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Monday, August 15, 2011

IOC’s bonds, Dragon's shares & Shell’s spill

The Indian Oil Corporation Ltd (IOC) issued its much talked about bonds to the tune of US$500 million last week, with a 5.625% rate due in 2021 to fund ongoing and future domestic projects. Banking on the premise of burgeoning demand among other metrics, ratings agency Moody’s gave it a Baa3 rating with a stable outlook.

Through its 10 refineries with a combined capacity of 1.2 million barrels a day, IOC is India’s largest downstream company with a near 40% market share. While it is a publicly listed company, the Indian government owns 78.92% of it. From an Indian majority state-owned behemoth to a LSE-listed upstream company 51% owned by the government of the Emirate of Dubai – Dragon Oil – which was brought to the Oilholic’s attention recently.

Dragon’s share price is nowhere near its own 52-week high of 609p, but past few trading sessions following its H1 interim results have seen its price rise nearly 4% or 20p on average to about 490p in a decidedly bearish environment. (For the record, it is not the biggest LSE-listed riser of the day – that accolade goes to Heritage Oil but that’s a story for another day).

Question is do you buy it? Examining past performance seems to suggest so and Dragon has recorded a 25% average (gross) production growth for H1 2011. Furthermore, the upstream co has set itself a rather ambitious production growth target of 20% on an annualised basis for the year.

For 2011-2013, the company seeks to maintain target of average annual production growth in the range of 10% to 15%. Away from production projections and by force of habit the Oilholic always looks at the EPS which is up 125% year over year for the first half of this year. Additionally, it remains a takeover target for the majority owners (among others).

The Dragon’s central plank or prized asset is prospection in the Cheleken, an offshore Turkmen jurisdictional area in the eastern section of the Caspian Sea. This can be further narrowed down to an operational focus on the re-development of two oil-producing fields - Dzheitune (Lam) and Dzhygalybeg (Zhdanov).

On the ground Dragon looks promising; on paper it looks a shade one-dimensional. From an investor’s standpoint, that would make its shares a reasonable medium term investment. The Oilholic is always partial to the idea of going long; hence Dragon’s shares are appealing within reason.

Moving on to an offshore story of a grave kind, Royal Dutch Shell confirmed that a leak in a flow line leading to the Gannet Alpha oil platform, east of Aberdeen, Scotland, found on Wednesday is “under control with leakage considerably reduced.” According to local sources, a Remote-Operated Vehicle (ROV) has been deployed for inspection checks and to monitor the subsea leak.

Admittedly not much is coming out in terms of information, except for Shell’s claims that the oil would disperse naturally and not reach the UK coastline. The Oilholic finds the lack of information to be frustrating and sincerely hopes Shell is not doing a BP style “underestimation”. At this point there is no reason to believe that is the case.

Finally, both WTI and Brent are in the green up 1.83% and 1.31% in intraday at 15:15GMT. The bears are still in Crude town, but quite possibly taking a breather after last week’s mauling, or as Commerzbank analysts note, “Even if the short term trough appears to be reached, weak physical demand should keep oil prices in check.”

Update 16:45 GMT: Latest estimates from Shell’s press office suggest 216 tonnes or 1,300 barrels had been spilled.

Update 10:30 GMT, Aug 16: Shell says additional leakage has been discovered in the flow line beneath Gannet Alpha platform
© Gaurav Sharma 2011. Photo: Dzheitune Lam Platform B © Dragon Oil Plc.

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