DGO - Dragon Oil

[yadayada]

You can probably find several write ups in detail around if you look good, so ill be brief. What is interesting here is the high return on capital, abundance on oil, the discount because they are operating in mostly Turkmenistan (and is too large) and all the free options you get on it.

 

To start off with some numbers:

 

http://i.imgur.com/XEFFH5y.jpg

 

As you can see they have a very nice return on capital (after tax by accident, so even better as i wrote down). And they are a nice cash machine (which I like). Which is teh result from their high return on capital. Especially compared to other oil companies. They have increased their revenue an impressive amount, and they are targetting 100k bopd by 2015. They only need 11% CAGR in production to do that, which seems v doable. Especially looking at their track record.  They have no debt, and about 2 billion$ cash on the balance sheet, with a market cap of 4.4 bn$ now I think.

 

So a 7.5 PE, but I think a good part of that cash will be returned to share holders. Their oil reserves are about 650 million barrels of 2p reserves. But they have stayed roughly the same the last 8 years. Gas is at 1.5 TCF (which means rougly one third of Barrel of oil equivalent I think, but would have to look up precise number).  They are building a facility that will be finished within 2 years that will more then double gas production.

 

A potential catalyst here is the lifiting of Iranian embargo's. This would mean that they can export their oil through Iran, which would mean a 10% upside (lower discount to brent).

 

This is all purely Turkmenistan. I looked into political risk, and it seems pretty low. Their recent nutjob president deceased in 2007, and the guy currently in power reversed a good amount of some of those crazy laws that were in place. They are mostly farmers, and I don't get the impression the region is very unstable. Even though it is located next to two hot beds. GDP per capita is waaay higher then in Afghanistan and growing fast.

 

The free option here is the extra gas production and Iraq, Tunesia and Afghanistan oil production. And also Egypt I think. They are having the rights to oil fields there on a much smaller scale then in Turkmenistan. And I think Afghanistan will go in production soon. Im not too excited about this, but it looks like a nice free option.

 

At 7.5 FCF and the fact that they have 2 billion$ on the balance sheet, and the free options, it looks cheap. And it also looks like a nice option on increasing oil prices. Because a lower oil price looks to be priced in for a good part already?

 

They are part buying back shares and part giving out dividends. A little over 50% is owned by ENOC. And they did a 3.4 bn$ bid (out of the top of my head) in 2009 for the rest off it, and got declined. That was for a PE of well over 10. Looks like you can lose at most like 20% here with a bad oil price, and gain potentially 100-150% if everything goes right and oil goes up a bit.

 

Risks: lower oil price, return on capital going down too much from here and exporting the oil out of Turkmenistan can be hairy. Currently costing them 15-21% discount to brent. Through Iran it would cost them only a few % max.

 

Thoughts?

 

Also if there are large oil companies with more upside out there I would love to hear it :) . Oh and is there an intelligent discussion somewhere on this board on where oil prices will go in the next 10 years?

[Max Alpha]

This name has popped up in my screens of late but i haven't had a good look at it yet, looks promising.

 

Not a large oil company by any means but i have been looking at TransGlobe Energy (TGA).

 

Like Dragon Oil it looks great fundamentally but is heavily discounted because of political risk operating almost purely in Egypt at the moment. In saying this, the volatility in Egypt had limited impact on their performance.

 

Market cap of $680m, conservative balance sheet with $130m of cash which looks set to expand rapidly in the near future as CapEX stabilises at around $100m per year in order to achieve their 5 year plan of 40k bopd up from around 19k today.

 

Earnings, EBITDA and Book Value have grown at approx 25% pa for the last 5 years. This year has been flat due to disruptions to their (soon to be proportionally insignificant) operations in Yemen and the writing off of a poor acquisition.

 

Trading at 1.4 x BV, EV/EBITDA of approx 3x, and about 9 x FCF in the last 12 months.

 

As the company begins to churn out FCF management have stated they are going to return money to shareholders through a significant ongoing dividend. They also believe there will be room for M&A opportunities to deploy excess capital but have set a high bar and are happy to sit it out if they don't find anything suitable.

 

Have a new concession coming online in Q4 that will begin the production advance into the 20k's after a flat year.

 

2014 should see a return to rapid growth. A basket approach of these high growth / great valuation sovereign risk oil and gas plays could be promising.

[ItsAValueTrap]

Transglobe struck me as a silly company... here is my blog post on it:  http://wp.me/p1mOGr-xc

 

The political risk is very real.  The EGPC hasn't been paying TransGlobe on time.

[Max Alpha]

Yeah there is significant risk in the receipt of payment, the EGPC seem to be seeing how much they can push the envelope without completely destroying foreign investment.

 

Management are surprisingly confident of a turnaround in the accounts receivable status in the next year, time will tell how credible they are / unpredictable the EGPC is.

 

I won't hijack the thread but thanks for the blog post, the Rebel Economy post is enlightening. TGA should be looking at a diversification strategy like Dragon Oil are seeking.

[ItsAValueTrap]

Yeah TGA probably deserves its own thread.

 

Back to Dragon Oil... there are some things about the company that doesn't make sense to me.

 

1- Why would a bunch of people from the UAE want to invest elsewhere?  Doesn't UAE have a shortage of local oil and gas talent?  Isn't that the reason why there are so many foreign contractors in the country?

 

2- Why is a UAE company listed in London?  If the UAE individuals commit fraud, would they face consequences (e.g. extradition) for committing it?

 

If you want to commit fraud, a foreign listing is a good idea if differences in law makes it difficult for others to prosecute you.

 

If you want to legitimately raise capital... I think that UAE has a serious excess of capital.  Dubai has so much wealth spent on all sorts of crazy things.  Why didn't these people just raise capital in their home country?

 

*Um... I think I analyze too many crappy and fraudulent companies.  This is why I ask these questions.

**TGA is obviously a scumbag company.  Their options accounting is hyper aggressive.  I give their retired CFO a lot of points for creativity and innovation.

[yadayada]

Is it really a company by UAE? Couldnt it be that they just simply bought a load of stock to diversify? I would have to check that. Maybe they are just following Mungers advice, and are looking to profit from oil outside the country, and just want to sit on their own oil reserves a bit more?

 

And if they are printing cash, and returning that to shareholders, who really cares? I mean frauds usually don't return a steady flow of cash right? Net income was 2.8 billion and FCF 2.4 billion the last 8 years. Unless ofcourse you think the cash on the balance sheet is fake. They did anounce a 450 million$ buy back recently tho. And they finished a 250 mimllion$ buyback in 2012 I believe.  And paid quite a bit of dividends already.

[rmitz]

I don't have a specific opinion about DGO, but I wanted to comment on some of these from a mideast perspective, as I spent a few years working there.  All this is just my opinion.

 

Yeah TGA probably deserves its own thread.

 

Back to Dragon Oil... there are some things about the company that doesn't make sense to me.

 

1- Why would a bunch of people from the UAE want to invest elsewhere?  Doesn't UAE have a shortage of local oil and gas talent?  Isn't that the reason why there are so many foreign contractors in the country?

 

How do you get your foot in the door?  Remember that the resources are almost entirely going to be owned by the royal family.  If you don't have connections in there, you're not really going to get much going.  Extraction has been in place under systems that are decades old, those don't change on a dime, even if you did have the influence.

 

2- Why is a UAE company listed in London?  If the UAE individuals commit fraud, would they face consequences (e.g. extradition) for committing it?

 

If you want to commit fraud, a foreign listing is a good idea if differences in law makes it difficult for others to prosecute you.

 

If you want to legitimately raise capital... I think that UAE has a serious excess of capital.  Dubai has so much wealth spent on all sorts of crazy things.  Why didn't these people just raise capital in their home country?

 

London will have far more liquidity, a better trading infrastructure, more legitimacy, and other benefits.  I don't know about extradition.  That excess capital, to a large degree depends on those relationships I mentioned above--you can't just raise money as you would in the states (not that it's particularly easy to do that in the equity markets here anymore for a real startup).

[yadayada]

So market cap is 2.4bn GBP. They got 1.6bn GBP in cash.  Net current assets a bit less. With about 90-100$ oil, they made 184m pounds in H1. Production is expected to increase a bit. So about 400m pounds. I wish they would pay some of that cash though.

[Palantir]

FIRE AND BLOOD!!!!!!!!!!!!!

[Patmo]

Transglobe struck me as a silly company... here is my blog post on it:  http://wp.me/p1mOGr-xc

 

The political risk is very real.  The EGPC hasn't been paying TransGlobe on time.

 

Anything that's trading for cheap is going to have some very real risk or another. The question is: Is share price past the point of discounting this risk and into +EV territory? I've learned that the things I like can go from cheap to what the f*** cheap, and although I like this co at first glance I'll give the market a chance to make mistakes and I'll do appropriate due diligence while I wait.

[ItsAValueTrap]

Anything that's trading for cheap is going to have some very real risk or another.

I think the point is to find cheap stocks without catastrophic risks or shady insiders.