17 February 2015

DRAGON OIL PLC

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

2014 Full-Year Results

Dragon Oil (Ticker: DGO), an international oil and gas exploration, development and production company, today announces its full-year results for the year ended 31 December 2014. These results are prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

Key Financial Highlights

*excludes US$664mn (2013: US$549mn) in abandonment and decommissioning funds.

Key Operational and Corporate Highlights

Turkmenistan

§ Fourteen wells completed during 2014;

§ Average gross daily production increased by 6.8% to 78,790 barrels of oil per day (bopd);

§ December 2014 average gross production of 89,680 bopd;

§ 2014 exit rate of 92,008 bopd reached;

§ The Caspian Driller jack-up drilling rig arrived to the Cheleken Contract Area and is being commissioned to commence operations;

§ Drilling in the Dzhygalybeg (Zhdanov) field commenced with one well completed during 2014;

§ Water injection pilot ongoing in the Dzheitune (Lam) 75 area;

§ Artificial lift in the form of jet pumping systems commissioned for two wells;

§ New marketing contracts put in place until 31 December 2015 using two routes; and

§ Approx. 60% organic reserves replacement of 2P oil and condensate reserves achieved.

 Exploration

§ Iraq: successful discoveries in both formations targeted in Block 9;

§ Algeria: two exploration blocks won in partnership with Enel;

§ Egypt: the contract for East Zeit Bay signed in May 2014; and

§ The Philippines: unsuccessful Baragatan-1A exploration well.

Financial and corporate developments

§ The Board recommends the payment of a final dividend of 16 US cents per share for 2014; the full-year dividend for 2014 amounts to 36 US cents (2013: 33 US cents);

§ Cash generating capabilities remained strong: US$0.8bn was generated from operations during 2014;

§ The Group considered but decided not to pursue a significant corporate acquisition in 2014; and

§ Amendment to the Production Sharing Agreement signed to make the tax rate consistent with the provisions of the Tax Code of Turkmenistanat 20% resulting in tax credit of US$160 million to current income tax expense in respect of the reversal of the accrual made in prior years, and to formalise a commitment from Dragon Oil to spend approximately US$10mn a year on social projects and training programmes in Turkmenistan.

Outlook

§ Complete between 15 and 20 wells a year in 2015 and in 2016;

§ Target annual production growth of around 10% or higher in 2015 and exit 2015 at 100,000 bopd;

§ Grow gross production in 2016 to average 100,000  bopd and maintain this rate as plateau from 2016 for at least five years;

§ US$500mn to US$600mn estimated capital expenditure for infrastructure and drilling excluding the Gas Treatment Plant cost in Turkmenistan in 2015;

§ Annual exploration spend of around US$50-100mn; and

§ Actively pursue the diversification strategy to add development assets to the portfolio.

Dr Abdul Jaleel Al Khalifa, CEO, commented:

"With 14 development and appraisal wells completed in 2014 as well as solid field performance, we grew average gross production in the Cheleken Contract Area by 6.8% to 78,790 bopd. Drilling accelerated significantly in the second half of the year allowing us to exit at 92,008 bopd - well above our expectations of 87,000-90,000 bopd.

"Revenues grew by 4% to US$1.1 billion as a result of higher sales volumes, which were offset by lower realised prices. Our cash generating abilities remained strong: US$0.8 billion was generated from operations.

"Among our exploration assets, the exploration well in Iraq yielded encouraging oil discoveries in both targeted formations. We also added two exploration blocks in Algeria and looked at bidding to acquire a major E&P company towards the end of the year, but subsequently withdrew our interest in the uncertain crude oil price environment.

"The Board is pleased to announce a final dividend of 16 US cents bringing the total dividend for 2014 to 36 US cents."

Webcast and conference call details:

Dragon Oil will webcast the presentation of its results with a simultaneous conference call today at 9.00am. For details of the analyst call, please contact Shabnam Bashir at Citigate Dewe Rogerson on +44 (0)20 7282 2822 or at shabnam.bashir@citigatedr.co.uk  for further details.

The webcast can be accessed at http://www.axisto-live.com/investis/clients/dragon-oil/presentations/54db42fb96cead59397d7cd1/fy14; the details are also available on the Home page of www.dragonoil.com.

A replay of the webcast will be available for one year, the replay of the conference call will be available from around 1pm today until 24 February 2015.

Replay numbers:

For further information please contact:

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, Afghanistan, Egypt, the Philippines and Algeria. 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.

DRAGON OIL PLC

2014 Full-Year Results

Overview by the Chief Executive Officer

Financial Performance

Revenues for 2014 were up by 4% impacted primarily by a significant decline in the Brent oil price in the second half of the year. Profits were higher by 27% on the account of the reversal of an overprovision of US$160mn made in prior years in respect of tax liabilities offset by recognition of US$85mn of social expenses and provision for impairment for exploration activity in 2014. We generated US$0.8bn from operations in 2014.

Our strong cash position allows us to maintain payment of dividends: the interim dividend was increased by 33% and today the Board announced the final dividend of 16 US cents bringing the total dividend for 2014 to 36 US cents. The Board continues to consider and strike the right balance of capital investment requirements for the Cheleken Contract Area, investment needs for our exploration assets, return of value to shareholders and opportunities to acquire development assets in addition to prospective exploration blocks on a selective basis, and will exercise prudence in the current low crude oil price environment.

Operational Results

Our 2014 drilling programme saw an increase in the number of wells we drilled. A total of 14 wells were completed and the wells in the second half of the year were particularly good. The average gross production reached 78,790 bopd - a 6.8% increase from 73,750 bopd in 2013. We also exited the year at a very strong rate of 92,008 bopd.

We welcomed the arrival of the Caspian Driller in the Cheleken Contract Area; it is currently being commissioned to commence drilling operations. With the Caspian Driller, we now have three jack-up rigs and one land rig - this drilling fleet gives us sufficient flexibility and capacity to drill between 15 and 20 wells in 2015 to achieve the exit rate of 100,000 bopd at the end of 2015.

Organic growth in oil and condensate 2P reserves continued last year; reserves replacement of approx. 60% was achieved against the 2014 gross production. The increase comes from booking additional reserves attributed primarily to the additional volumes, resulting from the new wells and well performance.

2014 saw the award of a contract to build and install the Dzheitune (Lam) E platform and associated pipelines; work on other major projects is progressing and we expect to award more infrastructure projects contracts during 2015.

Diversification

Further progress was made in our exploration blocks and on executing our diversification strategy. We had two successful oil discoveries in targeted formations in the exploration well in Block 9, Iraq. We also won two exploration perimeters in Algeria in partnership with a major European integrated energy company. The results of drilling and testing offshore the Philippines were disappointing: Baragatan-1A well did not discover hydrocarbons.

In the second half of 2014, Dragon Oil considered an acquisition of a listed company with exploration and production assets in the regions of interest to us. However, an extraordinary slide in oil prices raised questions about the long-term level of oil prices and under such circumstances, the Board did not believe it was advisable to proceed with this transaction.

Diversification remains a key strand of our strategy, our financial position is strong and we are determined to continue searching for the right-fit development or producing asset in the regions of interest, namely Africa, the Middle East and parts of Asia.

operating and financial review

PRODUCTION

Turkmenistan

Production and entitlement

The average gross field production for 2014 reached approximately 78,790 bopd (2013: 73,750 bopd). We achieved a 6.8% average gross production growth on the back of 14 wells completed in the Dzheitune (Lam) and Dzhygalybeg (Zhdanov) fields, including two sidetracks, and solid performance from the existing wells.

The entitlement production for 2014 was approximately 56% (2013: 44%) 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. The higher proportion of entitlement barrels in 2014 is due to the higher capital expenditure and lower realised oil price.

Marketing

In December 2014, the Group announced that it had reached a one-year agreement with two buyers for all its anticipated entitlement export production in 2015, achieving diversification in marketing routes. The terms are FOB (free-on-board) the Aladja Jetty, Turkmenistan through Baku, Azerbaijan and Makhachkala, Russia. Negotiations on the new marketing agreements resulted in a better overall discount to monthly average Brent prices compared to the discount in the previous year. The discount to Brent is expected to be approximately US$14 per barrel. The previous arrangement expired on 31 December 2014 with the new arrangements in place until 31 December 2015.

Dragon Oil sold 13.5 mn barrels (2013: 11.5 mn barrels) of crude oil in 2014. The volumes sold were higher than the previous year's level mainly due to higher entitlement share of gross production offset by the movement in the lifting position.

In 2014, Dragon Oil exported 100% (2013: 100%) of its crude oil production through Baku, Azerbaijan.

The Group was in an underlift position of approximately 2.1 mn barrels of crude oil at the end of 2014 (31 December 2013: overlift position of 0.1 mn barrels of crude oil).

Drilling

During 2014, Dragon Oil completed a total of 14 development and appraisal wells: 13 wells in the Dzheitune (Lam) and one well in the Dzhygalybeg (Zhdanov) field. The table below summarises the results of the drilling programme in 2014 and the results of two wells completed since the beginning of 2015:

The initial flow rates from the completed wells vary depending on the depth of completions, maturity of the area and type of completion (a dual or single completion or a sidetrack).

The sidetrack drilled from the Dzheitune (Lam) 4 platform to appraise a location for a future platform encountered water and will be sidetracked in the future.

An appraisal well Zhdanov 21/101 was drilled to a depth of 3,447 metres, but due to difficulties only the top of the reservoir was tested and flowed at 425 bopd with a high water content. The bottom section of the reservoir was not tested, but has further potential. The well was suspended and will be sidetracked in the future.

The Dzhygalybeg (Zhdanov) A/102 well was drilled to a depth of 3,745 metres and is currently being completed and tested. State-of-the-art technology was used to drill this deep well helping us evaluate these hard and complex rock formations, and successfully confirm the presence of hydrocarbons.

The development well Dzheitune (Lam) 22/188 was drilled to a depth of 3,276 metres but due to equipment failure has been temporarily suspended and is scheduled for sidetracking in the future.

We are currently employing two jack-up and one platform-based rigs and expect the Caspian Driller to commence operations in 1H 2015.

The Elima jack-up rig is contracted until May 2016. It is currently drilling the Dzheitune (Lam) 13/199 well.

The second jack-up rig, Neptune, is available until we take delivery of the Mercury jack-up drilling rig later in 2015. The Mercury rig has been constructed and delivered to the contractor from whom we will be leasing it for the remainder of the three-year period as a replacement for the Neptune rig. The Neptune rig is currently completing the Dzheitune (Lam) C/198 development well.

The Caspian Driller jack-up rig is in the Cheleken Contract Area being commissioned to commence operations in the Dzheitune (Lam) field. The lease and management contract is for an initial duration of five years, with an option to extend it for a further period of up to two years.

Land Rig 2 is contracted for drilling on the Dzhygalybeg (Zhdanov) A platform until it completes eight slots allocated for drilling with a land rig on this platform. It is currently completing the Dzhygalybeg (Zhdanov) A/102 well.

Land Rig 1 has been released following the completion of the Dzheitune (Lam) 22/194 well.

Water injection project and artificial lift

The water injection pilot project has been progressing in the pilot Dzheitune (Lam) 75 area since June 2013. The process to acquire water injection facilities to be installed in the Dzheitune (Lam) field is in the approval stage with the intention to procure these facilities. The aim of the water injection programme is for pressure maintenance, to sustain production rates and increase reserves recovery.

In 2H 2014, Dragon Oil commissioned the jet pumping system on the Dzheitune (Lam) 13 platform for two wells. Additional jet pumping systems were procured for other platforms and commissioning is scheduled to start later in 1Q 2015. The objective of this artificial lift application is to increase production and enhance recovery.

In parallel, Dragon Oil is considering use of electric submersible pumps (ESP) with an aim to commence their application in a pilot in 2H 2015.

Infrastructure

In February 2014, Dragon Oil awarded a contract for the construction and installation of the wellhead and production platform Dzheitune (Lam) E and associated pipelines. The platform will have eight slots with provision for another four slots to be fitted later, and suitable for a jack-up drilling rig use. Design and detailed engineering work is in progress and fabrication of the platform has commenced. Construction and installation are expected to take two years with the platform being ready in 1H 2016.

Installation of the Dzheitune (Lam) F accommodation platform in the central part of the Dzheitune (Lam) field has been completed. Installation of the production platform is in progress and the platform is expected to be made ready for drilling by 2Q 2015.

The project to quadruple our crude oil storage capacity at the Central Processing Facility is progressing as planned. The tank farm is anticipated to be completed in 1Q 2016 of which three tanks will be built and commissioned on a priority basis in 2Q 2015.

The process to select a contractor to build another 30-inch trunkline from the Dzheitune (Lam) field to the Central Processing Facility is in the tendering stage. Construction is expected to take two years after the contract is awarded.

In 2014, we installed additional equipment to increase the capacity of the Central Processing Facility to handle 100,000 bopd and 150 mmscf of gas per day of average current production. This would allow us to accommodate increases in gross production in 2015 and 2016 and the plateau production of 100,000 bopd for at least five years from 2016.

Structural strengthening and slot addition works continue at a number of platforms in the Dzheitune (Lam) field, with new slots being added or planned to be added to allow further drilling from these platforms. Work has been completed at the Dzheitune (Lam) C and Dzheitune (Lam) 28 platforms with four slots added on each platform. Strengthening and slot addition works are ongoing at the Dzheitune (Lam) 10 (six slots) and Dzheitune (Lam) B (two slots) platforms and are expected to be completed in 1Q 2015.

Gas Treatment Plant

The bids for an engineering, procurement, installation and construction project of the Gas Treatment Plant are in the evaluation stage. We anticipate the construction phase to take three to four years after the contract is awarded.

The processing capacity of the plant is expected to be 360 mmscfd of gas, which, according to our currently optimised estimates, which are to be confirmed at a later stage, should allow us in the future to strip around 3,600 barrels of oil equivalent per day of condensate and produce dry gas.

Abandonment and decommissioning activities

Dragon Oil continues to perform abandonment and decommissioning work within the first phase of its strategy for the plugging, abandonment and decommissioning of the old non-producing wells and non-producing platforms in the Cheleken Contract Area under the PSA. In 2014, Dragon Oil evaluated another 12 non-producing old wells in the Dzhygalybeg (Zhdanov) field and plugged and abandoned six wells, bringing the total of old non-producing plugged and abandoned wells to 11. The cost of activities is to be met from the abandonment and decommissioning funds.

Reserves and resources

Based on the results of the recent assessment by an independent energy consultant, the 2014 year-end oil and condensate 2P reserves were 663 (31 December 2013: 675) million barrels after having allowed for the 2014 production of 29 million barrels. Assessment of the ongoing drilling operations and well performance have contributed towards the increase of oil and condensate 2P reserves by 17 million barrels. The oil and condensate contingent resources are 93 million barrels compared with 69 million barrels as of 31 December 2013. 

The gas 2P reserves are 1.3 TCF and the gas contingent resources are 1.3TCF. Necessary upgrades of and additions to offshore and onshore infrastructure are planned to allow the conversion of the contingent resources into reserves in the future.

No changes have been made to the estimates of recoverable oil from the Dzhygalybeg (Zhdanov) field, where we believe 15% of the total proved and probable recoverable reserves are contained.

EXPLORATION

Iraq

On 10 September 2014, the partners in Block 9 in Iraq, Dragon Oil (30%) and Kuwait Energy (70% and operator), announced their first oil discovery at the consortium's first target, the Mishrif formation, reached at 2,700 meters, in the Block 9 exploration well, Faihaa-1. Preliminary open hole tests of the Faihaa-1 Mishrif formation resulted in flow rates of c. 2,000 bopd and 3,400 bopd of 20º API oil on 32"/64" and 64"/64" chokes, respectively.

Later in the year, in December, the partners reported their second oil discovery in the second target, the Yamama formation, reached at 4,000 meters in the same Faihaa-1 exploration well. Preliminary open hole tests of the Faihaa-1 Yamama formation resulted in oil flow rates of c. 5,000 and 8,000 bopd of 35º API crude oil on 32"/64" and 64"/64" chokes, respectively.

The report from an independent petroleum engineer incorporating the results of testing the Mishrif formation indicated contingent 2C oil resources of 198 million barrels and contingent 2C gas resources of 56 Bscf net to Dragon Oil on a working interest basis.

More detailed testing on both formations will be conducted in the cased hole to help evaluate the commerciality of the findings. The consortium's strategy is to accelerate the evaluation of the Faihaa-1 discovery by drilling two appraisal wells in 2015 in order to fast track the development.

Block 9 is located in the Basra province and covers an area of 866km². The work commitment on the block within the initial five-year exploration period includes de-mining, seismic acquisition and interpretation and the drilling of the exploration well Faihaa-1.

Algeria

On 30 September 2014, Dragon Oil announced that in partnership with ENEL Trade S.p.A. ("Enel"), the Group was awarded two exploration perimeters in Algeria, Tinrhert Nord Perimeter and Msari Akabli Perimeter. The contract for the exploration and exploitation of hydrocarbons was signed on 29 October 2014.

The Tinrhert Nord Perimeter in which Dragon Oil holds a 70% paying interest and is the operator, with Enel holding the remaining 30%, is in the Illizi Basin in Eastern Algeria and near a number of producing oil and gas fields. The total area of the perimeter is 2,907 km². A number of undeveloped discoveries have been previously identified on the perimeter. The commitment during the exploration period includes acquisition and interpretation of 2D seismic data and drilling four wells.

The Msari Akabli Perimeter in which Dragon Oil holds a 30% paying interest, with Enel holding the remaining 70% and serving as the operator, is in the Ahnet Basin in South-western Algeria. The total area of the perimeter is 8,096 km². A number of undeveloped discoveries have been previously identified on the perimeter. The commitment during the exploration period includes acquisition and interpretation of 3D seismic data and drilling three wells.

Egypt

The contract for the East Zeit Bay (Dragon Oil 100%), offshore the Gulf of Suez, Egypt, was signed between the Petroleum Ministry, represented by Ganoub El Wadi Petroleum Holding Company (GANOPE), and Dragon Oil on 19 May 2014. We have hired a country manager and are setting up an office in Cairo.

The East Zeit Bay is located offshore in the prolific southern Gulf of Suez region. The block covers an area of 93km² and lies in shallow waters ranging in depth from 10 to 40 metres. A number of producing oil fields are adjacent to or near the block, namely East Zeit, Hilal, Ashrafi, SW Ashrafi and Zeit Bay fields. Dragon Oil plans to acquire a new 3D survey over an area of approximately 100km² and reprocess all of the available 2D data in the block in addition to drilling two wells during the initial exploration period of four years. We have commenced the work programme as per the Concession Agreement.

Dragon Oil is evaluating bids to select a contractor to re-process the existing 2D seismic data.

Afghanistan

In 2014, the consortium, comprising Dragon Oil (40%, operator of Sanduqli block), TP Afghanistan Ltd. (TPAL, 40% and operator of Mazar-i-Sharif block) and the Ghazanfar Group (20%), awarded contracts for the airborne gravity and magnetic survey, which commenced in early 1Q 2015 in both blocks.

Tunisia

The joint venture partners (Dragon Oil, 55%; Cooper Energy, 30% and operator; and Jacka Resources Ltd, 15%) have rescheduled appraisal drilling at Hammamet West until 2016. The extension to the current exploration phase taking it to 7 August 2015 has been granted.

The Philippines

On 7 July 2014, Nido Petroleum Limited (ASX: NDO, 20% participating interest) on behalf of SC 63 Joint Venture partners PNOC-EC (40% and operator) and Dragon Oil (Philippines SC 63) Limited (40%) advised that the Baragatan-1A well did not discover commercial hydrocarbons. The Baragatan-1A well was plugged and abandoned. The partners are in the process of integrating information and data obtained from the well into current geological models and Dragon Oil is assessing its future interest in the block.

Dividends

The Board of Directors of Dragon Oil recommends the payment of a final dividend of 16 US cents per share (2013: 18 US cents). Together with the interim dividend of 20 US cents, the total dividend for the year ended 31 December 2014 is 36 US cents. The final dividend of 16 US cents is subject to shareholder approval at the Annual General Meeting to be held in London, UK on 27 April 2015. If approved, the final dividend of 16 US cents is expected to be paid on 30 April 2015 to shareholders on the register as of 7 April 2015.

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

17 February 2015: Declaration of final dividend

2 April 2015: Ex-Dividend Date

7 April 2015: Record Date

27 April 2015: Annual General Meeting

30 April 2015: Dividend Payment Date.

MATERIAL EVENTS

Diversification

In line with our diversification strategy, we continue to look for development or production assets in Africa, the Middle East and parts of Asia.

On 6 October 2014, the Dragon Oil Board confirmed that it was in detailed discussions regarding a possible offer to be made by Dragon Oil for the issued, and to be issued, share capital of Petroceltic International plc (Petroceltic) and submitted a proposed offer of 230 pence sterling per share in cash following an extensive confirmatory due diligence exercise.

On 1 December 2014, Dragon Oil confirmed that, in light of the then prevailing market conditions, it no longer intended to make an offer for Petroceltic and accordingly, as a result of the announcement, was bound by the restrictions set out in Rule 2.8 of the Irish Takeover Rules.

The Board did not believe it was advisable to proceed with this deal following a significant drop in the crude oil price and subsequent uncertainty about the long-term prices for crude oil.

Our People

In 2014, the Group increased its average headcount to 1,775, an 18% increase over the previous year. In 2014, 475 people joined Dragon Oil across its two main locations, the headquarters in Dubai, UAE, and operational and administrative sites in Turkmenistan. The overwhelming majority of new hires joined our workforce in Hazar, Turkmenistan, of whom 93% were local people as we gear up for continued growth of production at the Cheleken Contract Area towards our medium-term goal of exiting 2015 at 100,000 bopd and maintaining the average gross production of 100,000 bopd as a plateau for at least five years from 2016.

The Group continued with its objective of strengthening our expertise, cultural diversity and talent through hiring experienced and competent people. Our guiding principle of "People First" continues to drive our focus on training, empowering and trusting our talented workforce.

Corporate Social Responsibility

We strongly believe in giving back to the community, aiming to contribute to the well-being, educational and sports life of our host communities. In 2014 Dragon Oil undertook a number of projects for the community of Hazar, the hub of our operations in Turkmenistan. Among these projects were refurbishment of educational quarters and building an auxiliary building at two nurseries and refurbishment of sanitary facilities and the canteen, including procurement of canteen equipment, at a secondary school.

Dragon Oil also equipped all of Hazar's schools with interactive boards, including installation and training, and set up a seminar for the city's secondary school teachers on the application of computer technologies to the educational process. Other projects included sponsorship for a number of sport events in Turkmenistan and donations to relevant charitable organisations.

In 2014, Dragon Oil celebrated Earth Day at our Hazar operations hub by cleaning the harbour area and bringing together our employees, contractors and school-age children-citizens of Hazar and other towns.

In December 2014, we signed an amendment to the PSA with The State Agency for Management and Use of Hydrocarbon Resources at the President of Turkmenistan ("the Agency"), which will see an allocation of approximately US$10mn annually for jointly identified social and training projects.

Social projects would cover any such projects designed to develop or upgrade social infrastructure and facilities, training, sponsorship of cultural, educational, sports and other related activities to the benefit of the host communities in Turkmenistan. This is line with our corporate social responsibility policy towards host communities.

Training programmes will focus on higher education or vocational training, training courses for Turkmenistan citizens, including school graduates and secondary school leavers, who are not employees of Dragon Oil. This would be an expansion of our currently run in-house programme of providing financial assistance to help high-potential employees fund their higher education.

Outlook

In 2015, our target is to grow average gross production at around 10% or higher and exit the year at 100,000 bopd. We plan to complete 15 to 20 wells a year in 2015 and 2016 given the present and future availability of drilling rigs. We aim to average the gross production at 100,000 bopd in 2016 and maintain this level of production for a minimum period of five years from 2016.

Financial Summary

Dragon Oil has strengthened its balance sheet further in the last 12 months with a growth of 14% in net assets to US$3.7bn. The Group has no debt and is able to finance its operations internally with net cash generated from its operations in Turkmenistan.

Net profit for the year was 27% higher than the previous year primarily on account of an increase in revenue and a credit in the current income tax expense offset by increased cost of sales, recognition of corporate social expenses, a provision for impairment and higher corporate costs. Earnings per share were 27% higher and net cash from operations was 26% higher over 2013.

Key financial data  

Income Statement

Revenue

Gross production levels in 2014 averaged approximately 78,790 bopd (2013: approximately 73,750 bopd) on a working interest basis.

Revenue for the year was US$1,093mn compared with US$1,048mn in 2013. An increase of 4% over the previous year is primarily attributable to a 17% increase in the volume of crude oil sold over the previous year, despite the 11% decrease in the average realised crude oil price during the year. The average realised crude oil price during the year was approximately US$81 per barrel (2013: US$91 per barrel) and was at an 18% (2013: 17%) discount to Brent during the year. 

Operating profit

Gross profit is measured on an entitlement basis. The entitlement production was approximately 56% (2013: 44%) of the gross production in 2014. 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. The increase in the volumes of crude oil sold was mainly due to higher entitlement share of gross production offset by the movement in the lifting position. The higher proportion of entitlement barrels in 2014 is primarily due to the higher capital expenditure in the Cheleken Contract Area and lower realised crude oil prices.

At the year-end, the Group was in an underlift position of approximately 2.1mn barrels that is recognised and measured at market value (31 December 2012: overlift position of approximately 0.1mn barrels).

The Group generated an operating profit of US$579mn (2012: US$688mn), 16% lower than in the previous year.

The decrease in operating profit of US$109mn was primarily on account of higher cost of sales, recognition of corporate social obligations, provision for impairment towards the exploration and evaluation costs of the Baragatan-1A well, offshore the Philippines and administrative expenses offset by higher revenue.

The Group's cost of sales was US$357mn in 2014 compared to US$324mn in 2013, an increase of about 10%. Cost of sales includes operating and production costs and the depletion charge. The increase is primarily due to the increased depletion charge during the year and higher field operating costs, offset by the movement in the lifting position.

The depletion and depreciation charge during the year was higher by about 47% at US$316mn (2013: US$215mn) primarily due to increased entitlement barrels during the year. The depletion rate per barrel, and the consequent charge, is also impacted by significant assumptions in the future oil and gas prices and future development costs, and is partly offset by reserves replacement during the year. The decrease in operating and production costs was primarily attributable to the changes in lifting positions of US$93mn, offset by increased costs of US$24mn due to a higher level of field operations.

Administrative expenses (net of other income) were higher at US$49mn (2013: US$36mn) primarily due to an increase in corporate costs during 2014. Under the terms of the PSA amended in December 2014, the Group is committed to spend US$10mn per year until the end of the PSA towards corporate social expenses. Consequently an amount of US$85mn (2013: nil) has been recognised for corporate social expenses for the initial term of the PSA in Turkmenistan. A provision for impairment of US$24mn (2013: nil) was recognised towards the exploration and evaluation costs of the Baragatan-1A well, offshore the Philippines. The exploration well did not discover commercial hydrocarbons and has been plugged and abandoned. The future interest in the block remains to be assessed.

Profit for the year

Profit for the year was US$651mn (2013: US$513mn), 27% higher than the previous year primarily on account of a credit in the current income tax expense in respect of the reversal of the overprovision made in prior years up to 2013 no longer payable, and higher revenue offset by higher cost of sales, recognition of corporate social obligations, a provision for impairment and administrative expenses. The profit for the year includes finance income of US$11mn (2013: US$11mn).

The Group's subsidiary Dragon Oil (Turkmenistan) Ltd has paid taxes in accordance with the legislation of Turkmenistan. From 2008 to 2013 Dragon Oil (Turkmenistan) Ltd paid taxes in accordance with the Tax Code at the rate of 20% and provided for additional taxes at 5% in line with provisions of the Production Sharing Agreement (PSA) and the Hydrocarbon Resources Law of 2008.

During 2014 the state authorities in Turkmenistan and the Group entered into an amendment to the provisions of the PSA to bring the tax rate in line with the provisions of the Tax Code of Turkmenistan. The rate of 20% is now applicable to the Group in respect of its petroleum operations in Turkmenistan. The Group has applied this rate in determining its tax liabilities as at 31 December 2014. The impact of the reduction in the tax rate is a reversal of US$160mn in respect of an overprovision for prior years up to 2013 no longer payable, and a corresponding credit resulting from remeasurement of deferred taxes at 20%.

Finance income in 2014 remained similar to that of the prior year, despite higher cash and cash equivalents and term deposits maintained during the year on account of marginally lower interest yields.

Basic Earnings per share of 132.32 US cents for the year were 27% higher than the previous year (2013: 104.44 US cents).

Balance Sheet

Total capital expenditure for 2014 was US$679mn (2013: US$331mn). Investments in property, plant and equipment increased by an amount of US$310mn primarily due to capital expenditure of US$627mn (2013: US$272mn) incurred on oil and gas interests, offset mainly by the depletion and depreciation charge during the year. The total capital expenditure during the year was on drilling and infrastructure projects in Turkmenistan and exploration assets in Afghanistan, Iraq, Egypt and the Philippines.  Of the total capital expenditure for 2014, 49% was attributable to infrastructure (2013: 37%) with 44% (2013: 46%) spent on development and appraisal drilling and the balance spent on exploration assets and computer software, which are classified as intangible assets on the balance sheet. The infrastructure spend during the period included relocation of the Dzhygalybeg (Zhdanov) B platform (now Dzheitune (Lam) F platform), construction of the tank farm and additional slots on a number of platforms.

Current Assets and Liabilities

Current assets rose by US$225mn primarily due to an increase of US$115mn in abandonment and decommissioning funds, US$85mn in underlift debtors, US$51mn in term deposits and cash and cash equivalents and US$11mn in inventories offset by a US$37mn decrease in trade and other receivables. The cash and cash equivalents and term deposits at the year-end were US$1,975mn (2013: US$1,924mn), excluding funds held for abandonment and decommissioning activities. Amounts of US$1,936mn (2013: US$1,894mn) are held in term deposits with original maturities greater than three months.

Funds held for abandonment and decommissioning activities at the year-end were US$664mn (2013: US$549mn). Previously, the abandonment and decommissioning funds and the related liability were presented within Term deposits and Cash and cash equivalents, and Trade and other payable, respectively. The presentation has since been amended to reflect the specific nature of the fund and the related liability and accordingly the change has been applied retrospectively.

Current liabilities rose by US$47mn due to increases of US$105mn in trade and other payables, US$95mn in the abandonment and decommissioning liability set aside to meet future obligations based on increased production offset by a US$153mn decrease in the current tax liability.

Cash flows

Net cash generated from operations during the year increased by US$170mn to US$822mn (2013: US$652mn). The increase was primarily attributable to an increase in volumes of crude oil sales despite marginally lower average realised crude oil prices, the change in the working capital position, lower tax paid and lower amounts transferred to abandonment and decommissioning funds.

Cash used in investing activities was US$627mn (2013: US$764mn), comprising capital expenditure of US$546mn (2013: US$281mn), net placement on term deposits of US$42mn (2013: US$435mn) and additions to intangible assets of US$50mn (2013: US$59mn), offset by interest received on cash and cash equivalents and term deposits of US$11mn (2013: US$11mn).  Cash used in financing activities was US$185mn (2013: US$136mn) mainly on account of the payment of dividends of US$187mn (2013: US$147mn).

Group balance sheet

As at 31 December

* Certain amounts shown here do not correspond to the 2013 financial statements and reflect the restatement made in 2014, refer to Note 9.

Group income statement

Year ended 31 December

Group statement of comprehensive income

Year ended 31 December

Group cash flow statement

Year ended 31 December

Comparative information presented above has been amended to accord to the current year presentation (refer to Note 9).