9 to secure a drilling rig to enable the spudding of an early well.

 

"I am pleased to report solid gross production growth in the first half of this year, at a healthy 15% compared to the corresponding period last year. Financial results for the first half of this year reflect the impact of slower than expected progress on the awarding of infrastructure projects and a revised pricing structure under the current crude oil marketing agreement. In 2H 2013, we expect to award a number of contracts for the construction of platforms and the Gas Treatment Plant. We also monitor closely alternative marketing routes and engage with market participants with an aim to diversify future export routes.

"A production test of the Hammamet West-3 well is due to commence soon in the Bargou Exploration Permit, offshore Tunisia with initial results to be available shortly thereafter. In Iraq, the consortium is undertaking necessary work to secure a drilling rig to spud an early well. In Afghanistan, we hope to conclude the negotiations in 3Q 2013 and sign the contract for the two blocks with our partners.

"The Board is pleased to announce an interim dividend of 15 US cents. This testifies to the Board's confidence in the Group's performance and strong financial position."

 

 

Glossary/Definitions/Abbreviations

A&D

Abandonment and decommissioning

Bopd

barrels of oil per day

Dragon Oil / the Group

Dragon Oil plc and its various subsidiary companies

Dual completion

Two pay zones in the same well that produce independent flow paths in the same well

EPS

Earnings per share

Mn

million

Overlifts and underlifts

Crude oil overlifts and underlifts arise on differences in quantities between the Group's entitlement production and the production either sold or held as inventory

Platform

Large structure used to house employees and machinery needed to drill wells in a reservoir to extract oil and gas for transportation to shore

PSA

Production Sharing Agreement is a contractual arrangement for exploration, development and production of hydrocarbon resources in the Cheleken Contract Area

Sidetrack

An efficient way to drill a new well via re-entering and then deviating from an existing wellbore with drilling equipment to access reserves from alternate zones or pools of hydrocarbons

Single completion

One pay zone in a development well that produces an independent flow path

US cents

United States cents

US$

United States Dollars

Workover

Well intervention involving invasive techniques, such as wireline, coiled tubing or snubbing

 



A conference call for analysts will take place today at 9.00a.m. BST. For details, please contact Priscilla Garcia at Citigate Dewe Rogerson on +44 (0)20 7282 1075 or at priscilla.garcia@citigatedr.co.uk.

A replay of the call will be available from around 12.00pm today for one week on the following telephone number:

UK/International

+44 (0)20 3427 0598

Ireland

+353 (0)1 486 0902

USA/International

+1 347 366 9565

Passcode

2130689

Dragon Oil plc (+44 (0)20 7647 7804)

Anna Gavrilova

Citigate Dewe Rogerson (+44 (0)20 7638 9571)

Martin Jackson

Priscilla Garcia

 

About Dragon Oil

Dragon Oil plc is an international oil and gas exploration, development and production company, quoted on the London and Irish Stock exchanges (Ticker symbol: DGO). Its principal producing asset is in the Cheleken Contract Area, in the eastern section of the Caspian Sea, offshore Turkmenistan.

Dragon Oil (Turkmenistan) Ltd., a wholly owned subsidiary of Dragon Oil plc, holds 100% interest in, and is the operator of, the Production Sharing Agreement for the Cheleken Contract Area. The operational focus is on the re-development of two oil and gas producing fields, Dzheitune (Lam) and Dzhygalybeg (Zhdanov).

The Group has exploration blocks in Tunisia, Iraq and Afghanistan. Dragon Oil's diversification strategy is to add exploration and production assets within Africa, parts of Asia and the Middle East in order to create a diversified and balanced portfolio of assets for the Group.

 

www.dragonoil.com 

Disclaimer

This news release may contain forward-looking statements concerning the financial condition and results of operations of Dragon Oil. Forward-looking statements are statements of future expectations that are based on management's current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. No assurances can be given as to future results, levels of activity and achievements and actual results, levels of activity and achievements may differ materially from those expressed or implied by any forward-looking statements contained in this report. Dragon Oil does not undertake any obligation to update publicly or revise any forward-looking statement as a result of new information, future events or other information.

2013 Interim Results

 

Chief Executive Officer's Statement

OVERVIEW

Solid production growth at 15% compared to the same period last year was achieved in the Cheleken Contract Area. Dragon OiI completed six wells, including one sidetrack; the underlying performance from the existing wells was strong and continues to hold. We have introduced an artificial lift system in two wells and initial results are encouraging. Further studies will be undertaken to examine a wider application of the artificial lift systems. The pilot water injection project has commenced in the Dzheitune (Lam) 75 area and we expect to see the initial results in the next six months.

Revenue in the first half of the year was down by 16% primarily on account of lower realised crude oil prices at US$86 per barrel as a result of the revised pricing under the current marketing agreement. We anticipate that over the course of the agreement, expiring on 31 December 2014, the discount to Brent will range between 14% and 21%. 

On the infrastructure front, installation of the Dzhygalybeg (Zhdanov) A platform is progressing well with drilling expected to commence from this platform in 4Q 2013. We are currently reviewing options for an optimum location of the Dzhygalybeg (Zhdanov) B platform. Limited availability of quality contractors in the Caspian Sea region has held back our plans to add new platforms as quickly as intended; however, significant progress has been made this year to enable the Group to award contracts in the near future for the construction of up to four platforms.

At the same time, tendering processes are ongoing to award contracts for the construction of the Gas Treatment Plant and another 30-inch oil and gas trunkline as well as for expansion of the crude oil storage capacity and the Central Processing Facility.

Availability of drilling capacity remains key to the Group's operations. While the arrival of the Caspian Driller and delivery of Land Rig 3 have been delayed; we have signed a memorandum of understanding for new jack-up drilling capacity to be used for a period of three years. This would make up to five drilling rigs available for part or all of 2014 and 2015 to enable the Group to reach the 100,000 bopd target in 2015.

Production testing of the Hammamet West-3 well is due to commence shortly in the Bargou Exploration Permit area, offshore Tunisia. This well is designed to intersect the open fractures within the Abiod formation thereby testing the flow potential of the reservoir. We look forward to seeing test results from the well in the near future. In Iraq, our consortium is undertaking the necessary work to enable the drilling of an early well and is in discussions to secure a drilling rig to spud this well. Discussions with the Afghanistan Ministry of Mines and Petroleum for the exploration, development and production activities in two blocks in northern Afghanistan are nearing completion and we anticipate these negotiations and subsequent approvals to conclude in the third quarter of this year.

The Board is announcing an interim dividend of 15 US cents. We maintain a strong unleveraged balance sheet with US$1.7 billion of cash, excluding funds set aside for abandonment and decommissioning activities, to support our operations in the Cheleken Contract Area and exploration activities, return value to shareholders and continue our diversification strategy.

 

OPERATIONS OVERVIEW

Turkmenistan

Production and Entitlement

For 1H 2013, the gross field production averaged 73,600 bopd (1H 2012: 64,200 bopd) at observed temperature representing an increase of 15% over the comparable period. Six wells, including one sidetrack, were completed as well as an artificial lift system was introduced in two wells.

The entitlement production for 1H 2013 was approximately 44% (1H 2012: 49%) of the gross production. Entitlement barrels are finalised in arrears and are dependent on, amongst other factors, operating and development expenditure in the period and the realised crude oil price. Entitlement barrels in 1H 2013 resulting from operation of the fiscal terms of the Production Sharing Agreement are lower due primarily to slower than expected development spend, despite lower realised crude oil prices.

Marketing

Dragon Oil sold 5.7 million barrels of crude oil in 1H 2013 (1H 2012: 5.8 million barrels). Lower entitlement percentage and change in the lifting position were the main reasons for a 2% decrease in the volume sold over the comparable period.

In 1H 2013, Dragon Oil exported 100% (1H 2012: 100%) of its crude oil production through Baku, Azerbaijan. This follows the signing of a two-year agreement with Socar Trading for the sale of the full volume of our export entitlement production via Baku, Azerbaijan, until 31 December 2014, FOB (free-on-board) the Aladja Jetty.

The average realised crude oil price during the first half of 2013 was approximately US$86/bbl (1H 2012: US$102/bbl), at a provisional discount of 20% (1H 2012: 10%) to Brent.

We revised our previous guidance on the discount to Brent in light of the fact that the pricing period is not fully aligned with the reporting period under the current arrangement and the discount was previously estimated in a flat oil price environment. We now expect that the realised crude oil prices will range at between a 14% and 21% discount to Brent for the duration of this marketing agreement reflecting an increasing or decreasing oil price throughout the corresponding pricing period. If the present recovery of crude oil prices continues we expect the actual discount in the period to be at around 18% to Brent.

We continue to review alternative routes for marketing our crude oil in line with our strategy to have a number of routes available to access international markets and maintain flexibility in operations.

Drilling

During the first six months of 2013, Dragon Oil completed six wells, including one sidetrack, in the Dzheitune (Lam) field. The following table summarises the results of this drilling programme:

Completion date

Depth (metres)

Type of completion

Initial test rate (bopd)

28/178

February

2,010

Single

1,653

28/179

March

1,885

Single

1,975

28/182

April

1,986

Single

1,876

21/180

June

Suspended due to high gas pressure

21/181

June

3,475

Dual

960

28/151A

June

2,000

Single sidetrack

869

The jack-up rig is currently drilling the Dzheitune (Lam) C/183 well. The leased platform-based rig ("Land Rig 1") is being mobilised to the Dzheitune (Lam) 22 platform, where after its scheduled maintenance it is expected to commence drilling the Dzheitune (Lam) 22/184 well in September 2013.

The Caspian Driller jack-up rig ("Caspian Driller") has been moved to a ship yard in Kazakhstan where it is undergoing final completion and preparation for commissioning, which are expected to take up to three months. Following commissioning, the Caspian Driller is due to be mobilised to the Cheleken Contract Area at the end of 2013 with drilling expected to commence in 1Q 2014. The timing of the arrival of the rig will be confirmed later in the year dependent on the progress with the commissioning of the rig.

Towards the end of 3Q 2013, the Group anticipates the arrival of one of the platform-based rigs ("Land Rig 2") secured for drilling in the Dzhygalybeg (Zhdanov) field. It is expected to commence drilling shortly thereafter from the Dzhygalybeg (Zhdanov) A platform. The delivery of the other platform-based rig ("Land Rig 3") is being delayed on the contractor's side and is currently expected in 1Q 2014 with drilling to commence in mid-2014.

Dragon Oil has recently signed a memorandum of understanding (MOU) with BKE Shelf to contract for the use of jack-up drilling capacity in the Caspian Sea for a total period of three years. The Neptune drilling rig is expected to be available in 3Q 2013 and will be used for nine months; the Mercury drilling rig is anticipated to be available in 4Q 2014 and will be used for the remainder of the term.

We have started using an artificial lift system, specifically jet pumps, on two wells in the Dzheitune (Lam) area and have seen encouraging results. Our intention is to do a more detailed engineering design study in the near future for a wider implementation.

Water Injection

Pilot water injection has commenced on a permanent basis at the Dzheitune (Lam) 75 platform and we anticipate seeing the initial results in the next six months. A second pilot water injection project is planned for the Dzheitune (Lam) 13 area in the next few months. The long-term focus of the water flooding will be on the Dzheitune (Lam) main area.

Infrastructure

The top side of the Dzhygalybeg (Zhdanov) A platform is currently being installed to have the platform ready for drilling in September 2013. Drilling is scheduled to commence thereafter from this platform using one of the platform-based rigs expected to arrive into the Cheleken Contract Area towards the end of 3Q 2013.

Assembly of the Dzhygalybeg (Zhdanov) B platform is continuing in Dragon Oil's yard in the harbour area in Hazar, Turkmenistan near our operations. We are currently reviewing options for its optimum location. Both new Dzhygalybeg (Zhdanov) platforms will have 16 slots each: eight for drilling with a jack-up rig and eight for drilling using a land rig.

The tendering processes to award contracts for the construction and installation of up to four platforms in the Dzheitune (Lam) field and associated pipelines, including the Dzheitune (Lam) D and E platforms, are ongoing. The technical evaluation of submitted bids has been completed. We anticipate the award of these contracts to take place in the second half of 2013 and early 2014. These platforms are expected to be constructed and installed in 2015 - 16.

The tendering process to select an engineering, procurement, installation and construction contractor to quadruple our crude oil storage capacity at the Central Processing Facility is expected to conclude with the award of the contract in 3Q 2013. The tank farm is anticipated to be constructed and commissioned in 4Q 2015 with a number of tanks built on a priority basis.

The tendering process to select a contractor to build another 30-inch trunkline from one of the future platforms in the Dzheitune (Lam) field to the Central Processing Facility is ongoing. The purpose of the additional trunkline will be to transport oil and gas production onshore to accommodate production growth. The award of the contract is expected in 1H 2014. Simultaneously with this project, we have already started partial replacement of the two existing 12-inch pipelines creating flexibility in the oil and gas pipeline network.

Within the first phase of its strategy for plugging, abandonment and decommissioning of the old non-producing wells and non-producing platforms in the Cheleken Contract Area, Dragon Oil has plugged and abandoned another non-producing old well, bringing the total of plugged and abandoned wells to three. The execution of this strategy is part of the abandonment and decommissioning activities the Group plans to undertake to fulfil its obligations under the Production Sharing Agreement. Up to 13 non-producing wells remain to be logged for evaluation before being completely plugged and abandoned. The cost of this and future projects is to be covered from the abandonment and decommissioning funds, set aside for this activity.

Gas Treatment Plant

The tendering process for an engineering, procurement, installation and construction project for the Gas Treatment Plant is ongoing with technical bids currently under evaluation. The intention is to award a contract in 4Q 2013. We anticipate the construction phase to take two to three years after the contract is awarded.

The processing capacity of the plant is expected to be 360 mmscfd of gas, which, according to our estimates, to be verified at a later stage, should allow us in the future to strip around 3,600 barrels (annual average) of condensate (depending on the final gas composition) and blend our share of condensate with our entitlement share of crude oil. The split of the produced condensate is subject to the same terms under the Production Sharing Agreement as crude oil.

Iraq

The formal contract for the exploration, development and production service contract for Block 9 in the Basra region was signed between the Iraqi Ministry of Oil and the consortium in January 2013. The work commitment on the block within the initial five-year exploration period will include de-mining, seismic acquisition and interpretation and drilling of an exploration well. The first meeting of the joint management committee took place in March and the partners (Kuwait Energy 70% and operator and Dragon Oil 30%) agreed to conduct all the necessary work to enable the drilling of an early well. The consortium is in the process of securing a drilling rig to spud a well.

Tunisia

Testing of the Hammamet West-3 well in the Bargou Exploration Permit, offshore Tunisia, is due to commence imminently with initial results expected shortly.

High gas readings were reported at the start of the sidetrack; additional oil and gas shows have also been observed over a number of intervals. Ultraviolet fluorescence has been observed on the cuttings, which indicates the likely presence of oil. The high gas readings and oil shows observed on the cuttings coincide with features seen on the image logs from Logging While Drilling analysis, which probably indicate the existence of a fracture zone intersected by the well within this interval. Recent significant drilling mud losses and subsequent observations of oil and gas in the mud point to the presence of oil in an open porous, fracture system in the Abiod Formation target.

Dragon Oil is contributing 75% of the cost to drill the Hammamet West-3 well, according to an agreed well plan scope, up to a cost cap of US$26.6 million (on a 100% basis). Costs in excess of the cost cap will be shared among the joint venture partners pro rata to their participating interest.Based on the latest plan the well cost is now estimated to be around US$59 million.

Afghanistan

A consortium of companies has been selected as the winning bidder for two exploration blocks, Sanduqli and Mazar-i-Sharif, in the Afghan-Tajik Phase 1 Oil & Gas Tender. The consortium is currently in the final stages of negotiations with the Afghanistan Ministry of Mines and Petroleum for the exploration, development and production activities in these two blocks, which are expected to conclude in 3Q 2013.

The contract has been initialled and submitted for final approval of the authorities. The participating interest of Dragon Oil, Turkiye Petrolleri A.O. (TPAO) and the Ghazanfar Group in the two blocks is 40%, 40% and 20% respectively. Dragon Oil shall be the operator of the Sanduqli block while the Mazar-i-Sharif block would be operated by TPAO.

Dragon Oil's diversification strategy remains to screen and evaluate targets that fit our criteria within Africa, parts of Asia and the Middle East in order to create a diversified and balanced portfolio of exploration and development assets for the Group.

 

MATERIAL EVENTS

Board change

On 2 March 2013, Nigel McCue stepped down from the Board of Directors of the Company after over 10 years of excellent contribution of his knowledge and experience to the Board's work. Mr McCue had served on the Board of the Company for more than 10 years having been appointed in April 2002. He had also served as the Senior Independent Non-executive Director. Thor Haugnaess has temporarily assumed the role of Senior Independent Non-executive Director. The Board is searching for an Independent Director to replace Mr McCue.

Interim dividend

The Board is pleased to announce the interim dividend of 15 US cents per share. The final dividend in respect of 2013 will be announced at the time of publication of the 2013 full-year results in February 2014. The interim dividend is not subject to shareholder approval.

The following is the dividend timetable for the shareholders' information:

 

6 August 2013: Declaration of interim dividend

14 August 2013: Ex-Dividend Date

16 August 2013: Record Date

16 September 2013: Dividend Payment Date.

 

Corporate Social Responsibility

The polyclinic building and related infrastructure in the town of Hazar, Turkmenistan, have been completed. The official inauguration took place in March 2013. It is a high quality facility the use of which will significantly improve the healthcare services offered to our employees, their families and local citizens from Hazar and neighbouring towns. The facilities are currently being handed over to the local authorities who will be responsible for operating the polyclinic.

2013 Principal risks and uncertainties

In accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, a description of the principal risks and uncertainties facing the Group in the six months to 31 December 2013 is set out below:

§ Oil prices

The Group's business is the production of hydrocarbons from the Cheleken Contract Area in the Caspian Sea, Turkmenistan. The financial performance of the Group and its ability to fund development plans may, therefore, be negatively affected by adverse movements in the price of oil. The Group actively monitors its exposure to oil prices and retains flexibility in sizing its development programme.

§ Provisionally priced sales

Under the current crude oil marketing arrangement, part of the revenue from the sale of crude oil, and correspondingly the trade receivables, is recognised at provisional prices at reporting period ends, subject to determination of final pricing at the end of the pricing period. In respect of the provisionally priced sales, fluctuations in crude oil prices at the end of the pricing period can impact the Group's revenue and realisation of receivables to the extent of the change in the prices determined at the end of the pricing period.

The Group does not use derivative financial instruments to manage the exposure to crude oil prices.

§ Export routes

Current available export routes to sell crude oil from the Caspian Sea region to international markets are via Azerbaijan, Russia and Kazakhstan. The Group currently exports all of its crude oil via Azerbaijan. The success of this marketing arrangement will continue to be evaluated over the longer term.  At the same time, we are also evaluating alternative export routes.

§ Other

Other medium to long-term principal risks and uncertainties facing the Group are as disclosed in the 2012 Annual Report, available on Dragon Oil's website at www.dragonoil.com. These include, among other risks and uncertainties, the following: risk related to having a sole producing asset; country risk; ability to attract, retain and motivate highly skilled and talented personnel; availability of drilling rigs; quality of contractors to undertake projects; risks related to Health, Safety and Environment hazards; asset integrity regarding pre-PSA infrastructure; uncertainty of estimates of oil and gas reserves and future net revenues; risks related to economics under the PSA; risks related to the gas development project; security of cash balances; risks related to approval processes and licences; impact from sanctions against Iran; adequacy of internal controls.

 

FINANCIAL OVERVIEW

US$ million (unless stated)

1H 2013

1H 2012

Change

Revenue 

491.6

588.4

-16%

Operating profit 

324.1

404.2

-20%

Profit for the period 

241.4

308.9

-22%

Net cash generated from operating activities

219.9

483.7

-55%

Earnings per share, basic (US cents)

49.25

60.47

-19%

Earnings per share, diluted (US cents)

49.19

60.34

-18%

Interim dividend per share (US cents)

15.00

15.00

-

Total equity  

3,039.7

2,791.5

+9%

 

Income Statement

Revenue

In the first half of 2013, the Group's revenue decreased by 16% to US$491.6 million (1H 2012: US$588.4 million). The Group sold 5.7 million barrels of crude oil (1H 2012: 5.8 million barrels) at a realised price of US$86/bbl (1H 2012: US$102/bbl). Of the overall revenue decrease, 94% was attributed to a lower realised crude oil price with the balance due to marginally lower volume sold. Revenue includes provisionally priced sales of US$206.8 million (1H 2012: nil) due to the structure of the current marketing agreement when the pricing period does not fully coincide with the reporting period.

Operating profit

Cost of sales decreased by US$17.5 million to US$151.8 million (1H 2012: US$169.3 million). Cost of sales includes operating and production costs and depletion charges. The depletion charge of US$101.9 million (1H 2012: US$105.7 million) was lower by 4% than the charge in the corresponding period in 2012. The depletion charge was lower primarily due to reserves replacement offset by an upward revision in the estimated long-term oil price in 2H 2012. While the field operating costs have largely remained in line with the comparable period, the decrease in the operating and production costs is primarily attributed to movement in the lifting position.

The Group generated an operating profit of US$324.1 million in 1H 2013 (1H 2012: US$404.2 million), which was lower by 20% over the comparable period. The decrease in operating profit of US$80.1 million was primarily on account of lower revenue partly offset by lower cost of sales. Administrative expenses (net of other income) at US$15.7 million (1H 2012: US$15 million) were higher by 5%, primarily due to an increase in corporate costs. 

Profit for the period

The profit for the first six months of 2013, at US$241.4 million (1H 2012: US$308.9 million), includes a taxation charge of US$88.4 million (1H 2012: US$105.4 million), and finance income of US$5.7 million (1H 2012: US$10.2 million). The taxation charge was lower during the period on account of lower profits. The finance income was lower due to a reduced average cash balance on deposit and lower interest yields achieved during the first six months of the year in a weak interest rate environment.

During 2008, the effective tax rate applicable to the Group's operations in Turkmenistan was increased by 5% to 25% by the Hydrocarbon Resources Law of 2008.  The Group has continued to apply this rate in determining its tax liabilities as at 30 June 2013.  The Group is in discussions with the authorities in Turkmenistan about the applicability of this rate to periods prior to 2008, but it does not believe that prior periods are affected by this increase. A provision of US$11.1 million has been made in respect of the additional tax that could become payable if the increased tax rate were applied to prior periods.

Basic EPS of 49.25 US cents in the first half of this year were 19% lower than the basic EPS in the same period last year (1H 2012: 60.47 US cents) primarily due to lower net profit despite the decrease in the number of shares in issue during the period.

Balance Sheet

Net book value of property, plant and equipment increased by US$21.8 million due to capital expenditure of US$123.7 million incurred (1H 2012: US$207.9 million) offset by the depletion and depreciation charge of US$101.9 million (1H 2012: US$105.7 million) during the period. Of the total capital expenditure, US$76.5 million (1H 2012: US$95.6 million) was attributable to drilling with the balance spent on infrastructure. The infrastructure spend during the period included construction of the Dzhygalybeg (Zhdanov) A and B platforms, additional slots on the Dzheitune (Lam) 21 and 22 platforms.

Current Assets and Liabilities

Current assets increased by US$99.9 million, primarily due to higher trade receivables and term deposits  offset by lower cash and cash equivalents, as compared to 2012 year-end. The trade receivables increased by US$118.2 million on account of the credit terms under the current marketing arrangement.

Cash and cash equivalents and term deposits as at 30 June 2013 were US$2,125.0 million (31 December 2012: US$2,144.2 million), including US$473.9 million (31 December 2012: US$407.7 million) set aside for abandonment and decommissioning activities.

Current liabilities decreased by US$50.7 million due to a reduction of US$76.0 million in the current income tax liability partly offset by an increase of US$25.3 million in trade and other payables.

Cash flows

Net cash generated from operating activities in 1H 2013 of US$219.9 million was 55% lower than net cash generated in the same period last year (1H 2012: US$483.7 million), with the decrease primarily attributed to a lower revenue during the period and movement in working capital, partly offset by lower tax paid.

Net cash used in investing activities in 1H 2013 was US$398.1 million (1H 2012: US$163.6 million) comprising of capital expenditure of US$181.9 million and amounts of US$221.9 million placed on term deposits, partly offset by interest income of US$5.7 million received during the period.

Net cash used in financing activities in 1H 2013 was US$63.0 million (1H 2012: US$107.8 million) primarily due to the payment of 2012 final dividends of US$73.6 million partly offset by an inflow of US$10.8 million on issue of new shares following the exercise of share options.

 

OUTLOOK

For 2013, the updated target is to put into production a total of 12 wells, including two sidetracks of existing wells. This is due to delays with the delivery of rigs this year; the Group expects to have sufficient drilling capacity with up to five drilling rigs operational for part or all of 2014 and 2015 to enable us to reach targeted production levels.

Six wells, including one sidetrack, have already been competed to-date with another six wells, including one sidetrack, to be put into production by the end of the year. The remaining wells will be drilled by Land Rig 1 (one well), the jack-up rig (four wells) and Neptune jack-up rig (one sidetrack) on the Dzheitune (Lam) 22, C and 21 platforms, respectively. Land Rig 2 is expected to spud a well from the Dzhygalybeg (Zhdanov) A platform in 4Q 2013, which is likely to be completed early in 2014. The Caspian Driller and Land Rig 3 are expected to commence drilling in 1Q 2014 and mid-2014, respectively.

Having seen solid performance from the existing wells and taking into account forecast production from the future wells that remain to be completed in 2013, we reiterate our guidance of average gross production growth at the lower end of the medium-term growth rate range of 10% to 15% for 2013. Our anticipated capital expenditure on infrastructure and drilling is estimated at US$450 million. We maintain our medium-term guidance over the 2013-15 period of average gross production growth of 10% to 15% per annum, taking our gross field production to the target level of 100,000 bopd in 2015 and maintaining this plateau for a minimum period of five years. For 2013-15 the estimated capital expenditure for infrastructure and drilling in the Cheleken Contract Area remains US$1.5 billion.

 

Dr Abdul Jaleel Al Khalifa

Chief Executive Officer 

Dragon Oil plc

 

- end -

Condensed group balance sheet

 







Unaudited



 

Note

30 June

2013

31 December

2012



US$'000

US$'000

ASSETS




Non-current assets




Property, plant and equipment

6

1,545,881

1,524,157

Intangible assets

7

31,098

5,466



------------------------

------------------------



1,576,979

1,529,623



------------------------

------------------------





Current assets




Inventories


13,425

12,387

Trade and other receivables


275,011

156,858

Term deposits

9

2,088,108

1,866,228

Cash and cash equivalents

9

36,862

277,997



------------------------

------------------------



2,413,406

2,313,470



------------------------

------------------------

Total assets


3,990,385

3,843,093



==========

==========

EQUITY

Capital and reserves attributable to equity shareholders

 

 

 

 

 

 

Share capital

10a

77,720

77,474

Share premium

10a

244,440

233,889

Capital redemption reserve

10b

80,644

80,644

Other reserve


6,226

8,022

Retained earnings


2,630,664

2,459,287



------------------------

------------------------

Total equity


3,039,694

2,859,316



------------------------

------------------------

LIABILITIES




Non-current liabilities




Trade and other payables

11

707

1,290

Deferred income tax liabilities


159,945

141,789



------------------------

------------------------



160,652

143,079



------------------------

------------------------

Current liabilities




Trade and other payables

11

591,447

566,070

Current income tax liabilities


198,592

274,628



------------------------

------------------------



790,039

840,698



------------------------

------------------------

Total liabilities


950,691

983,777



------------------------

------------------------

Total equity and liabilities


3,990,385

3,843,093



==========

==========

 

 

 

Condensed group income statement

 



Unaudited

Unaudited


Note

6 months

ended

30 June 2013

6 months

ended

30 June 2012



US$'000

US$'000





Revenue

12

491,640

588,394





Cost of sales


(151,822)

(169,287)



-------------------

-------------------

Gross profit


339,818

419,107





Administrative expenses


(15,861)

(15,173)

Other income


165

220



-------------------

-------------------

Operating profit


324,122

404,154





Finance income


5,702

10,205



-------------------

-------------------

Profit before income tax


329,824

414,359





Income tax expense

16

(88,391)

(105,435)



-------------------

-------------------

Profit attributable to equity holders of the Company


241,433

308,924



========

========









 

Earnings per share attributable to equity holders of the Company


US Cents

per share

US Cents

per share

Basic

14

49.25c

60.47c

Diluted

14

49.19c

60.34c



========

========

 

 

 

Condensed group statement of comprehensive income

 



Unaudited

Unaudited



6 months

ended

30 June 2013

6 months

ended

30 June 2012



US$'000

US$'000





Profit attributable to equity holders of the Company


241,433

308,924



-------------------

-------------------

Total comprehensive income for the period


241,433

308,924



========

========

 

 

 

Condensed group statement of changes in equity


Share

capital

Share

premium

Capital

redemption

reserve

Other

reserve

Retained

earnings

Total


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

For the six months ended 30 June 2013 (Unaudited)






 








At 1 January 2013

77,474

233,889

80,644

8,022

2,459,287

2,859,316


-----------------

-------------------

-----------------

---------------

----------------------

----------------------

Total comprehensive income for the period

-

-

-

-

241,433

241,433

 

-----------------

-------------------

-----------------

---------------

----------------------

----------------------

Shares issued during the period

246

10,551

-

-

-

10,797

Employee share option scheme:







  -value of services provided

-

-

-

1,903

-

1,903

Transfer on exercise of share options

-

-

-

(3,699)

3,699

-

Dividends (Note 13)

-

-

-


(73,586)

(73,586)

Employee share purchase plan contribution

-

-

-


(169)

(169)


-----------------

-------------------

-----------------

---------------

----------------------

----------------------

Total transactions with owners

246

10,551

-

(1,796)

(70,056)

(61,055)

 

-----------------

-------------------

-----------------

---------------

----------------------

----------------------

At 30 June 2013

77,720

244,440

80,644

6,226

2,630,664

3,039,694


=======

========

=======

======

==========

==========

For the six months ended 30 June 2012 (Unaudited)


 





 






 

At 1 January 2012

80,169

231,635

77,825

5,489

2,193,427

2,588,545


-----------------

-------------------

-----------------

---------------

----------------------

----------------------

Total comprehensive income for the period

-

-

-

-

308,924

308,924

 

-----------------

-------------------

-----------------

---------------

----------------------

----------------------

Shares issued during the period

99

1,687

-

-

-

1,786

Employee share option scheme:







  -value of services provided

-

-

-

1,854

-

1,854

Transfer on exercise of share options

-

-

-

(1,196)

1,196

-

Dividends (Note 13)

-

-

-

-

(56,231)

(56,231)

Shares repurchased and cancelled

(763)

-

763

-

(52,713)

(52,713)

Employee share purchase plan contribution

-

-

-

-

(671)

(671)

 

-----------------

-------------------

-----------------

---------------

----------------------

----------------------

Total transactions with owners

(664)

1,687

763

658

(108,419)

(105,975)

 

-----------------

-------------------

-----------------

---------------

----------------------

----------------------

At 30 June 2012

79,505

233,322

78,588

6,147

2,393,932

2,791,494


-----------------

-------------------

-----------------

---------------

----------------------

----------------------

 

 

 

Condensed group cash flow statement

 


Note

Unaudited

6 months

ended

30 June 2013

Unaudited

6 months

ended

30 June 2012



US$'000

US$'000





Cash generated from operating activities

15

366,169

635,499





Income tax paid


(146,271)

(151,765)



------------------

------------------

Net cash generated from operating activities


219,898

483,734



------------------

------------------

Cash flows from investing activities




Additions to property, plant and equipment


(156,265)

(172,008)

Additions to intangible assets


(25,632)

(1,574)

Interest received on bank deposits


5,702

10,205

Amounts placed on term deposits (with original




maturities of over three months)


(221,880)

(178)



------------------

------------------

Net cash used in investing activities


(398,075)

(163,555)



------------------

------------------

Cash flows from financing activities




Proceeds from issue of share capital

10a

10,797

1,786

Dividends paid

13

(73,586)

(56,231)

Shares repurchased

10a

-

(52,713)

Employee share purchase plan contribution


(169)

(671)



------------------

------------------

Net cash used in financing activities


(62,958)

(107,829)



------------------

------------------





Net (decrease) / increase in cash and cash equivalents


(241,135)

212,350





Cash and cash equivalents at the beginning of the period


277,997

87,499



------------------

------------------

Cash and cash equivalents at the end of the period


36,862

299,849



========

========

 

 

 

1          General information

 

Dragon Oil plc (the "Company") and its subsidiaries (together, "the Group") are engaged in upstream oil and gas exploration, development and production activities primarily in Turkmenistan under a Production Sharing Agreement ("PSA") signed between Dragon Oil (Turkmenistan) Limited and The State Agency for Management and Use of Hydrocarbon Resources at the President of Turkmenistan ("the Agency"). The production of crude oil is shared between the Group and the Government of Turkmenistan as determined in accordance with the fiscal terms as contained in the PSA.    The Group headquarters is based in Dubai, United Arab Emirates.

 

The Company is a public limited company, incorporated and domiciled in the Republic of Ireland in September 1971. The address of its registered office is 6th Floor, South Bank House, Barrow Street, Dublin 4, Ireland. The registration number is 35228.

 

The Company's ordinary shares have a primary listing on the Irish Stock Exchange and premium listing on the London Stock Exchange.

 

This condensed consolidated interim financial information ("interim financial information") was approved for issue by the Board of Directors on 5 August 2013.

 

2          Basis of preparation of interim financial information

 

This interim financial information for the six months ended 30 June 2013 has been prepared in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the related Transparency Rules of the Central Bank of Ireland and with International Accounting Standard 34, "Interim financial reporting" ("IAS 34") as adopted by the European Union. The interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2012, which have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union. The interim financial information has been prepared under the historical cost convention except for the measurement at fair value of underlift receivables/overlift payables and provisionally priced trade receivables.

 

The preparation of the interim financial information includes the use of estimates and assumptions that affect items reported in the condensed Group balance sheet and the condensed Group income statement. Although these estimates are based on management's best knowledge of current circumstances and assumptions about future events and actions, actual results may differ from those estimates.

 

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

 

3          Accounting policies

 

The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2012, as described in those annual financial statements, except for the adoption of new standards and interpretations as of 1 January 2013.

 

(a)     New standards, interpretations and amendments adopted by the Group

 

The Group applies, for the first time, certain standards and amendments which includes amendments to IAS 1 Presentation of Financial Statements. As required by IAS 34, the nature and the effect of these changes are disclosed below.

 

Several other new standards and amendments apply for the first time in 2013. However, they do not impact the annual consolidated financial statements of the Group or the interim condensed consolidated financial statements of the Group.

 

The nature and the impact of each new standard/amendment is described below:

 

IAS 1 Presentation of Items of Other Comprehensive Income - Amendments to IAS 1              

 

The amendments to IAS 1 introduce a grouping of items presented in other comprehensive income. Items that could be reclassified (or recycled) to profit or loss at a future point in time (e.g., net gain on hedge of net investment, exchange differences on translation of foreign operations, net movement on cash flow hedges and net loss or gain on available-for-sale financial assets) now have to be presented separately from items that will never be reclassified (e.g., actuarial gains and losses on defined benefit plans and revaluation of land and buildings). The amendment affected presentation only and had no impact on the Group's financial position or performance.

 

IAS 1 Clarification of the requirement for comparative information (Amendment)

 

The amendment to IAS 1 clarifies the difference between voluntary additional comparative information and the minimum required comparative information. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional voluntarily comparative information does not need to be presented in a complete set of financial statements.

 

An opening statement of financial position (known as the 'third balance sheet') must be presented when an entity applies an accounting policy retrospectively, makes retrospective restatements, or reclassifies items in its financial statements, provided any of those changes has a material effect on the statement of financial position at the beginning of the preceding period. The amendment clarifies that a third balance sheet does not have to be accompanied by comparative information in the related notes. Under IAS 34, the minimum items required for interim condensed financial statements do not include a third balance sheet.

 

IAS 32 Tax effects of distributions to holders of equity instruments (Amendment)

 

The amendment to IAS 32 Financial Instruments: Presentation clarifies that income taxes arising from distributions to equity holders are accounted for in accordance with IAS 12 Income Taxes. The amendment removes existing income tax requirements from IAS 32 and requires entities to apply the requirements in IAS 12 to any income tax arising from distributions to equity holders. The amendment did not have an impact on the interim condensed consolidated financial statements of the Group.

 

IAS 34 Interim financial reporting and segment information for total assets and liabilities (Amendment)

 

The amendment clarifies the requirements in IAS 34 relating to segment information for total assets and liabilities for each reportable segment to enhance consistency with the requirements in IFRS 8 Operating Segments. Total assets and liabilities for a reportable segment need to be disclosed only when the amounts are regularly provided to the Chief Operating Decision-maker ("CODM") and there has been a material change in the total amount disclosed in the entity's previous annual consolidated financial statements for that reportable segment. The amendment did not have an impact on the interim condensed consolidated financial statements of the Group.

 

IAS 19 Employee Benefits (Revised 2011) (IAS 19R)

 

IAS 19R includes a number of amendments to the accounting for defined benefit plans, including actuarial gains and losses that are now recognised in other comprehensive income and permanently excluded from profit and loss; expected returns on plan assets that are no longer recognised in profit or loss, instead, there is a requirement to recognise interest on the net defined benefit liability (asset) in profit or loss, calculated using the discount rate used to measure the defined benefit obligation, and; unvested past service costs are now recognised in profit or loss at the earlier of when the amendment occurs or when the related restructuring or termination costs are recognised. Other amendments include new disclosures, such as, quantitative sensitivity disclosures. The amendment did not have an impact on the interim condensed consolidated financial statements as the Group does not have any defined benefit plans.

 

IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities -

Amendments to IFRS 7

 

The amendment requires an entity to disclose information about rights to set-off financial instruments and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity's financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether the financial instruments are set off in accordance with IAS 32. As the Group is not setting off financial instruments in accordance with IAS 32 and does not have relevant offsetting arrangements, the amendment does not have an impact on the Group.

 

IFRS 13 Fair Value Measurement

 

IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The application of IFRS 13 has not materially impacted the fair value measurements carried out by the Group.

 

IFRS 13 also requires specific disclosures on fair values, some of which replace existing disclosure requirements in other standards, including IFRS 7 Financial Instruments: Disclosures. Some of these disclosures are specifically required in interim financial statements by IAS 34.16A(j), thereby affecting the interim condensed consolidated financial statements period. The Group provides these disclosures in Note 8.

 

(b)     Standards and amendments issued that are not yet effective and have not been early adopted by the Group

 

IFRS 10 Consolidated Financial Statements and IAS 27 Separate Financial Statements

 

IFRS 10 establishes a single control model that applies to all entities including special purpose entities. IFRS 10 replaces the parts of previously existing IAS 27 Consolidated and Separate Financial Statements that dealt with consolidated financial statements and SIC-12 Consolidation - Special Purpose Entities. IFRS 10 changes the definition of control such that an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. To meet the definition of control in IFRS 10, all three criteria must be met, including: (a) an investor has power over an investee; (b) the investor has exposure, or rights, to variable returns from its involvement with the investee; and (c) the investor has the ability to use its power over the investee to affect the amount of the investor's returns. IFRS 10 is not expected to have any impact on the currently held investments of the Group. This standard becomes effective for annual periods beginning on or after 1 January 2014.

 

IFRS 11 Joint Arrangements and IAS 28 Investment in Associates and Joint Ventures

 

IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities - Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities ("JCEs") using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture under IFRS 11 must be accounted for using the equity method. This standard becomes effective for annual periods beginning on or after 1 January 2014. The Group is currently assessing the impact that this standard will have on its financial position and performance.

 

IFRS 12 Disclosure of Interests in Other Entities

 

IFRS 12 sets out the requirements for disclosures relating to an entity's interests in subsidiaries, joint arrangements, associates and structured entities. This standard becomes effective for annual periods beginning on or after 1 January 2014. The Group is currently assessing the impact of this standard.

 

In addition to the above-mentioned amendments and new standards, IFRS 1 First-time Adoption of International Financial Reporting Standards was amended with effect for reporting periods starting on or after 1 January 2013. The Group is not a first-time adopter of IFRS, therefore, this amendment is not relevant to the Group.

 

The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

 

3.1        Crude oil underlifts and overlifts

 

Crude oil underlifts and overlifts arise on differences in quantities between the Group's entitlement production and the production either sold or held as inventory by the Group. Underlifts and overlifts of entitlement to crude oil production are measured at market value and recorded as a receivable and payable respectively. In 1H 2013, the movement within an accounting period has been adjusted through cost of sales such that the gross profit is recognised on an entitlement basis. In 1H 2012, the movement of underlifts and overlifts was adjusted in revenue and cost of sales, respectively. Comparative information has not been restated on the grounds of materiality, where the underlift movement in 1H 2012 for an amount of US$4.4 million was adjusted through the revenue.

 

3.2        Revenue recognition

 

(a)  Sales of crude oil

 

Revenue represents sale of crude oil and related income and comprises the fair value of the consideration received or receivable for the sale of crude oil by the Group in the ordinary course of business to customers. Revenue arising from the sale of crude oil is recognised when the significant risks and rewards of ownership have passed, usually upon delivery, to the buyer and the amount of revenue can be reliably measured.

 

Crude oil sale agreements may provide for provisional pricing of sales, with final pricing based on average oil prices at the end of the specified pricing periods. Such a provisional sale contains an embedded derivative which is required to be separated from the host contract. Revenue under the host contract is recorded at the spot price on the date of delivery and not subsequently remeasured. The embedded derivative is the forward contract for which the provisional sale price is adjusted and subsequently remeasured at mark-to-market at each reporting date, with any gains or losses being recorded in revenue in the income statement and in trade debtors in the balance sheet. The Group determines mark-to-market prices using forward prices at each period end.

 

Revenue excludes abandonment and decommissioning barrels under the terms of the PSA.

 

4          Segment information

 

The Group is managed as a single business unit and the financial performance is reported in the internal reporting provided to the CODM. The Board of Directors ("BOD"), which is responsible for allocating resources and assessing performance of the operating segment, has been identified as the CODM that makes strategic decisions.

 

The Group's development and production assets are located in Turkmenistan in the Caspian region.

 

The exploration and evaluation assets represent the Group's interest in certain exploration blocks in Tunisia and Iraq. Presently, it does not constitute a reportable segment under IFRS 8.

 

The financial information reviewed by the CODM is based on the IFRS financial information for the Group.

 

5          Critical accounting judgements and estimates

 

The preparation of the interim financial information in conformity with IAS 34 requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities as well as contingent assets and liabilities at the date of the balance sheet, and the reported amounts of revenues and expenses during a reporting period. The resulting accounting estimates will, by definition, seldom equal the related actual results. 

 

The critical accounting judgements and estimates that could result in material adjustments to the income statement and the carrying amounts of assets and liabilities are discussed below:

 

(a)             Carrying value of development and production assets

 

In arriving at the carrying value of the Group's development and production assets, significant assumptions in respect of the depletion charge have been made. These significant assumptions include estimates of oil and gas reserves, future oil and gas prices, finalisation of the gas sales agreement and future development costs including the cost of drilling, infrastructure facilities and other capital and operating costs.

 

The Group's estimated long-term view of oil prices is US$85 per barrel and netback prices for gas is US$3.5 per Mscf, based on the current outlook.

 

·    If the estimate of the long-term oil price had been US$20 per barrel higher at US$105 and the netback price of gas had been US$2 per Mscf higher at US$5.50 from 1 January 2013, the reserves attributable to the Group would decrease, with a consequent increase in the depletion charge of US$5.1 million for the six months period ended 30 June 2013.

 

·    If the estimate of the long-term oil price had been US$20 per barrel lower at US$65 and the netback price of gas had been US$2 per Mscf lower at US$1.50 from 1 January 2013, reserves attributable to the Group would increase, with a consequent decrease in the depletion charge of US$10.3 million for the six months period ended 30 June 2013.

 

If the gas sales were delayed to 2017, the depletion charge would increase by US$1.3 million.

 

The depletion computation assumes the continued development of the field to extract the assessed oil and gas reserves and the required underlying capital expenditure to achieve the same. For this purpose, it assumes that a gas sales agreement will be signed and that the PSA, which is valid up to 2025, will be extended on similar terms up to 2035 under an exclusive right to negotiate for an extension period of not less than ten years, provided for in the PSA.

 

(b)             E&E assets

 

The application of the Group's accounting policy for exploration and evaluation expenditure requires judgement to determine whether it is likely that future economic benefits will arise, from either exploitation or sale, or whether activities have not reached a stage which permits a reasonable assessment of the existence of reserves.

 

6          Property, plant and equipment

 

During the six months period ended 30 June 2013, the Group acquired development and production assets with a cost of US$123.7 million (1H 2012: US$207.9 million). The depletion and depreciation charge was US$101.9 million (1H 2012: US$105.7 million).

 

7          Intangible assets

 

The intangible assets are exploration and evaluation assets including US$23.6 million (31 December 2012: US$5.5 million) relating to the Group's interest in certain exploration blocks in Tunisia and a signature bonus payment of US$7.5 million (31 December 2012: nil) for an exploration block in Iraq.

 

8          Financial instruments

 

(i)      Financial instruments by category


Unaudited

30 June

2013

 

31 December

2012


US$'000

US$'000

Assets as per balance sheet






Loans and receivables






Trade and other receivables excluding prepayments and advances to suppliers

218,451

113,585

Term deposits

2,088,108

1,866,228

Cash and cash equivalents

36,862

277,997


---------------------

-------------------


2,343,421

2,257,810


==========

=========

Fair value through profit or loss






Embedded derivatives

63

-


==========

=========




 

Liabilities as per balance sheet



 




 

Liabilities at amortised cost



 




 

Trade and other payables

579,584

553,443

 


==========

=========

 




 

Fair value through profit or loss



 




 

Crude oil overlift payable

12,570

13,917

 


==========

=========

 

 

The carrying value of the financial instruments is a reasonable approximation of their fair value. Trade and other receivables include provisionally priced sales of US$206.8 million (31 December 2012: nil) which are marked-to-market.

 

(ii)     Fair value hierarchy

 

All financial instruments for which fair value is recognised or disclosed are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

Level     1: Quoted market prices in an active market (that are unadjusted) for identical assets or liabilities;

 

Level     2: Valuation techniques (for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable); and

 

Level     3: Valuation techniques (for which the lowest level input that is significant to the fair value measurement is unobservable).

 

As at 30 June 2013, the Group held the following classes of financial instruments measured at fair value:

 


Unaudited

30 June

 2013

Level 1

Level 2

Level 3


US$'000

US$'000

US$'000

US$'000

Financial assets measured at fair value










Fair value through profit and loss - Embedded derivatives

63

-

63

-


==========

=========

=========

=========

Financial liabilities measured at fair value










Fair value through profit and loss - Crude oil overlift payable

12,570

-

12,570

-


==========

=========

=========

=========

 

9          Cash and bank balances

 

Cash and bank balances include an amount of US$473.9 million (31 December 2012: US$407.7 million) held on deposit for abandonment and decommissioning activities. The related liability is shown under trade and other payables (Note 11).

 

Cash and cash equivalents do not include any interest bearing deposits with original maturities of less than three months (31 December 2012: nil).

 

10a       Share capital and premium


Number of

Ordinary

Share



shares

shares

premium

Total


('000)

US$'000

US$'000

US$'000






At 1 January 2012

511,118

80,169

231,635

311,804

Shares issued during the period in respect of

  share options vested

762

99

1,687

1,786

Shares repurchased and cancelled

(6,153)

(763)

-

(763)


------------------

----------------

------------------

------------------

At 30 June 2012

505,727

79,505

233,322

312,827


========

=======

========

========

At 1 January 2013

489,462

77,474

233,889

311,363

Shares issued during the period in respect of

  share options vested

1,893

246

10,551

10,797


------------------

----------------

------------------

------------------

At 30 June 2013

491,355

77,720

244,440

322,160


========

=======

========

========

 

In 1H 2013, the Company did not have a share buyback and cancellation program. During 1H 2012, the Company repurchased and cancelled 6.2 million shares for an aggregate consideration of US$52.7 million including transaction costs of US$0.6 million.

 

10b       Capital redemption reserve 
 
During 1H 2012, the nominal value of 6.2 million shares repurchased and cancelled was transferred to the capital redemption reserve account. This reserve is non-distributable.

 

11         Trade and other payables

 


Unaudited

30 June

2013

 

31 December

2012


US$'000

US$'000




Trade payables

29,772

48,979

Accruals

44,000

65,480

Crude oil overlift payable

12,570

13,917

Abandonment and decommissioning liability

504,561

438,465

Other creditors

1,251

519


-------------------

-------------------


592,154

567,360

Less: Non-current portion

707

1,290


-------------------

-------------------


591,447

566,070


========

========

 

Trade payables and accruals include amounts of US$20.1 million (31 December 2012: US$40.4 million) and US$32.4 million (31 December 2012: US$44.8 million) respectively, relating to additions to property, plant and equipment - development and production assets. 

 

The abandonment and decommissioning liability represents amounts relating to the sale of crude oil set aside to cover abandonment and decommissioning liabilities under the terms of the PSA.

 

12         Revenue

 

Revenue of US$491.6 million (1H 2012: US$588.4 million) comprises an amount of US$491.5 million (1H 2012: US$592.8 million) arising from the sale of crude oil through Azerbaijan and US$0.07 million (1H 2012: US$0.05 million) arising from other sales. In 1H 2012 the Group recognised US$4.4 million from the underlift of entitlement to crude oil produced, as a reduction in Revenue.

 

Revenue from the sales of crude oil was from one customer (1H 2012: one customer).

 

13         Dividends paid and proposed


Unaudited

6 months

ended

30 June 2013

Unaudited

6 months

ended

30 June 2012


US$'000

US$'000

Dividends on ordinary shares declared and paid during the six month period:

 

 



Final dividend: US cents 15 per share (2011: US cents 11 per share)

73,586

56,231


----------------

------------------


73,586

56,231


=======

========

Interim dividends on ordinary shares approved subsequent to the period-end (not recognised as a liability as at 30 June):



 

Interim dividend US cents 15 per share (Interim 2012: US cents 15 per share)

73,703

75,859


=======

========

 

The 2013 proposed interim dividend was approved on 5 August 2013



 

14         Earnings per share

 

The calculation of basic earnings per ordinary share is based on the weighted average number of 490,256,102 ordinary shares in issue during the six months to 30 June 2013 (1H 2012: 510,881,685 ordinary shares) and on the profit for the period of US$241 million (1H 2012: US$309 million).

 

The calculation of diluted earnings per ordinary share is based on the number of 490,823,659 ordinary shares in issue during the six months to 30 June 2013 (1H 2012: 512,004,021 ordinary shares) adjusted to assume conversion of potential dilutive options over ordinary shares.

 

15         Cash generated from operating activities

 



Unaudited

6 months

ended

30 June 2013

Unaudited

6 months

ended

30 June 2012



US$'000

US$'000





Profit before income tax


329,824

414,359

Adjustments for:




- Depletion and depreciation


101,932

105,716

- Crude oil underlifts


-

4,445

- Crude oil overlifts


(1,347)

14,737

- Employee share option schemes - value of services provided


1,903

1,854

- Interest on bank deposits


(5,702)

(10,205)



-------------------

------------------

Operating cash flow before changes in working capital


426,610

530,906





Changes in working capital:




- Inventories


(1,038)

(2,446)

- Trade and other receivables


(118,153)

54,677

- Trade and other payables


58,750

52,362



-------------------

------------------

Cash generated from operating activities


366,169

635,499

   


========

========

 

16         Income tax expense

 

Income tax expense is recognised based on management's best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual tax rate used for 2013 is 25% (2012: 25%).

 

During the period,the Group recognised a current tax charge of US$70.2 million (1H 2012: US$87.5 million) and a deferred tax charge of US$18.2 million (1H 2012: US$17.9 million). 

 

During 2008, the effective tax rate applicable to the Group's operations in Turkmenistan was increased by 5% to 25% by the Hydrocarbon Resources Law of 2008.  The Group has continued to apply this rate in determining its tax liabilities as at 30 June 2013.  The Group is in discussions with the authorities in Turkmenistan about the applicability of this rate to periods prior to 2008, but it does not believe that prior periods are affected by this increase.  A provision of US$11.1 million has been made in respect of the additional tax that could become payable if the increased tax rate were applied to prior periods.

 

17         Related party transactions

 

a)         Transactions and balances

 

The Company's largest shareholder is Emirates National Oil Company Limited (ENOC) L.L.C ("ENOC"), which owns approximately 53.99% of the Company's ordinary share capital. ENOC is ultimately a wholly owned entity of the Government of Dubai. Two members of the Board, Mr. Ahmad Sharaf and Mr. Mohammed Al Ghurair are nominees of ENOC. All transactions with related parties are on an arm's length basis.

 

(i) The following transactions are with ENOC and its subsidiaries:







Unaudited

6 months

ended

30 June 2013

Unaudited

6 months

ended

30 June 2012


US$'000

US$'000

Trading transactions:



Sale of services

213

291


-----------------

-----------------

Purchase of services

417

479


-----------------

-----------------





Unaudited

30 June

 2013

31 December

 2012


US$'000

US$'000

Period end balances:



Receivables

88

84


-----------------

-----------------

Payables

375

8


-----------------

-----------------


(ii) The following transactions are with financial institutions under common control and associates:





Unaudited

6 months

ended

30 June 2013

Unaudited

6 months

ended

30 June 2012


US$'000

US$'000

Other transactions:



Finance income

568

3,976


-----------------

-----------------

 


Unaudited

30 June

 2013

31 December

 2012


US$'000

US$'000

Period end balances:



Term deposits

90,032

330,730


-----------------

-----------------

Abandonment and decommissioning funds

473,876

407,718


-----------------

-----------------

Cash and cash equivalents

6,541

3,782


-----------------

-----------------

 

b)         Key management compensation


Unaudited

6 months

ended

30 June 2013

Unaudited

6 months

ended

30 June 2012


US$'000

US$'000



(restated)*




Non-executive directors' fees

429

459

Salaries and short-term benefits

1,773

1,746


--------------

--------------

Short term benefits

2,202

2,205

End of service benefits

142

155

Share-based payments

435

592


--------------

--------------


2,779

2,952


======

======

*Comparative information presented above has been amended to accord to the current year presentation.

 

18         Commitments and contingencies

 

a)         Capital commitments

 

(i)        Committed future expenditure for property, plant and equipment for which contracts were placed       at 30 June 2013 amounted to US$933.7 million (31 December 2012: US$674.4 million).

 

(ii)        The Group, within a consortium, signed an exploration, development and production service             contract for Block 9 in Iraq. Under the approved contract, the Group has commitments of    US$27.5 million for its share of the minimum work and expenditure obligation.

 

(iii)       The Group has commitments of US$10.8 million for its share in the exploration costs of the             Bargou Exploration permit, offshore Tunisia.

 

b)         Operational commitments

 

Irrevocable letters of credit of US$13.5 million were in issue at 30 June 2013 towards the supply of equipment and services (31 December 2012: US$16.5 million).

 

c)         Taxation

 

At 30 June 2013, there was a contingent liability with respect to taxation. Details of the contingent liability are outlined in Note 16.

 

d)         Others

 

The Group's operations in Turkmenistan, conducted through Dragon Oil (Turkmenistan) Ltd., are undertaken in accordance with the terms of the PSA, which became effective on 1 May 2000 between Dragon Oil (Turkmenistan) Ltd. and the Turkmenistan government. The agreement determines the rights and obligations of Dragon Oil (Turkmenistan) Ltd, inter alia, to carry out development activities through work plans and annual budgets. It also grants various tax, currency control and related concessions. However, there are no financial commitments, other than those disclosed above, arising from the terms of the PSA.

 

However, the Group's operations in various geographies are ultimately subject to the political, socio-economic and legal uncertainties arising from the political and legal systems in those countries.

 

19         Statutory accounts

 

The interim financial information presented in this report does not represent full statutory accounts. Full statutory accounts for the year ended 31 December 2012, prepared in accordance with IFRS, as adopted by the European Union, and containing an unqualified audit report, have been delivered to the Registrar of Companies.

 

20        Subsequent event

 

The Board has declared an interim 2013 dividend of US cents 15 per share for the half year to 30 June 2013 to be paid on 16 September 2013 to shareholders on the register on 16 August 2013 (1H2012: US cents 15 per share). No liability has been recognised as at 30 June 2013.

 

 

 

Directors' responsibilities statement

 

We, the Board of Directors, confirm our responsibility for the half year report and that to the best of our knowledge:

 

(a)        the interim financial information comprising the condensed Group balance sheet, the condensed Group income statement, the condensed Group statement of comprehensive income, the condensed Group statement of changes in equity, the condensed Group cash flow statement and related notes 1 to 20 have been prepared in accordance with IAS 34 as adopted by the European Union.

 

(b)        the interim management report includes a fair review of the information required by:

 

(i)         Regulation 8(2) of the Transparency (Directive 2004/109/EC) Regulations 2007, being an indication of important events that have occurred during the first six months of the current financial year and their impact on the interim financial information; and a description of the principal risks and uncertainties for the remaining six months of the year; and

 

(ii)         Regulation 8(3) of the Transparency (Directive 2004/109/EC) Regulations 2007, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

 

The Directors are confident that the Group will have adequate financial resources to continue in operational existence for the foreseeable future after reviewing the Group's plans for 2013 and future years.  We have therefore continued to adopt the going concern basis in preparing the accounts.

 

The directors of Dragon Oil plc are listed in the Dragon Oil plc Annual Report for the year ended 31 December 2012. A list of current directors is maintained on the Dragon Oil plc website www.dragonoil.com.

 

The maintenance and integrity of the Dragon Oil plc web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the web site.  Legislation in the Republic of Ireland governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions.

 

On behalf of the Board

 

 

 

Mohammed Al Ghurair

Chairman

 

 

 

Saeed Al Mazrooei

Director

Date: 5 August 2013

 

 

 

 

INDEPENDENT REVIEW REPORT TO DRAGON OIL PLC

 

Introduction

 

We have been engaged by the Company to review the condensed set of financial statements in the half year financial report for the six months ended 30 June 2013 which comprises the condensed Group balance sheet, the condensed Group income statement, the condensed Group statement of comprehensive income, the condensed Group statement of changes in equity, the condensed Group cash flow statement and the related explanatory notes 1 to 20. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

This report is made solely to the Company in accordance with guidance contained in International Standards on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

 

Directors' Responsibilities

 

The half year financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half year financial report in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007 and the Transparency Rules of the Central Bank of Ireland.

 

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half year financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

 

Our Responsibility

 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half year financial report based on our review.

 

Scope of Review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom and Ireland. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half year financial report for the six months ended 30 June 2013 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Transparency (Directive 2004/109/EC) Regulations 2007 and the Transparency Rules of the Central Bank of Ireland.

 

 

Ernst & Young

Dublin

Date: 5 August 2013                                                        

 

 

 

 

Supplementary information - Movement in oil, condensate and gas reserves and resources (Not reviewed by auditors)

 

PROVED AND PROBABLE COMMERCIAL RESERVES AND RESOURCES

 


Working interest

Entitlement


 

 

Oil and condensate mmbbl

 

 

 

Gas bscf

 

 

Total Petroleum mmboe

 

 

Oil and condensate mmbbl

 

 

 

Gas bscf

 

 

Total Petroleum mmboe

Commercial reserves - Turkmenistan






As at 1 January 2013

677

1,461

920

308

559

401

Production

(13)

-

(13)

(6)

(6)

As at 30 June 2013

664

1,461

907

302

559

395







Contingent resources- Turkmenistan






As at 1 January and 30 June 2013

59

1,459

302

-

-

-

 

Notes:

 

1.        Commercial reserves are estimated quantities of proven and probable oil and gas reserves that available data demonstrates, with a specified degree of certainty, to be recoverable in future from known reservoirs that are considered commercially producible. The working interest of the proved and probable commercial reserves is based on a reserves report produced by an independent engineer. Reserves estimates are reviewed by the independent engineer based on significant new data or a material change with a review of the field undertaken generally every year. The Group's entitlement to the proved and probable commercial reserves is derived based on the terms of the PSA and certain assumptions made by the management in respect of estimates of oil and gas reserves, future oil and gas prices, future development costs including the cost of drilling, infrastructure facilities, signing of the gas sales agreement and other capital and operating costs.

 

2.        Contingent resources relate to resources in respect of which development plans are in the course of preparation or further evaluation is under way with a view to development within a foreseeable future.

 

 


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