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Dragon Oil PLC
17 August 2009
 





17 August 2009

DRAGON OIL PLC

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


2009 Interim Results


Dragon Oil plc (Ticker: DGO), an international oil and gas exploration and production company, today announces its Interim financial results for the period ended 30 June 2009

Financial highlights 


1H 2009 

1H 2008 

Change





(US$ millions, unless stated otherwise)




Revenue

263.5

373.5

-29%

Operating profit

122.0

200.2

-39%

Profit for the period

105.0

166.9

-37%

Capital expenditure

155.1

154.5

+0.4%

Net cash generated from operating activities 

118.6

231.0

-49%

Cash and term deposit balance

875.4

875.7

-


Operational performance

Outlook for 2H 2009


Dr Abdul Jaleel Al Khalifa, Chief Executive Officer, commented:

"We continue to build momentum towards achieving significant production growth in the coming years. We have contracted the Iran Khazar rig for another two years and are looking to secure another platform-based rig to ensure that we have three full-time rigs operating simultaneously before the end of the year along with an additional rig on a short-term contract. Our infrastructure upgrade and renewal programme has showed progress, with the expansion of our export capabilities and the construction of the Dzheitune (Lam) B platform, which is currently being installed in the Western part of the Dzheitune (Lam) field. 

"With the slowdown in the broader economy, we have been able to drive cost optimization by renegotiating contracts and re-tendering certain projects. Despite the slow start to the drilling programme in 2009, we achieved an 11% growth in production compared to 1H 2008. While the overall production growth in 1H 2009 was below our expectations, we expect more wells to come on stream in 2H 2009 with the aim to complete up to 35 wells during the 2009-11 period. That will help us achieve our long-term goal of annual production growth of up to 15% on average for 2009-11. 

"The first half of 2009 has been a challenging period for Dragon Oil, but the full support of the Board and the enthusiasm and teamwork across the Group have enabled us to move ahead confidently."



Analyst meeting and conference call details:

A meeting and conference call for analysts will be held today at 9.00am BST. For details, please contact Kate Lehane at Citigate Dewe Rogerson on +44 (0)20 7282 1063 or at kate.lehane@citigatedr.co.uk


A replay of the call will be available from around 12.00pm today until 24 August 2009 on the following telephone numbers: 


UK 

Ireland 

USA

+44 20 7806 1970

+353 1 659 8321

+1 718 354 1112

  The pass code is 4785100#.


For further information please contact: 


Media enquiries 

Citigate Dewe Rogerson (+44 20 7638 9571) 

George Cazenove

Emma Woollaston


Investor and analyst enquiries 

Dragon Oil plc 

For investor queries: Leanne Denman, Investor Relations Officer (+971 4 305 3660) 

For analyst queries: Anna Gavrilova, Communications Officer (+44 20 7647 7804)


Joint financial advisers

Davy Corporate Finance (+353 1 679 6363)

Hugh McCutcheon 

John Frain


HSBC Bank Plc

Philip Wolfe (+44 20 7992 2216)

Abbas Merali (+44 20 7992 2279)





2009 Interim Results


Chief Executive Officer's Statement


OVERVIEW


During the first six months of 2009, the oil industry faced a challenging market environment due to the weak global economy and volatile oil prices. However, with almost ten years' experience of operating in the Cheleken Contract Area under the Production Sharing Agreement ("PSA"), Dragon Oil has accumulated significant knowledge of the fields and expertise that make us confident in our field development strategy. 


Revenues in the period were 29% lower at US$263.5 million compared with the level achieved during the same period in 2008. This is primarily due to significantly lower realised oil prices, at US$50/bbl (1H 2008: US$108/bbl) only partially offset by 40% higher quantity of crude oil sold and change in the lifting position at the period end. We maintained our debt-free position with a healthy cash balance of US$875.4 million as of 30 June 2009. This strong financial position will allow us to finance internally our aggressive capital expenditure programmes to fuel the Group's organic production growth in the coming years.


We completed four wells in productive sections of the Dzheitune (Lam) field, and we expect to complete four more wells before the end of 2009. We are currently installing the Dzheitune (Lam) B platform in the Western part of the Dzheitune (Lam) field, which promises to be a productive area, and plan to commence drilling from this platform in Q4 2009.


A number of infrastructure projects were progressed during 1H 2009, including an upgrade of the Dzheitune (Lam) 63 platform and Phase 2 upgrade of the export facility at the Aladja Jetty in order to increase loading capacity.  


On the gas development, the tendering for the FEED study is ongoing and simultaneously we have advanced the gas commercialisation plans and intend to commence discussions on gas pricing soon. Meanwhile, we continue to look for acquisition opportunities focusing on good-quality right-fit assets to diversify our current portfolio.


On the Corporate front, in February this year we launched an investigation into irregularities detected in the Marketing Department and Contracts Department. The investigation has progressed substantially but remains ongoing. In March 2009, we announced the proposed restructuring of the Company by means of a scheme of arrangement by putting in place a Bermuda incorporated company as the new ultimate holding company of the Group. The corporate restructuring has been put on hold in light of the preliminary approach we received in June this year from Emirates National Oil Company Limited (ENOC) L.L.C. ("ENOC"), in relation to a possible offer for the entire issued and to be issued share capital of the Company that it does not currently own (the "Approach"). Dragon Oil has formed an Independent Committee of the Board to evaluate an offer should one be forthcoming.



OPERATIONS OVERVIEW


Production 

Gross field production in the first half of 2009 increased by 11% compared to the level achieved in the same period in 2008. Dragon Oil produced 7.7 million barrels of crude oil; the average daily production rate on a working interest basis was 42,808 bopd for 1H 2009. During the corresponding period in 2008, the Group produced 7.0 million barrels of crude oil with an average daily production rate of 38,482 bopd. 


Due to changes in the drilling programme, with the first two new wells coming on stream only at the end of May 2009 and lost production from the Dzheitune (Lam) A/127 well, the average daily production for 1H 2009 was below our expectations and lower than the 43,787 bopd reported for Q1 2009. The production from the Dzheitune (Lam) A/127 well has been significantly reduced due to operational issues, which are expected to be resolved through a workover scheduled to take place later this year. 


The entitlement production for 1H 2009 was approximately 65% of the gross production compared to 54% for the comparable period in 2008. The entitlement barrels are dependent, amongst other factors, on operating and development expenditure in the period and realised crude oil prices. In the first half of 2009, lower oil prices, than in 1H 2008, resulted in higher entitlement barrels. 


Marketing

The Group sold 4.9 million barrels of crude oil in 1H 2009 (1H 2008: 3.5 million barrels) and held a low crude oil inventory at the period-end. The quantity of crude oil sold during the first six months of 2009 is 40% higher than the amount sold during 1H 2008. This is due to higher production and entitlement than in the first half of last year. 


The Group was in an underlift position of approximately 0.5 million barrels of crude oil as at 30 June 2009 (31 December 2008: 0.6 million barrels). The significant volatility of the oil prices, experienced in the first six months of 2009, resulted in a 54% decrease in realised crude oil prices. The average realised crude oil price during 1H 2009 was approximately US$50/bbl (1H 2008: US$108/bbl). The Group's realised crude oil prices achieved a discount of about 2% (1H 2008: 1.4%) to Brent during the first six months of this year. The Group continues to leverage its marketing experience to achieve low discounts to Brent. 


In the first half of 2009, approximately 90% (1H 2008: 80%) of crude oil was exported via NekaIran. A new crude oil marketing contract via BakuAzerbaijan was put in place in early 2009 and the sales of crude oil via this route resumed in March 2009. Dragon Oil continues to assess additional routes to market, including Makhachkala in Russia and the BP operated BTC (Baku-Tbilisi-Ceyhan) pipeline.


Drilling 

Dragon Oil completed two wells in 1H 2009, with two further wells coming on stream in July and August this year. All wells were dual-completion development wells.

 

Good progress was achieved during the first half of this year in securing rigs to support our long-term drilling programme. In April 2009, Dragon Oil announced that we had reached an agreement to extend the contract for the Iran Khazar rig for another two years, commencing in May 2009. In June 2009, we announced that we had signed a six months' contract for the Astra jack-up rig, commencing in November 2009; we expect to drill two wells during the term of the contract. 


Later in 3Q 2009, we also expect to sign an agreement for another platform-based rig. In light of new information the management received during the initial tendering process, a re-tender for a platform-based rig is ongoing with the expectation of achieving better terms. We now anticipate that the rig will start drilling later than planned and the first well is expected to be completed in Q1 2010


Limited supply of offshore rigs is one of the constraints to the Company's field development programme. We constantly monitor the supply of rigs in the region and aim to secure long-term contracts on favourable commercial terms, while minimising mobilisation time and maximising efficient drilling. 


We maintain our target to complete eight wells before the end of the year through optimised drilling. Both the Iran Khazar rig and Rig 40 are expected to complete four wells each, including those wells already completed, by the end of 2009.


During the first half of 2009, our workover programme included a rigless workover operation conducted on Dzheitune (Lam) 13/96 well, which resulted in incremental production of 783 bopd. 


Infrastructure

A number of infrastructure projects were progressed in 1H 2009. The installation of the Dzheitune (Lam) B platform commenced in July 2009 and the platform will be ready for drilling later this year. As part of our ongoing upgrade of the existing infrastructure, the Dzheitune (Lam) 63 platform was upgraded and Phase 2 upgrade of the export facility at the Aladja Jetty was completed. The latter will increase loading capacity and enable simultaneous loading of two tankers to accommodate future production growth. Additional slots on the Dzheitune (Lam) A platform were added as well as three more oil storage tanks were built at the Central Processing Facility, significantly increasing the storage capacity.


We have made slower progress on the construction of the 30" 40 km trunkline and Phase 2 expansion of the Central Processing Facility than expected, due to delays in project execution. As we progress through the second half of this year, we will mobilise internal and external resources to deal with the delays we have experienced with these projects. 


Limited availability of qualified contractors in the Caspian Sea region remains one of the key risks to Dragon Oil's operations. We are actively addressing this risk by initiating contact with new contractors with a focus on rigorous due diligence process in light of the increased number of infrastructure projects planned over the next five years.


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 2009 is set out below:

 



FINANCIAL OVERVIEW


US$ million (unless stated)

1H 2009

1H 2008

Change

Revenue  

263.5

373.5

-29%

Cost of Sales  

129.6

73.5

76%

Gross Profit 

133.9

299.9

-55%

Operating profit  

122.0

200.2

-39%

Profit for the year  

105.0

166.9

-37%

Earnings per share, basic (US cents)

20.39

32.54

-37%

Earnings per share, diluted (US cents)

20.36

32.34

-37%

Capital employed  

1,548.0

1,442.3

  7%

Net cash from operations 

118.6

231.0

-49%

Cash used in investing activities  

411.8

443.2

-7%

Debt

0.0

0.0

nil


Income Statement


Revenue

The average daily production on a working interest basis was 42,808 bopd in 1H 2009 (1H 2008: 38,482 bopd) and 27,782 bopd on the entitlement basis (1H 2008: 20,850 bopd). The Group's share of entitlement production is determined by reference to cost oil and profit oil, in accordance with the terms of the PSA. The entitlement barrels have been and continue to be determined by, amongst other factors, the level of development expenditure and realised oil prices.


In the first half of 2009, the Group's revenue was US$263.5 million compared to US$373.5 million in the same period in 2008. The 29% decrease was due to lower realised crude oil prices of US$50/bbl (1H 2008: US$108/bbl), which were only partially offset by a 40% increase in the volume of crude oil sold and change in the lifting position at the period end. The realised oil prices achieved a discount of about 2% (1H 2008: 1.4%) to Brent during the first six months of 2009.


The PSA includes provisions such that parties to the agreement may not lift their respective crude oil entitlements in full, and as such underlifts or overlift of crude oil may occur at period-ends. At the year-end the Group was in an underlift position of 0.5 million barrels, which is recognised as revenue and measured at market value.


Operating profit

The Group generated an operating profit of US$122.0 million in 1H 2009 (1H 2008: US$200.2 million).


The cost of sales increased by US$56.1 million to US$129.6 million (1H 2008: US$73.5 million). The cost of sales includes operating and production costs and depletion. The depletion charge of US$99.7 million (1H 2008: US$61.7 million) was higher by 62% than the charge in the corresponding period in the prior year due to increased production during the period and the upward revision in estimates of field development costs. The increase in the cost of sales during the period in comparison with the corresponding period last year was primarily due to an impact of a reversal of the 2007 overlift position in 1H 2008. 


Administrative expenses (net of other income) at US$11.9 million (1H 2008: US$8.3 million) were higher by 43%, due to an increase in corporate head office costs and expenses incurred on the investigation into procurement irregularities reported in February 2009. Other losses in the current period, comprising movements in fair value of derivative financial instruments held for hedging purposes, are nil (1H 2008: US$91.4 million), since no hedges have been undertaken for the period beyond December 2008.


Operating profit was down 39% at US$122.0 million (1H 2008: US$200.2 million) as a result of lower revenues, which have been affected by lower realised oil prices and the higher cost of sales. 


Profit for the period

The profit for the first six months of 2009, at US$105.0 million (1H 2008: US$166.9 million), includes finance income of approximately US$17.4 million (1H 2008: US$11.7 million) and a lower taxation charge of US$34.4 million (1H 2008: US$44.7 million). Finance income was up due to higher cash and cash equivalents and term deposits maintained during the first six months of the year. 


In 2008, following the introduction of the Hydrocarbon Resources Law, the tax rate applicable to the Group's operations in Turkmenistan increased to 25% from 20%. The Group applies this tax rate to determine its tax liabilities. The Group is in discussions with the authorities in Turkmenistan regarding the applicability of the new rate to prior periods, but it does not currently believe that prior periods are affected by the new rule. Consequently, no provision has been made in respect of any additional tax that could become payable if the increased tax rate were applied to prior periods.


Basic earnings per share ("EPS") of 20.39 US cents in the first half of this year were 37% lower than the EPS in the same period last year (1H 2008: 32.54 US cents).

 

Balance Sheet

Investments in oil and gas interests increased by US$55.3 million due to capital expenditure of US$155.1 million incurred (1H 2008: US$154.5 million) offset by the depletion and depreciation charge during the period. Of the total capital expenditure, approximately 53% (1H 2008: 42%) was attributable to infrastructure with the balance spent on drilling. The infrastructure spend during the first six months of the year included construction of the Dzheitune (Lam) B platform, the 30" 40 km trunkline and Phase 2 expansion of the Central Processing Facility, the upgrade of the Dzheitune (Lam) 63 platform and Phase 2 of the Aladja Jetty, and a number of smaller projects. 


Current Assets and Liabilities

Current assets increased by US$26.1 million, primarily due to underlift debtors valued at a higher market price and higher trade receivable for the sale of crude oil at the period-end, compared to the 2008 year-end. The cash and cash equivalents and term deposits as at 30 June 2009 were US$875.4 million (31 December 2008: US$875.7 million), including US$103.6 million (31 December 2008: US$91.5 million) set aside for abandonment and decommissioning activities.


Current liabilities fell by US$32.1 million due to a US$60.7 million movement in current income tax liability, partly offset by a US$28.7 million increase in trade and other payables.


Cash flows

Net cash generated from operating activities in 1H 2009 of US$118.6 million was 49% lower than net cash generated in the same period last year (1H 2008: US$231.0 million), with the decrease primarily attributed to the lower crude oil price realised during the period


Net cash used in investing activities in 1H 2009 of US$411.8 million was down by 7% (1H 2008: US$443.2 million) due to lower amounts placed on term deposits and lower spend on capital expenditure, offset by an increased amount of interest received on bank deposits.


A decrease in cash flows from financing activities is due to lower proceeds from the issue of share capital, compared to the same period last year. 



MATERIAL EVENTS


Preliminary approach

On 4 June 2009, we announced that the Company had been approached by ENOC in relation to a possible offer for the entire issued and to be issued share capital of the Company it does not currently own. The Company formed an Independent Committee of the Board to evaluate an offer should one be forthcoming. Davy Corporate Finance and HSBC are acting as joint financial advisers to the Independent Committee. The Approach is of a preliminary nature and there can be no certainty that any offer will be made or as to the terms of any such offer. A further announcement will be made as appropriate. 


Corporate restructuring

On 27 March 2009, the Board of Dragon Oil plc announced the proposed restructuring of the Company by means of a scheme of arrangement by putting in place a Bermuda incorporated company as the new ultimate holding company of the Group. Following the restructuring, the Company was planning to apply for a primary listing on the London Stock Exchange and a secondary listing on the Irish Stock Exchange. In light of the approach received from ENOC, the corporate restructuring has been put on hold.  


Investigation

On 26 February 2009, Dragon Oil announced that the Group had identified, via its Internal Audit Department, possible irregularities within the Marketing Department and Contracts Department and, subsequently, had engaged KPMG (Dubai) to conduct an investigation. On 24 March 2009, the Company updated the market on the progress with the investigation and confirmed that there was no material impact on the Group's financial position. The investigation has progressed substantially but remains ongoing. The Company will update the market as and when required. The Group now has a strong and diligent management team who are working in line with the highest ethical standards. 



OUTLOOK FOR 2H 2009


Our drilling programme is currently progressing with two full-time rigs. We are in the process of re-tendering for another platform-based drilling rig and expect to be able to award a contract in Q3 2009. We anticipate that the new rig will start drilling in Q4 2009. Due to delays in securing this platform-based rig, we have optimised the drilling programme for 2009 to reach our target of eight wells for the year, which includes the four wells already completed. Rig 40 is scheduled to complete four wells on the Dzheitune (Lam) 13 platform with the other four wells to be completed by the Iran Khazar rig on the Dzheitune (Lam) 28 and Dzheitune (Lam) B platforms. 


On the infrastructure front, the Dzheitune (Lam) B platform is being installed and will be ready for drilling later this year.


Due to a combination of factors, namely changes in the drilling programme, lost production from the Dzheitune (Lam) A/127 well and lower than expected results from the latest completed well, Dzheitune (Lam) 13/135, our production growth for 2009 is likely to be below 15%. However, we maintain our target of annual production growth of up to 15% on average for 2009-11.


In addition to our drilling and infrastructure targets, we will also be focusing on gas commercialisation, with the tendering for the FEED study ongoing and discussions on gas pricing due to commence soon. The Group's New Ventures team continues to screen acquisition opportunities focusing on value-adding assets to diversify our current portfolio.



Dr Abdul Jaleel Al Khalifa 

Chief Executive Officer 

Dragon Oil plc 


end -



About Dragon Oil

Dragon Oil plc is an innovative international oil and gas 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. The Company acquired interests in Blocks 35, 49 and R2 (10%) in the Republic of Yemen in December 2007. 


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 producing fields, Dzheitune (Lam) and Dzhygalybeg (Zhdanov). 


www.dragonoil.com 


Disclaimer

The directors of Dragon Oil accept responsibility for the information contained in this announcement. To the best of the knowledge and belief of the directors (who have taken all reasonable care to ensure such is the case) the information contained in this announcement is in accordance with the facts and does not omit anything likely to affect the import of such information. 


Davy Corporate Finance, which is regulated in Ireland by the Financial Regulator, is acting for the Company and no-one else in relation to the Approach and will not be responsible to anyone other than the Company for providing advice in relation to the Approach. 


HSBC Bank Plc, which is authorised and regulated by the Financial Services Authority, is acting for the Company and no-one else in relation to the Approach and will not be responsible to anyone other than the Company for providing advice in relation to the Approach.


Any person who is a holder of one per cent or more of any class of shares in Dragon Oil plc may be required to make disclosures pursuant to Rule 8.3 of the Irish Takeover Panel Act, 1997, Takeover Rules 2007 and 2008.  


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.


Glossary of terms:


Bopd

US cents

US$

barrels of oil per day 

United States cents United States dollars




Group balance sheet









Unaudited


Audited



Note

30 June

2009


31 December

2008



US$'000


US$'000

ASSETS





Non-current assets





Property, plant and equipment

6

831,849


776,552

Intangible assets


947


947



832,796


777,499






Current assets





Inventories


59,498


56,585

Trade and other receivables

7

82,421


58,980

Term deposits


719,573


426,667

Cash and cash equivalents

8

155,870


449,051



1,017,362


991,283

Total assets


1,850,158


1,768,782






EQUITY

Capital and reserves attributable to equity shareholders








Share capital

9

80,687


80,685

Share premium 

9

228,809


228,764

Capital redemption reserve


77,150


77,150

Other reserve


2,245


1,689

Retained earnings


1,159,101


1,054,060






Total equity


1,547,992


1,442,348






LIABILITIES





Non-current liabilities





Deferred income tax liabilities


84,588


80,305

Trade and other payables

10

6,889


3,372








91,477


83,677






Current liabilities





Trade and other payables

10

170,549


141,880

Current income tax liability


40,140


100,877








210,689


242,757






Total liabilities


302,166


326,434






Total equity and liabilities


1,850,158


1,768,782



Group income statement



Unaudited


Unaudited




Note

6 months

ended

30 June 2009


6 months

ended

30 June 2008



US$'000


US$'000






Revenue

11

263,484


373,452






Cost of sales

12

(129,593)


(73,535)






Gross profit 


133,891


299,917






Administrative expenses


(12,041)


(8,327)

Other income


146


36

Other losses


-


(91,439)






Operating profit 


121,996


200,187






Finance costs


-


(293)

Finance income


17,425


11,697






Profit before income tax


139,421


211,591






Income tax expense 

16

(34,436)


(44,729)






Profit attributable to equity holders of the Company


104,985


166,862

















Earnings per share


Cents

per share


Cents

per share


Basic

14

20.39


32.54c

Diluted

14

20.36


32.34c









Group statement of comprehensive income



Unaudited


Unaudited



6 months

ended

30 June 2009


6 months

ended

30 June 2008



US$'000


US$'000






Profit attributable to equity holders of the Company


104,985


166,862






Total comprehensive income for the period


104,985


166,862







Group statement of changes in equity (unaudited)






Share

capital



Share

premium


Capital

redemption

reserve



Other

reserve



Retained

earnings




Total


US$'000


US$'000


US$'000


US$'000


US$'000


US$'000













At 1 January 2008 

80,075


217,706


77,150


3,827


681,669


1,060,427













Total comprehensive income for the period

-


-


-



166,862


166,862

Shares issued during the period

610


11,058


-



-


11,668

Employee share option scheme:












  -value of services provided

-


-


-


508 


-


508

Transfer on exercise of share options

-


-


-


(3,333)


3,333


-













At 30 June 2008

80,685


228,764


77,150


1,002 


851,864


1,239,465













Total comprehensive income for the period

-


-


-



202,180


202,180

Shares issued during the period

-


-


-



-


-

Employee share option scheme:












  -value of services provided

-


-


-


703 


-


703

Transfer on exercise of share options

-


-


-


(16)


16


-













At 31 December 2008

80,685


228,764


77,150


1,689 


1,054,060


1,442,348













Total comprehensive income for the period

-


-


-



104,985


104,985

Shares issued during the period

2


45


-



-


47

Employee share option scheme:












  -value of services provided

-


-


-


612 


-


612

Transfer on exercise of share options

-


-


-


(56)


56


-













At 30 June 2009

80,687


228,809


77,150


2,245 


1,159,101


1,547,992





































All amounts are attributable to equity holders of the Company.


 

Group cash flow statement





Note

Unaudited

6 months

ended

30 June

 2009


Unaudited

6 months

ended

30 June

2008



US$'000


US$'000






Cash generated from operating activities

15

209,445


316,407






- Interest paid


-


(219)

- Income tax paid


(90,890)


(85,186)






Net cash generated from operating activities


118,555


231,002 






Cash flows from investing activities 





Additions to property, plant and equipment 


(136,302)


(144,177)

Interest received on bank deposits


17,425


11,697

Amounts placed on term deposits (with original maturities of over three months)



(292,906)



(310,681)






Net cash used in investing activities 


(411,783)


(443,161)






Cash flows from financing activities





Proceeds from issue of share capital

9

47


11,668











Net decrease in cash and cash equivalents


(293,181)


(200,491)






Cash and cash equivalents at the beginning of the period


449,051


375,255






Cash and cash equivalents at the end of the period


155,870


174,764







1    General information


Dragon Oil plc ("the Company") and its subsidiaries (collectively, "the Group") are engaged in upstream oil and gas development and production activities in Turkmenistan under the terms of the Production Sharing Agreement ("PSA") between Dragon Oil (Turkmenistan) Limited and the state agency of the Government of Turkmenistan signed on 10 November 1999 and effective from 1 May 2000. The head office is based in DubaiUnited Arab Emirates.


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


The Company's ordinary shares are listed on the official lists of the Irish and London Stock Exchanges.


This condensed consolidated interim financial information ("interim financial information") was approved for issue by the Board of Directors on 16 August 2009.


2    Basis of preparation of interim financial information


This interim financial information for the six months ended 30 June 2009 has been prepared in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the related Transparency Rules of the Irish Financial Services Regulatory Authority 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 2008, which have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union.


The preparation of the interim financial information includes the use of estimates and assumptions that affect items reported in the Group balance sheet and 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, possibly significantly.


3    Accounting policies


Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2008, as described in those annual financial statements.


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


The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 January 2009.


IAS 1 (Revised), 'Presentation of financial statements' (effective from 1 January 2009). The revised standard prohibits the presentation of items of income and expenses (that is, 'non-owner changes in equity') in the statement of changes in equity, requiring 'non-owner changes in equity' to be presented separately from owner changes in equity. All non-owner changes in equity will be required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. The Group does not presently have any component of income or expenditure arising from non-owner changes in equity, other than profit or loss for the period.



IFRS 2 (Amendment), 'Share-based payment' (effective from 1 January 2009). The amended standard deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services; they would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The application of the new amendment does not have any material impact on the Group interim financial information.



IFRS 8, 'Operating segments' (effective for annual periods beginning on or after 1 January 2009). IFRS 8 replaces IAS 14, 'Segment reporting', and aligns segment reporting with the requirements of the US standard SFAS 131, 'Disclosures about segments of an enterprise and related information'. The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. The application of the new standard does not have any material impact on the interim financial information as the Group continues to report under a single segment.

 

The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year beginning 1 January 2009, but are not currently relevant for the Group. 



4    Segment information


The chief operating decision-maker has been identified as the Board of Directors ("BOD"). The BOD reviews the Group's internal reporting in order to assess performance and allocate resources. The Group's operations are primarily located in Turkmenistan in the Caspian region and the treasury function is based in its head office in Dubai where a significant portion of cash at bank and term deposits of the Group are held. Management has determined there is only one operating and reportable segment for the Group.


5    Critical accounting estimates and assumptions


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


Development and production assets - depletion 


The Group's share of commercial oil reserves is computed in accordance with the PSA. In arriving at the Group's share of reserves and, consequently, the depletion charge, significant assumptions have been made. These significant assumptions include estimates of oil reserves, future oil prices, future development costs including the cost of drilling, infrastructure facilities and other capital and operating costs. 


The Group revised its long-term view of oil prices from US$50 per barrel to US$70 per barrel from 1 January 2008. The effect of an upward revision in the long-term oil price is to lower the level of reserves attributable to the Group and to increase the depletion charge per barrel. There has been no revision to the long-term oil price during the six months period ended 30 June 2009


If the estimate of the long-term oil price had been US$20 per barrel higher at US$90 from 1 January 2009, the reserves attributable to the Group would decrease, with a consequent increase in the depletion charge of US$6.6 million for the six months period ended 30 June 2009.


If the estimate of the long-term oil price had been US$20 per barrel lower at US$50 from 1 January 2009, the reserves attributable to the Group would increase, with a consequent decrease in the depletion charge of US$10.2 million for the six months period ended 30 June 2009.


The depletion computation assumes 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.


6    Property, plant and equipment 



Development

and production

assets




Others




Total


US$'000


US$'000


US$'000

Cost






At 1 January 2008

895,537


1,816


897,353

Additions for the period

154,447


37


154,484







At 30 June 2008

1,049,984


1,853


1,051,837

Additions for the period 

132,458


-


132,458







At 31 December 2008

1,182,442


1,853


1,184,295

Additions for the period

155,057


18


155,075







At 30 June 2009

1,337,499


1,871


1,339,370







Depletion/depreciation 






At 1 January 2008

256,737


1,403


258,140

Charge for the period

61,701


129


61,830







At 30 June 2008

318,438


1,532


319,970

Charge for the period

87,684


89


87,773







At 31 December 2008

406,122


1,621


407,743

Charge for the period

99,718


60


99,778







At 30 June 2009

505,840


1,681


507,521







Net book amount






At 30 June 2009

831,659


190


831,849







At 31 December 2008

776,320


232


776,552


 

7    Trade and other receivables


Unaudited

30 June

2009


Audited

31 December

2008


US$'000


US$'000





Trade receivable 

36,035


27,890

Underlift receivable

37,722


22,785

Other receivables

4,893


6,767

Receivable from a related party

318


313

Prepayments 

3,453


1,225






82,421


58,980


8    Cash and cash equivalents


Cash and cash equivalents include term deposits of US$ Nil (2008: US$424.1 million), representing interest bearing deposits with original maturities of less than three months. 


9    Share capital and premium



Number of


Ordinary


Share




shares


shares


premium


Total


('000)


US$'000


US$'000


US$'000









At 1 January 2008

511,113


80,075


217,706


297,781

Shares issued during the year in

respect of share options vested


3,860



610



11,058



11,668









At 31 December 2008

514,973


80,685


228,764


309,449

Shares issued during the period

in respect of share options vested


16



2



45



47









At 30 June 2009

514,989


80,687


228,809


309,496










Trade and other payables


Unaudited

30 June

2009


Audited

31 December

2008


US$'000


US$'000





Trade creditors

29,442


25,036

Accruals 

35,804


24,235

Abandonment and decommissioning liability

111,043


94,728

Other creditors

1,149


1,253






177,438


145,252

Less: non current portion

(6,889)


(3,372)






170,549


141,880


Trade creditors and accruals include amounts of US$27.4 million (2008: US$23.3 million) and US$30.4 million (2008: US$15.8 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.


11    Revenue 


The Group's operations are primarily located in Turkmenistan in the Caspian region. Revenue includes an amount of US$231.9 million (1H 2008: US$308.3 million) and US$16.7 million (1H 2008: US$63.2 million) arising from the sale of crude oil in Iran and Azerbaijan respectively in addition to revenue recognised from the underlift of entitlement to crude oil produced of US$14.9 million (1H 2008: US$2 million).


Revenue from the sale of crude oil in Iran and Azerbaijan was from one customer each (1H 2008: one customer each).


12    Cost of sales


Unaudited

6 months

ended

30 June 2009


Unaudited

6 months

ended

30 June 2008


US$'000


US$'000





Operating and production costs

29,875


11,834

Depletion 

99,718


61,701






129,593


73,535


13    Dividends


The Directors do not recommend the payment of a dividend in respect of the six months ended 30 June 2009 (2008: nil).


14     Earnings per share

The calculation of basic earnings per ordinary share is based on the weighted average number of 514,975,265 ordinary shares in issue during the six months to 
30 June 2009 (1H 2008: 512,859,282 ordinary shares) and on the profit for the period of US$103.8 million (1H 2008: US$166.9million).


The calculation of diluted earnings per ordinary share is based on the diluted number of 515,562,668 ordinary shares in issue during the six months to 30 June 2009 (1H 2008: 515,938,748 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 2009


Unaudited

6 months

ended

30 June 2008


Note

US$'000


US$'000






Profit before income tax


139,421 


211,591 

Adjustments for: 





 - Depletion and depreciation

6

99,778 


61,830 

 - Crude oil underlift/overlift


(14,937)


(26,235)

 - Fair value movement on derivative financial instruments



91,439 

 - Employee share option scheme - value of services provided


612 


508 

 - Finance costs



219 

 - Interest on bank deposits


(17,425)


(11,697)






Operating cash flow before changes in working capital 


207,449 


327,655 

 - Settlement of the derivative financial instrument liability



(9,266)








207,449 


318,389 

Changes in working capital:





- Inventories 


(2,913)


4,900 

- Trade and other receivables 


(8,504)


(50,694)

- Trade and other payables


13,413 


43,812 






Cash generated from operating activities 


209,445 


316,407 


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 2009 is 25%. This rate has been applied from 1st July 2008


During the period, Dragon recognised a current tax charge of US$30.1 million (1H 2008: US$39 million) and a deferred tax charge of US$4.3 million (1H 2008: US$5.7 million). The deferred tax charge is due to temporary differences between the accounting carrying values and the tax bases of assets and liabilities computed under the tax laws of Turkmenistan, which principally relate to accelerated tax depletion.


In 2008, the tax rate applicable to the Group's operations in Turkmenistan was increased to 25% by the Hydrocarbon Resources Law of 2008. The Group has applied this new rate in determining its tax liabilities as at 30 June 2009 and 31 December 2008. The Group is in discussions with the authorities in Turkmenistan about the applicability of the new rate to prior periods, but it does not believe that prior periods are affected by the new rate. Consequently, no provision has been made in respect of any 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 51.51% 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 (appointed 25 April 2007) and Mr. Mohammed Al Ghurair (appointed 25 April 2007) are nominees of ENOC.






Unaudited

6 months

ended

30 June 2009


Unaudited

6 months

ended

30 June 2008



US$'000


US$'000






Trading transactions:





(i) Sale of services - companies under common control


245


87






(ii) Purchase of services - companies under common control


427


404






Other transactions:





(i) Finance income - banks controlled by Government of Dubai


5,589


2,286











Unaudited

30 June

2009


Audited

31 December 2008



US$'000


US$'000






Period end balances:





(i) Receivables - companies under common control

318


313






(ii) Term deposits - banks controlled by Government

  of Dubai

291,757


203,457






(iii) Cash and cash equivalents - banks controlled by

   Government of Dubai

134,418


246,823






(iv) Payables - companies under common control

42


450







b)    Key management compensation



Unaudited

6 months

ended

30 June 2009


Unaudited

6 months

ended

30 June 2008


US$'000


US$'000





Executive directors' fees

-


65

Salaries and short-term benefits

1,004


1,326

End of service benefits

31


324

Share based payments

460


201






1,495


1,916


18    Commitments


a)    Capital commitments


Committed future expenditure for property, plant and equipment for which contracts had been placed at 30 June 2009 amounted to US$ 432.8 million (31 December 2008: US$ 299.1 million).


b)    Operational commitments


Irrevocable letters of credit of US$0.02 million were in issue at 30 June 2009 towards the supply of equipment and services (31 December 2008: US$3.5 million).


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 2008, 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    Statement of directors' responsibilities


We confirm our responsibility for the interim financial information and that to the best of our knowledge: 

 

(a)   the interim financial information comprising the Group balance sheet, the Group income statement, the Group statement

       of comprehensive income, the Group statement of changes in equity, the 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 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 of Dragon Oil plc are listed in the Dragon Oil plc Annual Report for the year ended 31 December 2008. 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 website 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 website. 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



Nigel McCue

Director

16 August 2009


Independent review report to Dragon Oil plc


Introduction

We have been engaged by the company to review the condensed consolidated interim financial information in the interim financial report for the six months ended 30 June 2009, which comprises the Group balance sheet, Group income statement, Group statement of comprehensive income, Group statement of changes in equity, Group cash flow statement and related notes. 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 consolidated interim financial information.


Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007 and the Transparency Rules of the Irish Financial Services Regulatory Authority.


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 information included in this half-yearly 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 consolidated interim financial information in the interim financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Transparency (Directive 2004/109/EC) Regulations 2007 and the Transparency Rules of the Irish Financial Services Regulatory Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.


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 information in the half-yearly financial report for the six months ended 30 June 2009 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 Irish Financial Services Regulatory Authority.



PricewaterhouseCoopers 

Chartered Accountants

Dublin

16 August 2009




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