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Dragon Oil (LON:DGO) said it has resolved the production issue it encountered during the second quarter and is close to restoring field production to 70,000 barrels of oil per day.
The comments came in the company’s trading statement ahead of reporting results for the first half to end-June 2012.
It said average production rate on the Cheleken contract area in Turkmenistan came to 64,200 barrels of oil per day in the first half of 2012, a 10.7 percent rise from a year earlier.
After a strong start to the year, Dragon had flagged in the second quarter that a number of producing wells were choked down to minimise production of sand, reducing the oil flow from these wells, which had averaged over 70,000 bopd before the issue arose.
Today, the group said it continues to bring the wells back to normal levels of flow by installing sand screens in some of those affected older wells as well as installing desander equipment on certain platforms in areas prone to sand production.
In 2012, it plans to put into production up to 16 development wells, including two sidetracks of existing wells, three more than the target stated at the beginning of the year.
Twelve wells have been competed to-date with up to four more wells to be put into production by the end of the year.
For 2012, it expects to increase production by 10-15 percent year-on-year and is maintaining its medium-term guidance over the 2012-15 period of average gross production growth of 10-15 percent per annum.
The company remains on target to reach the 100,000 bopd gross production level in 2015.
Production has continued to increase Dragon’s massive cash pile, and it reported a balance of US$1.667 billion as of June 30 2012, compared to US$1.53 billion at the end of December 2011.
Chief executive Dr Abdul Jaleel Al Khalifa said: “The first half of the year was an eventful time for Dragon Oil on a number of fronts. We have continued to deliver on our goal to grow the group into a multi-asset company as shown by the recent award, in a consortium, of an exploration, development and production contract for Block 9 in Iraq.
"While diversification remains on top of our agenda, we also commenced a US$200 million share buyback programme to return some of the cash generated through solid growth of our asset in Turkmenistan to our shareholders."
While development drilling is ongoing, Dragon is expecting delivery of a new jack-up rig towards the end of 2012.
Tenders are out to secure another jack-up rig, two land rigs, more platforms, pipelines and other equipment for its operations.
Broker Davy noted that the knock-on effect from the production issue has been to change the full year production guidance from a straight 15 percent year-on-year expansion to a range of 10-15 percent production growth.
Importantly, according to analyst Job Langbroek, there is no change to the medium-term 100,000 bopd production expectation.
Sand ingress is a not unfamiliar problem for Caspian producers but is resolved with the appropriate remedial action, he said, adding: “Given the fact that this problem is widely encountered and is more often than not adequately dealt with, the production issues should be temporary.”
Taking into account the higher well count and the broader 10-15 percent range for production growth guidance, Langbroek’s has lowered his previous 678 pence per share net asset value to 661-670 pence per share.
“Even taking the lower of these two estimates, the share is trading at a 15 percent discount. In the context of a very low risk balance sheet, expansion opportunity and clear medium-term production growth, we continue to rate the stock as 'outperform',” the analyst added.