see that Aton have now returned Dragon to a buy from a hold. I think their near-term target assumes no new oil finds.
Direct exposure to the Caspian. Dragon Oil shares represent a rare opportunity for investors to gain direct and focused exposure to a rapidly growing Caspian E&P play. Dragon is developing two fields located in Turkmenistan’s part of the Caspian Sea, which hold 645mn barrels of proven and probable oil reserves. The cornerstone of our investment case for Dragon is a clearly visible outlook for strong output and profit growth at a highly attractive valuation.
Strong growth expected both near- and long-term. In the next two years, we expect Dragon’s net income and cash flows to more than double by 2005 from 2003 levels on the back of an expected doubling of oil production. In the peak years (2008-2010) we expect Dragon to generate revenue of $190mn, EBITDA of around $130mn and operating cash flow of around $100mn, all up several fold on 2003 levels.
Dragon trades at a sharp discount to fair value, peer multiples. Dragon offers 40% appreciation potential to our DCF-based fair value of $0.73, on an assumed 18.9% cost of equity, zero terminal FCF growth and $22/bbl long term Brent price. From the comparative valuation standpoint, Dragon trades at a deep discount to peers on both asset-based ($1.8/bbl of proven, $0.7/bbl of 2P oil reserves) and financial multiples (04F EBITDA multiple of 3.8 times, P/E of 4.5), which is particularly surprising given its growth outlook.
Turkmenistan, oil price key risks. The location of Dragon’s operations poses significant political risk due to possible hostile moves towards foreign business by the authorities. We note, however, that Dragon operates under PSA terms, which places it in a completely different legal framework; we also believe that our 12.5% overall risk free rate for Turkmenistan fairly adequately compensates investors for risks.
Dragon upgraded from Hold to Buy. Overall, based on a detailed evaluation of Dragon’s operations, financials and valuation, we find the company’s risk-return profile very appealing. We thus upgrade our recommendation on the stock from Hold to Buy with a new target price of $0.73; our asset-based fair value targets are 50%-100% above current levels.
Mr P90 - 30 Dec'03 - 11:49 - 218 of 218
Some one knows - £7500 retail buys from the drillers perhaps??
