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Investors today welcomed Dragon Oil’s (LON:DGO) proposal to buy back US$200 million worth of shares and the growing oil producer gained over 6 per cent in London.
Theses purchases will be carried out through ‘on market’ transactions.
Dublin based broker Davy says the share buyback programme does not come at the expense of Dragon’s investment in organic growth or diversification.
Dragon has the firepower to execute this plan using its cash from operations, the broker said.
“The share buyback is a good way of rewarding shareholders without entering into any long-term commitments. This seems sensible in light of the recent drop in the oil price and current concerns regarding demand,” said analyst Caren Crowley.
“It is worth noting that our valuation of 678p per share for Dragon assumes a long-run oil price of $85 per barrel, which is below the spot price.”
The company says it has a strong financial position and significant cash generating abilities.
And it believes a share buy-back programme offers an efficient route to return surplus cash to shareholders. At the end of March Dragon Oil had US$1.65 billion in cash.
“With a solid track record of delivering organic growth in production and reserves from our key asset, we are well positioned to pursue our diversification strategy and to return value to our shareholders,” said chief executive Dr Abdul Jaleel Al Khalifa.
“We have commenced paying regular dividends and have now added a share buyback programme."
He added: “Diversification remains at the top of our agenda as we seek to deploy our expertise and resources to become a multi-asset company."
Dragon Oil made one of its first steps towards its diversification last week as it landed new exploration acreage in Iraq, through a venture with Kuwait Energy and Turkish Petroleum.
Meanwhile this morning it also provided an update on its continued expansion of its oil producing operations in the Caspian Sea.
The company said that the Dzheitune (Lam) 28/170 well has been completed as a dual producer and it has been tested with initial production of 2,072 barrels of oil per day. And the Dzheitune (Lam) 28/172 well was completed as a single producer and it tested with initial production of 1,976 barrels a day.
Elsewhere the Dzheitune (Lam) 28/169 well has been re-tested after optimisation work added 300 barrels of extra daily production, and it was subsequently tested at 2,097 barrels a day.
The Dzheitune (Lam) 13/171 well currently has limited production and optimisation work will be carried out on the well.
On the London Stock Exchange Dragon Oil shares gained 30.5p, or 6.3 per cent, today to trade at 515p each.
