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Dragon spreading wings with $1.1bn expansion into new regions

DRAGON Oil, which released its full-year results this week, is a curious cultural hybrid that has been very good to those brave investors who bought the stock two or three years ago.

The company has enjoyed a fairly simple brief until now; to operate oil and gas fields in the shallow Caspian Sea, which is offshore from Turkmenistan.

Almost all of the production goes to northern Iran where it is swapped for crude shipped from southern Iran to international markets. While this has made Dragon a major player in the area (and on the Irish stock exchange), the trick relies on two politically unstable countries.

This is perhaps why Dragon announced plans this week to use its $1.1bn (€800m) cash pile to expand into north Africa and the Middle East by drilling 11 new wells this year.

Some of the heavyweight stocks on the ISEQ have fallen so far lately it is easy to forget just how large Dragon is relative to many household names.

Dragon is now the seventh biggest company on the benchmark after a stellar performance that made the shares the ISEQ's ninth best performer over the past 12 months.

Like its bigger rival Tullow Oil, Dragon started life as an Irish exploration stock but has since gone international so that it has few real links with this country beyond a Dublin listing. It is based in Dubai, incorporated in Bermuda and led by a Saudi Arabian chief executive, Abdul-Jaleel Al-Khalifa. It is a formula which appears to work.

The company said on Tuesday it would invest as much as $870m in oil and gas projects in the next 24 months. The plans impressed the market, pushing shares still higher but is Dragon worth a punt at these prices?

It is easy to lose sight of the fact that Dragon has failed so far to maintain production at the 15pc compound increase it initially projected from 2009 to 2011. This week, Dragon reiterated its plans for 15pc growth next year despite disappointing results, which saw profits and sales fall.

Potential shareholders may also baulk at the prospect of Emirates National Oil Company (which owns 52pc of the shares) making another bid. A rip-off bid by Emirates last year failed thanks to activist shareholders but another distracting takeover battle is always an unwelcome possibility.

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A question mark also hangs over Dragon's management after a fraud was uncovered early last year, although a subsequent investigation by KPMG found that "improper conduct" in the marketing and contracts division had no material effects on the company's finances.

Dragon seems to shrug off every problem and the company's success means that previously hefty discounts to sector peers in terms of forward PE ratio and reserve valuations per share have unwound so that valuations now look toppy. Anybody thinking of investing would perhaps do well to wait for the next disappointment, or signs of political instability, and buy on the dips.

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