Dno Asa Ord

Good afternoon, ladies and gentlemen, and welcome to DNO's second quarter 2024 earnings call on this very pleasant day in August. My name is Jostein Löfvås, and I'm the communication manager here at DNO. The plan for today's call is to start with a brief presentation, which will be given by DNO's managing director, Chris Spencer, and CFO, Håkon Sandborg. After the presentation, we will open up up for questions in a Q&A session. Please note that the Q&A session is for investors and analysts and any media requests will be dealt with separately. During the presentation, all other participants in this call will be in a listen-only mode. If you want to ask a question in the Q&A, please click on the virtual hand on top of your screen. When you are selected, you will be notified on your screen that you are allowed to unmute, after which you must remember to unmute yourself. It could be nice if you introduce yourself before asking your question. And with that, let's start the presentation. I will hand over to Chris.

Thank you very much, Jostein. And once again, welcome to everyone joining this call this afternoon here in Oslo. Let me just start by explaining the picture that you are looking at. In DNO, we had a wonderful milestone during the quarter, actually on the 25th of June in 2004, some 20 years ago. The Taoki PSC first edition, if I can call it that, was signed in 2004. and it is from that that DNO has built the tremendous business that we have down in Kyrgyzstan. It was a wonderful occasion. I had the privilege of being down in the region and we had some wonderful events and also together with our partners in the Kyrgyzstan Regional Government and the Ministry of Natural Resources who we've obviously worked with very closely throughout those 20 years.

Thank you.

Turning to the quarterly report, as we said in our storage change announcements this morning, another set of solid quarterly results, a doubling of the net profit, which we'll go into in a bit more detail later since we have a couple of accounting effects we've had to deal with this quarter. Underlying all of that was an increase in production, both in Kurdistan and the North Sea, with West Africa pretty stable. And West Africa continues just to be a nice stable cash flow to the group. So I'll come back to Taraki production a bit more on the next slide. The other big event Down in Kyrgyzstan is the well that we're drilling under the Shiga license. And there we've reached total depth, TD, during the quarter, and we're just about now about to start right at the beginning of that 70-day testing program. Turning to the North Sea. We had another discovery in our Trollier area which we have a slide on in a few minutes time and as we've previously announced that the Arran acquisition completed during Q2 and we signed the Norna area deal in Q2 which completed in Q3. excellent additions to the portfolio and giving us a nice outlook in terms of production in the North Sea. Probably the biggest event of the quarter, other than the 20-year celebration in Kurdistan of course, was the issue of a new five-year bond. We're very, very pleased with the response we had from the market on that. We've traditionally been very proactive in refinancing our debt, and this is an example of that. We upsized from the original 300 to 400, and we've achieved an excellent coupon rate. In fact, it's the lowest margin between the sort of prevailing market interest rates and the nominal rate that we've had on a D&O bond, so extremely pleased with that result. and further enhances an already strong balance sheet and that's reflected with the exit in with 940 million of cash on the balance sheet and 158 in net cash which is actually pretty similar as hawking will show to the end of the previous the last few quarters really yeah Now, with all that background, I'm pleased to say that our board has decided to increase the dividend by some 25%. The dividend was reintroduced back in late 2021. This is the first increase since then. And as we've said in our announcement, that's because the board, when it makes a move on dividend, it wants it to be a sustainable move.

Thank you, Sven.

So touch briefly on the main messages from Kyrgyzstan. Through Q1, we effectively feel we've established the local sales as a consistent method of monetizing our oil, albeit at lower prices than we would wish. And on the back of that, we increased spending, and we should have probably said increased quarter to quarter. quarter on quarter spending. So in Q2 we increased a little bit relative to Q1 and to optimise the production in the tapley licence. And I make that comment because now, as we say later on the slide, we're actually going to mobilise a rig to go back and drill the first new well on there since early 2023. And thanks to the excellent performance of our Kilostar Business Unit team who've had a real laser focus on costs this year. All of this new activity we're going to be able to deliver within the budget that we had set for 2024 for the Taukey PSC. So that's why I made the distinction between increased spending that was just quarter on quarter, not increased compared to what we thought we were going to spend. Having said that, there'd be a slight rejigging from OPEX to CAPEX, but the total budget for the year remains the same. Whereas the production is going to come in probably around the £80,000 mark through the whole year. We were a little under in the first half, £78,000 I think on the operated level and we hope to be a little over in the second half. So great performance from the teams in the field in aerial and support teams in VBI. I touched on this earlier, the export pipeline regrettably remains shut. However, we have now got a pretty much well machine where we're selling to local traders. We've got the prices into the upper 30s per barrel, which is obviously low compared to Brent international pricing. However, we get payment in advance to our international bank accounts. So we have removed the payment risk that we used to have from time to time. And then finally, we're all very excited by the Bishika III well. Great performance from our drilling team to get down to TD on this well. And as I mentioned a few minutes ago, just starting that testing program these days. I hope to have something to report next time we have one of these calls.

Thank you.

Turning to the North Sea, and we have the two wells that we've drilled so far. I have a Heisenberger, which was the last time around. and last quarter we had the cuvette where these are smaller which was a lovely success just come and say discovery right in the heart of this pretty big area and with an operator who's keen to get this developed and tied back and so these should be although it's a smaller than some of our other discoveries these should be very valuable barrels well they're actually It's actually gas, so it's barrel of oil equivalent, I should say. We're a little disappointed with the rig schedules that have been against us from Chutkarka and Horatio, but that's where it goes in the North Sea sometimes. We were really looking forward to those wells, but they've slipped now probably into 2025. Maybe one might start in December. we should spend this year, but it just moves it into the next calendar year. But importantly, after a disappointment in the first half where we had both a delay to the trim start up on the back of the well publicised delays to the restart of the Danish Harald system, but also a delay to our Anvara development. Now, looking ahead, those give us a nice should give us a nice bump in production as we move from now into 2025 and that is also complemented by the two acquisitions that we've done that I touched on the previous slide which we'll be adding to our North Sea production as well so although we have the traditional summer shutdowns in one or two of the fields right at the moment the outlook for North Sea production over the next few quarters is very strong. So those were the comments that I had from the operational aspects and over to my colleague to take us through the key financials.

Yes, thanks, Chris. And hello, everyone. Right. So I'll do a brief financial review for the second quarter. And as usual, let's start with these key figures. As shown here, revenues dropped by $46 million to $137 billion in Q2. And this was mainly due to lower sales in the North Sea, coming from lower lifted volumes in the quarter. North Sea revenues thereby dropped by $43 million to $80 million in the quarter. In addition, our Kurdistan revenues declined by $3 million to $57 million. higher oil prices in the period. The operating loss of $3 million that you see in this quarter is partly driven by the lower North Sea revenue due to the lower liftings. But it should be noted that we thereby are building an underlift position in Q2 that will be lifted and converted into revenue in the following quarters. In addition to explain that operating loss, we had the following, the ARAN acquisition, we recognized a deferred tax asset of 62 million from UK tax losses, and that in turn led to a $41 million impairment of goodwill. Together, we used to see that these two entries have a positive impact of $20 million on net income, though they have been recorded in different lines in the profit and loss statement. as required by IFRS accounting rules. Also, we had an increase in exploration expenses reflected from higher seismic cost in this quarter. Next one, please. When we move to the cash flow, we see that we had a good increase in operational cash flow this time to $139 million in Q2, up from $100 million in the first quarter. Now, net working capital change admittedly had a positive impact of 62 million in the quarter, explained by an increase in trade and other payables. And key contributors here were repayments from customers under our sales contracts in the North Sea, as well as a positive working capital contribution from our sales and lifting arrangements from the toolkit license. Otherwise, we mentioned we had no NCS tax payments or refunds in the first half of this year. And based on the current expiration program and development capex, we will only have minor Norway tax payments, if any, in the second half of 2024. We had high investments of $121 million in Q2. Mostly, well, partly due to the acquisition of license interest in the iron gas field in the U.K. at $60 million, combined with $61 million in organic development capex, mainly for the Berlin, Brage, and Vestla licenses in the North Sea. As well as we had some capitalized exploration, mostly for the discovery. So, this means that we are following up on our clear strategy of building significant new North Sea production. both through extensive organic development, but also through M&A transactions. Under finance, we had a net inflow of $318 million, driven by the new bond placement in the quarter. I'll discuss that a bit further on the next slide. We also paid a quarterly dividend of $23 million in Q2 under finance items. It should be noted that we have a strong free cash flow in Q2 at $76 million if you net out the ARIN acquisition. So on this basis, we saw an all-in increase of cash to over $337 million, up to quite a high level of $943 million at the end of the quarter.

Next slide.

capital structure, and Chris touched on that, but we have for many years followed a conservative financial strategy of quite proactive management of debt maturities and maintaining a strong balance sheet. So, in line with this strategy, we completed another successful $400 million bond placement in May. I think maybe you took some of my points because it's well-received, oversubscribed, and with a very competitive rate compared to some of the other placements in the period. And maybe more importantly, this is, again, a five-year bond, and that prudently extends the maturity profile of our interest-bearing debt. And concurrent with the new bond, we also bought like $50 million in our existing DNO-04 bond that reduced the outstanding amount of that bond to $350 million. That was done partly in order to start early on addressing the maturity of that bond that comes in September 2026. And following these bond transactions, combined with the solid cash flow in the second quarter, our increased cash position at $943 million now clearly adds further to our financial flexibility and to our capacity for additional inorganic growth. As you see here, we remain in a stable net cash position at $158 million, while our equity ratio dropped to 42 increased size of the balance sheet following the debt placement. So I'd say in summary we have had a very good second quarter both for operations and finance and we are now well underway into the second half of this year.

That ends my comments and I'll hand back to you then Chris. Thanks Håkon.

So just summing up as Håkon says another solid set of results from the NO this quarter. and an extremely strong balance sheet. The outlook is of increasing North Sea production as we move from 24 into 25, steady production in Ivory Coast and of course in Kyrgyzstan, even in a local sales scenario. And this was the background to the Board decision. As we said in the announcement, the Board of Directors aims for a sustainable dividend level. And with these three points I just made, that formed the backdrop to the decision to increase the dividend by 25%. Of course, we all in DNO remain In terms of our Kona Star business, we also remain focused on debt recovery from the sales we made to KLG in 2022, 2023. And we keep pushing for reopening of ITP, but the board is not counting on those when it decided to increase the dividend. We believe that's a sustainable decision. Those were the last thoughts I had. I'll turn it back to you, your stand,

Q&A, second. Thank you, Chris and Håkon, for the presentation. And then we are ready to start the Q&A session. And the first question comes from Eivind Hagen.

Eivind, please go ahead.

Yes, I was unable to mute myself, but now I believe you can hear me. Yes. Excellent. Just one question on, you know, the cash position and the inorganic growth opportunities that you're mentioning. Could you talk a little bit more about what kind of opportunities you are seeing and in what regions you focused most of your efforts?

Certainly, I can take that. Yes, the priority number one remains the North Sea, and in that context, Norway. We keep an opportunistic eye out on the UK, where, as you know, we have a couple of very mature assets, but also one or two exploration blocks. So we have a small business in the UK now, and that also enable us to do that ARIN transaction that we're very pleased with. So we are optimistic as it's the case of the UK, but the main focus is Norway, where I think we discussed last quarter that we are really pleased with the development portfolio we have. and obviously to optimise the financing of the company, it'd be lovely to put some more production on top of that business. So that's the priority. We have also talked about a third leg for the company and that remains something we would like to do, but it's been a lower priority than building on the North Sea business in recent times.

excellent thank you and just one quick question on Kurdistan as well over the past few months have you seen any developments towards a solution to the export issue or is it still a bit of a deadlock

We have seen efforts, we've made efforts and we've seen efforts, but it remains deadlocked, I think is a fair comment, yes. And where exactly the deadlock is, is very difficult for us to diagnose. We spend a lot of time speculating on that, as our colleagues in other oil companies do, but really it's very much up to the governments the regional government, the federal government in Baghdad, and indeed the Turkish government obviously has a role to play. In our view, if there was a will, there is a way, but so far this hasn't happened, and I guess we wish we could, but I think we're on why.

Okay.

Then we'll move on to the next one, and that will be Theodore Sven Nielsen.

Theodore, please unmute yourself. Good afternoon. Can you hear me?

Yes. Perfect. Congrats on a strong set of numbers. Three questions from me. I noticed that the oil price in Kurdistan increased from $32 to $36 per barrel, quarter on quarter. Just on what's the driver behind that increase and what kind of realized oil price have you seen this far in third quarter? Second question is on the Talke production. I see that you're increasing activity there. What kind of production should we expect from Talke throughout the year? And maybe an indication of an exit rate this year would be useful. The third question is on NCS. You reported pretty substantial underlift this quarter. Should we expect that underlift to be reversed in third quarter or fourth quarter?

Thanks.

Chris, the first one was the driver for the increase in the local sales prices. Yeah, thanks.

So I think the increase in prices we've achieved from Q1 to Q2 is a mixture of things. First of all, the local market obviously has been ramping up since local sales started in earnest last summer. So I think part of it is stabilization of that market and finding routes to market for the refined products and so forth and the other element that well how well it's a bit difficult to break it out is that also traditionally for the um such as the you know the the the Kurdistan blend the average Kurdistan crude is on the heavier side so in the summer months when the market for asphalt internationally is stronger there has traditionally been a stronger pricing for these heavier crudes. So it could be partly that as well. So how we look at those two effects is very difficult to diagnose. We'll find that out as we head back into the winter. But certainly, although there are still the occasional disruptions in the local market, such as we experienced last week with the the initiative that the government took against some of the smaller, more polluting, topping plants in the region. Our ability to sell has really stabilised significantly over the last six months. We haven't stated specifically what we're selling for at the moment, but I think we touch on high, upper 30s, I think we put on the slide, so that gives you a good feel for where we're at. The second

question was then we were looking at the Torquay production in the second half of the year.

Yeah.

And again, I think in the slides too, we're saying, well, we're sticking with our guidance of 80,000 operated production for the year because the first half was a couple of thousand barrels a day under. That means the second half has to be a couple of thousand barrels over. So that's what we're sharing on that.

Good.

The third you had, the other was on the underlift that we have seen in the third quarter. Will it be reversed in the second quarter? Will it be reversed in the third and fourth quarter? Well, certainly we can see now that we will have an overlift in third quarter, but it's going to even out everything from Q2. Well, it remains to be seen, but do expect an overlift for the coming of the quarter that we are in now for the third quarter.

It sort of, you know, ebbs and flows, of course, in the business.

Okay, thank you. One follow-up on the talk of gross production. I interpret your answer that we shouldn't expect any increase from now, despite your investments. Is that correct, or are you just very conservative in the way you replied?

Time will show. Okay, that's fair. See where we're going.

Thank you. Yeah, OK, so the next question will come from Nicholas Stefanou. Nicholas, please unmute yourself.

Hi guys, it's Nick here. Can you hear me? Yeah. Alright, great. Thank you so much for the opportunity to answer my questions and congrats on the strong set of results. So I have three questions to ask. So the first one I just want to go back to the talkie guidance. I think the partner, Genel, when it was like last week, I think their guidance for Tokyo was that it will be at similar levels as the first quarter. So is the guidance for the second quarter pretty much similar to the first one? Because I think you just made the comment that it might be slightly higher. on the first half of the year. So if you could just clarify that question. And then the other one is on the dividend. I was surprised to see an increase on the base dividend before the pipeline opened. So I'm just wondering, can you maybe talk a bit about how you thought of that versus say kind of like a special dividend or maybe you know some buybacks which you know could arguably be more more kind of like sustainable like within a free cash flow And then the final question is from some kind of like remarks that have been on the press by Baghdad. It seems that what Baghdad wants is to change the PSE terms you guys have in Kurdistan. And I think Apikur said that, you know, that was one of the kind of like red lines, that the PCHMs need to be sacrosanct in order to resume exports. I'm just wondering if from kind of like from your side of things, is that still a red line? Or maybe would you be willing to kind of like give up some of the sort of like, you know, some of the fiscal term benefits to get higher realizations? Thank you.

The first one was on the talkie discussion, talkie production levels in the second half, Bruce.

Yeah, the talkie, you were talking about guidance and I assume you're talking about production guidance? Yeah, production guidance. Yeah, so I'm afraid I'm not as familiar with Ganel's numbers as you are, so I'm not sure exactly what they said, but as I said to Ted or what we've put in our slides today is mean the result the result is 78 000 barrels a day gross in the first half and uh we're still sticking with our 80 000 on average for the year guidance okay um well i get bashed at the dividend one and hawking will i'm sure supplement but as i as i try to cover in my closing remarks um we have As you commented, another quarter of very solid results with local sales in Coastal and particularly the cash flow we're pleased with. We've got a very strong balance sheet and the net cash, obviously we took a long work debt on, but the net cash has been very stable now for a year or so. And with the outlook that I described of steady production, in Kurdistan and the Ivory Coast, and that's Kurdistan in our local sales scenario, combined with North Sea production that we see increasing nicely from 24 through to 25, the board was satisfied that they could make a sustainable move in the dividend. And that was the background for that decision. I think when you talk about special dividends or share buybacks, that I think would be more linked with a special event. So if we were to see the 300 million of debt repaid to us from the Kurdistan government, that's something we continue to work on. would, in my mind, be a special event that could trigger a special dividend or the base dividend we want to be a sustainable one.

Paul, anything to add? Yeah, well, you touched on it, I think, Chris. But, of course, we have a very good, strong balance sheet now. We are comfortable where we are with the production in Kurdistan and the getting paid on a payment basis. So we think we're in a strong position long term here, and we do want to use a big part of our cash to be invested in new production. And that could give us additional free cash flow and additional growth in production. So you've seen that with the acquisitions over the ARIN license interest and the NORNA license interest in this quarter, in the second quarter. So I think if we are successful in some of the things we're working on, we could acquire more production and thereby also increase the dividend capacity going forward as we grow the production. So that's some of the thinking going into both the balance sheet that we have now and also the higher dividend level that we have on the board has decided for this quarter.

I think the third question was on the production sharing contract terms. Okay. Statements by Baghdad. Yes, thank you.

That's obviously on everyone's minds. So APICA have clearly set out the position for the IOCs as to what it takes for us to put oil into a reopened ITP. And you touched on one of the points there. Obviously, respect for our contracts and the commercial terms attached to that is an important one. as is surety of payment for future deliveries and past deliveries. So those are the conditions that we have set. We would love to sit down around the table with the key parties and get involved in a negotiation to unblock this issue. and uh if if ever such an invitation come then i might start to think about your hypotheticals but um until that happens um this is the position that we have and we're not going to start uh negotiating before we have the right counterpart across the table so uh that i think is uh my comment on on that question thank you okay so oh

We have another question coming from Sando.

Let me unmute you. Please. Yes, hello.

I was just wondering that with a declining entitlement share in Kurdistan and you have a lot of cash, I was just wondering going forward if you plan to ramp up or accelerate investments in Kurdistan going forward. As I see it now, you have probably some headroom in the cost pool. And then maybe a second question. I was just wondering if maybe it's too early to say, but is it possible to say something on your expectations regarding the Beshika well? Thank you.

Thank you.

Yes, we are ramping up carefully in Kirlistar. We have wanted to have comfort of a sales system, global sales is working before we started to go back into investment. It seems to be doing so. So we're ramping up, but carefully. And as we touched on the slides, we're planning to bring a rig back to the Turkey BSC to start drilling new wells again in the second half. Yes, we are ramping up investment, but we're doing it carefully. Obviously, the macro, you know, the political picture in the whole region is very tense at the moment. And so we think we should be cautious in terms of the amount of shareholder money we put into the region. But we're a long-term partner. We've been through many ups and downs. And so we, I think, you know, before my time as well, has ridden the ups and downs very well. and we're using that experience this time around as well. In terms of Beshika, yes, I'm afraid it is simply too early to tell you anything. I'll have to wait until I know something.

That's fine, thank you. So there seems to be only one hand up there, and that's Teodo again. And I think if nobody else is... who are raising their hand will round it off after Teodoro's question. So, Teodoro.

Yeah, thanks for my question. Just one question on the balance sheet. You already discussed that you have a strong cash position, a strong gross cash position. Previously, you have, at least Håkon, you have indicated that you're aiming for a minimum cash position of $300 million. That cash position, has now been well above 300 for many quarters and is now $900 million. So, I just wonder, has that number increased in terms of your desired minimum cash position or is there anything cooking on the M&A side?

I'll start and then Chris can help me. Well, Ted, you're right, we've said that many times and it's really a reflection of the risks and certainties we have seen in Kurdistan the fluctuations we have been going through and that we have the capacity to manage those in a good way with a minimum cash position at all times around 300. So we have not sort of left that idea I think that's pretty much intact but it's exactly that amount or a bit less that could be discussed but we are you know carefully making sure that we have adequate cash and liquidity to meet any perceived motivation or risk in our main operations in Kurdistan. Why are we having all this cash sitting here now? Basically because we want to, as I said, one of the reasons is to be very comfortable on our debt maturities going forward. One other reason is the M&A side, as you alluded to. So we certainly want to grow our North Sea business and looking actively for new opportunities That will serve many purposes, increase production, diversify our portfolio, and increase dividend capacity, etc. So, we have many good uses for the cash that we have on the balance sheet now. So, believe me, we are working hard on produce. I can't go in and discuss exactly what we're looking at, but it has been mostly North Sea lately.

So, I'm glad to answer that question.

I think those are excellent points. Those are the key points. When it comes to M&A, we've also seen in the processes, obviously you're involved in more processes than you succeed in, and we definitely note that most sellers are concerned about completion risk. And therefore, to be a company that has the ability to complete deals unconditionally is a great advantage in the market. There's a lot of companies who are not in that position. We can do that now. And that was perhaps just adding on to the M&A part that you touched on, Auckland. So I think that summarises our thinking there. We also add, I mean, it's what everyone says, but we have run at a higher cash position than we probably would aim for over the last couple of years because we have kept our discipline in the M&A market. So even though we have a lot of money, we are working very hard to make sure it doesn't burn a hole in our pockets. We want to ensure any investment lays the basis for further valuation for our shareholders.

Okay, thank you.

It seems like we must have given really good and fulfilling answers to your questions because there are no further questions. And we wouldn't want to keep you for longer than necessary, but end the call here. Thanks to all for participating. See you again next quarter. Thank you. Thank you.