Dno Asa Ord

Good afternoon, and welcome to DNO's third quarter 2024 earnings call. My name is Jostein Löfvoss, and I'm the communication manager here at DNO. Today, we will start with a short results presentation, which will be given to you by DNO's managing director, Chris Spencer, and CFO, Håkon Sandvold. After the presentation, we will open up for questions in a Q&A session. Please note that the Q&A session is for investors and analysts. Media requests will be dealt with separately. During the presentation, the microphones of participants will be muted. 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'll hand over to chris thank you stan and uh good afternoon everybody welcome to dno's q3 2024 interim results presentation being broadcast from our head office in oslo norway

First slide, please.

So Q3 was a solid or another solid quarter for the company, I should say. Increased revenues on the back of strong production in Kurdistan. North Sea production was somewhat down, but liftings were up. And the North Sea production was reduced due to planned maintenance, so nothing unforecasted there. Also in Kurdistan, the continued local sales during Q3 were able to tweak the prices up a little more. And that also contributed to the revenue increase during the quarter. On the appraisal and exploration side, The one event during Q3 itself was the Heisenberg appraisal well, which is the second appraisal well we've drawn on Heisenberg this year. And as with the first, we're pleased that that has confirmed the resources that we have in that discovery. Clearly, with that performance, we ended the quarter still with a very strong net cash position. And particularly with the reduced activity levels in Kurdistan, we are going to be spending less this year than we thought at the outset. And therefore, we're cutting our guidance to the market on projected total operational spend this year by just under 10%. I'm pleased to say that we are maintaining the dividend, which is at the annualised rate of 1.25 krona per share per year. This 0.3125 is a rather complicated quarterly version of that. As we mentioned in the last quarter, we increased that by 25% with a view to that being a new sustainable level for the dividend. And so we're pleased that this quarter we maintain that level. Next slide, please. Focusing a bit more into the North Sea. As we touched on in the last couple of presentations, we've been working hard to add production to the attractive portfolio of discoveries and developments that we have in the North Sea. And in the first half of the year, we were able to pick up a couple of bolt-on acquisitions. That is giving us a nice short-term trajectory on our projected production, which is illustrated on the chart here. Those acquisitions are combining with development of the portfolio we had prior to them with trim, which should be coming on as soon as the beginning of 2025. and that is connected into the Danish infrastructure of Total, which has suffered some delays, and now we understand that the ramp-up is well on its way, and VIM will follow as part of that. In addition, we're expecting the Anvara field, which is adjacent to Alva up in the Norwegian Sea, to come on stream during next year, and Badande, which was part of the transaction we did, announced during the summer, or completed during the summer, where we bought some assets from Vore Energy, and that should be coming on late 25, maybe early 26, I believe. And again, you see the nice ramp up we're expecting over these three to four years. Then in 27, our Bessler project, which is the tie-back to Braga, is planned to come on stream. The little teaser with the grey is just to flag that, of course, we have, as regular viewers, if I can call you that, know, we have lots and lots of reserves in our resource category and there's a huge amount of effort going in to try to mature those as quickly as possible. Trim Sur is a small one which we may be able to get on by 2027 but we hope that it's a prelude to much more. The final point we wanted to highlight to the market is addition building further on the competencies in our North Sea organisation in Stavanger. with a second production phase operatorship. Again, that's a result of this transaction we did with Vore Energy, and we have taken over a partnership with Amarok Field Up, that's one of the tiebacks to the Norna FPSL, and we've got some ideas there, in particular for drilling, which we are now working on with a partnership. That is then being brought into the organization alongside the Trim Operatorship and that's realized some nice synergies for us in our organization as a vendor and given the team more interesting tasks to deal with. Thank you for staying over to Kurdistan. I believe, yes. So as I touched on in the first slide, we're very pleased with production levels we reached during Q3 at the Taukey licence. We mentioned in the last quarterly report that we had these three wells that we had drilled but not completed and we suspended them when the Irapa-Turkey air pipeline was shut. We suspended operations on these wells. In Q2, with the stabilisation of the local cell situation, where we were splitting, making positive cash flow from that arrangement, we decided to invest in completing those specific wells. And during Q3, all three wells were on for the entire quarter. And as you see, they made quite a significant difference production rates from the licence, so 7,800 barrels of oil equivalent on average across that quarter. We also continue to run workovers and various other types of well interventions that are what you might call barrel chasing, continuous work that goes on in most oil fields. and our team have done a great job there and that contribution from that represented some 3,400 barrels a day on average through the whole quarter so again with those with that that's just to illustrate with those two bullet points the difference it makes with the activities and the funding that we're still dedicating to that PSC and that is how we got to that production increase of six percent quarter on quarter. In addition, I should also mention that our production operations team did a fantastic job in terms of uptime. I think there must be record uptimes that we achieved during August and September, so my thanks to them and all of our well intervention team and running team for these contributions. the quarter. Over at Bishika in our other PSC in Kyrgyzstan, we have completed testing on the Bishika 3 well. We're going back to Bishika 2. Well, we drove a couple of years ago to do some further testing. The Bishika 3 development well has not come in as we were hoping for. And so, as we say here, we are now having to consider next steps. We are also considering those next steps in the light, of course, that we're having to justify investments based on local sales currently. And then having pointed to the investments that we've been making in the region, whether it's in Bishika or in Talke, We also just remind our shareholders and other stakeholders that, of course, it's an uncertain world that we live in down there. If for some reason there's disruptions on the revenue side of our business, DNO has always been ready to cut back on costs and activities further. And indeed, we are ready should we need to do that again, which we hope, of course, we won't have to. Equally, if positive developments come along, we have a foot over and over the accelerator as well and would be more than happy to get back to drilling and so forth in Turkey if the environment allowed for that. Part of that environmental piece, the discussions we have ongoing with our hosts, the Kyrgyzstan Regional Government, related to the money they owe us from oil that they didn't pay for during the period 2022 and 2023. Still a significant amount of money for D&O and our partner, Ganel, some $300 million or so. I'm sure the exact number is in our report, and obviously an important focus for the company, our board, and I'm sure our shareholders and bondholders.

Thank you. I will then hand over to Wolfgang to take you through the financials.

Good. Thank you, Chris. And hello again, everyone. I'll do a brief review also of the financial results for the third quarter. And I'll start with these key figures that you see on the screen. To the left of this slide, you see that our Q3 revenues are up by $33 million from the second quarter. That counts as our North Sea revenues increased by $31 million to $111 million. That was mainly on higher sales volumes in the third quarter. And in addition, we had higher gas prices in the North Sea that also contributed to the increase in our third quarter revenues. With the higher lifted volumes, the North Sea underlift position that we reported for the second quarter this year has thereby changed to a minor net overlift in Q3. We also had some increase in our Kurdistan revenues up to a level of $59 million in Q3 on higher net entitlement volumes and also higher realized oil prices. If you look at the cost side, our cost of goods sold are up That's mainly due to the higher North Sea sales volumes and the over lift. But we also have on the other side, the expense exploration was up because we had expense cost relating to the two exploration wells that are the names I've shown on this screen. But we had no impairments, no material impairments this time. So the operating profit thereby increased up to $31 million from a loss of $3 million in the second quarter. As we go further on the P&L statement, the net finance expense was low in this quarter, supported by FX gains and also a small positive revision in the book value of the KRG arrears. For tax expense, we had significant tax income in Q2 from the ARIN acquisition, as you may recall. But this quarter, we have a tax expense of $8 million. And this explains much of the reduction, this change in the tax expense line. explains much of the reduction in net income from $35 million to $20 million in the third quarter. But not shown on this slide, but on a year-to-date basis through Q3 this year, revenues are stable or a bit up at $490 million from the same period last year. While the net income has strengthened significantly to $71 million, mainly on the lower net finance and lower tax expense. Well, the next one, it's time. So we're moving here to quarterly cash flow. And again, we have a very solid operational cash flow at $112 million for Q3. However, it was a bit down from $139 million in Q2. And that was basically due to the lower working capital adjustments this time in the third quarter. We had no NCS tax payments or tax refunds in Q3. and we will only have minor Norway tax payments, if any, in the fourth quarter of this year. I should mention, however, that if you look ahead and given the substantial activity that we have in exploration and development, we do expect significant tax refunds for Norway in the fourth quarter of next year. Q3 investments, we had $75 million of organic exploration and development investments, mostly spent on the North Sea assets, In addition, we spent a net $24 million on license acquisitions in the Norna area. Our Q3 finance outflow of 37 million was mostly for the dividend payment of $29 million that we made in August, and also for net interest expense. On this basis, the net cash reduction was limited at $25 million, And the cash balances thereby remain largely unchanged at $990 million at the end of the quarter. A key point to be made here is that we again are mostly cash flow funded on both significant investments and also on the dividend in the third quarter. Next. So again, with these high cash balances, our capital structure remains very strong. We have net cash at $134 million, and we have a solid equity ratio at 40%. If you ask about the year-to-date reduction in our equity ratio, this reflects several transactions with effect on the balance sheet. I can mention the new long-term bond debt of $219 million on a net basis. We have made two North Sea acquisitions, and we have quarterly dividend payments and others with effect on the equity levels. And I know it's been mentioned already, but for our dividend program, we are pleased to announce the quarterly dividend payment now at 0.3125 kronor per share, which is equal to around $28 million to be paid later this month. So in sum, we are pleased to deliver another quarter with, we think, very good operational and financial results for DNO. And as we have also highlighted today, we are clearly also building long-term values and financial strength through our successful North Sea exploration and development program. So we have come to the end of our short presentation today, and happy now to enter into a Q&A session. Jostein?

Yes. Let's see. I think we have a couple of questions already. Let's hear all the people. I think the first one that wanted to pose a question was Stine Schmitz.

Stine Schmitz, I think you can go ahead and pose your question. Do you remember to unmute yourself? Okay, maybe there was a mishap here.

Okay, we'll go over to Eivind Hagen.

Please go ahead. Can you hear me? Yeah, here we go.

Excellent. I just wanted to ask about the wording that you have on the Kurdistan slide where it seems as you are stepping up the wording when it comes to reducing activity levels. I'm just curious what's driving the more harsh wording this time around and

is it in any way connected to the news that we saw a few days ago with the potential for budget amendments on the federal level in iraq it's uh thanks for the question and i'll have a go to that hawk i guess you'll let me say that one so it's multi-faceted i think um there has been uh some disruption to local sales, both before and after the regional election in Kurdistan. And if you follow the sector, you will have read about that in the media. The same media suggests that those disruptions are very much related to internal Kurdistan politics. And for us, it's a great shame how in worked with many other stakeholders over the past 18 months to establish a reliable mechanism for local sales that had given us comfort to bring on the new wells that I mentioned and so forth. It was disappointing for us for political reasons that those sales became disrupted. Now, just in the last couple of days, we've seen signs of that market getting back to normality. We're hoping for the best on that. I guess that would be the main driver behind the comment there on the slides. What becomes from the announcement from Baghdad in the last couple of days, we will wait to see. I think it was the development in the local sales market

led us to put that point in the presentation.

Excellent. And if I could just follow up quickly, how big has the impact been on the local sales disruption so far in Q4 for you guys?

It's very up and down. It's not been that dramatic, but we felt the need to adjust our guidance for the year. So as you see, we haven't change the guidance this quarter, which means that we're standing by the guidance of 80,000 gross for the year.

All right.

So I guess the next question goes to Nicholas Stefanou, who will be allowed to ask the next question.

Gentlemen, hi. It's Nicholas Stefanou here. Can you hear me well?

So I've got a couple to ask. Both of them are on this announcement by Baghdad the other day. So the first one is, I just want to understand how enforceable is it for SOMO to just take over production? Because at the end of the day, you are guest in Kurdistan and, you know, the digital invidiation part of the KRG has worked well, but can SOMO actually enforce taking over, you know, the production there? That's the first question. The second one is on the $16 compensation. is that um is that something that satisfies you and and end up in general having we haven't seen a statement from africa so just wondering what you think about that and then just a clarification will the 16 dollars be 16 dollars that working interest barrel plus eurofix and capex or is it just 16 dollars flat regardless of the cost basically for what interest dollar thank you

Thank you all.

I will take those as well. Well, let me start by saying that a number of the questions you have are questions that we have. So, I mean, we think that that announcement by Baghdad a couple of days ago has indeed for us raised as many questions as it's provided answers. Now, clearly, that they've announced a proposal to amend the Iraqi budget law. And our position is that that's clearly a matter for government. That's not a matter for us, and whatever views we might or might not have on it, it's just not our business. Both DNO and APICU have been clear for the 18 months or so inside to be shut, but in order for us to entertain putting oil back into the Iraq-Turkey pipeline for export, we need to have surety of payment for the past debt that I touched on in the presentation, as well as future sales. And we require that our internationally recognized contract is honoured. Now, whether this proposed amendment to the budget law gives the governments enough room to fulfil those conditions, we are yet to hear. So we're looking forward to hear from our host governments how that will be bridged. As yet, we haven't heard on that, so I can't really provide any more answers. Similarly, you asked a question about SOMO. Again, I don't really think that's a point for DNO to answer. You'll have to ask SOMO or the Ministry of Oil whether they have that power. Again, we have a clear binding contract which sets out the rights and obligations for DNO. We're also very pleased that repeatedly through this and previous crises, the Kurdish authorities, including the Prime Minister, have stated very clearly that they will stand by the contracts that they have with international companies such as DNA. So I hope that's of some help to you, Stefano.

Yes. I appreciate these are difficult questions. So yeah, I didn't really expect you to be able to provide some of the answers I wanted. It's just hard to ask them anyway. Then another kind of like follow-up question. I just want to get a sense of the future pre-cash flow generation. based on the production outlook you have offered for the North Sea and capex there. Because for the past couple of quarters, free cash flow generation has been just enough to cover the dividend. So just wondering in the next quarter, especially as production from North Sea ramps up, how can we get a sense of how cash flow trajectory could move forward?

Thank you. Yeah, many questions, comment on that, Chris?

Yeah. Well, we're seeing that, Niklas, that our North Sea production is coming up. We've seen some, you know, the price, of course, are very important. We've seen some improving gas prices now, so that's helped us. We do have, you know, fairly good operational cash flow coming out of our North Sea business even now with the current production levels, and they will be coming up. But, of course, we also have then our exploration and development spending. Remember that we are covering these on a sort of a 12 to 18-month basis before you get a lot of the expenditures back as tax refunds. So, as I mentioned when I was talking this afternoon, we will get a significant tax refund at the end of next year. So, I think we're in good shape to carry the initial investments, and then you get reimbursed, say, roughly 78 percent of the major North Sea Norwegian spending. So, we feel that we have good control of this on a cash flow basis, together with the cash balances and the very strong balance sheet that we have in Dino. We also have support from our RBL banks. So, that's taken care of, I think, for the Norwegian and the North Sea expenditures, also on the UK side. And you will see that over time, Kurdistan has provided very strong cash flow to the group. We maintain our low lifting costs and we have made strong margins, strong cash flow even with half of the Brent prices that we have been getting in the local market. So I think all in we have a good grip on this situation and lots of extra headroom from these factors that I have mentioned in terms of how we will handle our future spend and our growth trajectory going forward.

Can you offer maybe some guidance from 2025 cash flow or is it too early to ask?

It's too early, Niklas. We will come back. So thanks for the question, but we'll revert to you. Okay. Thank you so much.

The next analyst to ask a question, that will be Theodor Sven Nils.

Please remember to unmute yourself. All right.

Can you hear me?

Yeah, here we go.

Looks like I was muted by on your side. But yeah, this is Theodor Nilsson, Sparrow World Markets. A quick question from my side. You mentioned that the talkie production was higher in Q3 compared to Q2, but probably it will decline slightly in Q4 because of just limitations on local sales. Could you comment on what's the talkie production right now? Next question is on dividends. I appreciate that you need to repeat your dividend guidance for this quarter, but looking into 2025, how should we think around dividends? Should we assume that will be paid as a percentage of earnings or based on a certain percentage growth from 2024? And last question there is on the working capital. It was also in this quarter, some release of working capital. Could you just comment on what that's related to and when you expect that to be reversed?

Thank you. I can try the first two, Morgan.

On the production side, obviously, it's very important numbers for us. Clearly, if you just figure out the average year to end Q3 and then that we are not increasing our production guidance, that suggests that, indeed, people were expecting to be a little lower than Q3. And that's the guidance that we're giving on production. When it comes to the dividend, as you know, the board take account of a number of factors when deciding to set the dividend. We have the intention for it to be sustainable, which is particularly with the uncertainties around our Kyrgyzstan business that make that difficult to sum up in a neat dividend policy as some other companies express. For example, of course, We hope that exports will come back. That will have a huge impact on our positive cash flow. Secondly, we fully expect that the $300 million of debt that I touched on will be repaid by Kurdistan Regional Government. They have always settled debts in the past. And again, if that were to happen next year, another huge impact on the To sum up dividend policy in DMO in one sentence or something is, I don't think, realistic. And hence, the board take account of all these factors. Also, our investment profiles in them all see when landing the dividend. But as we've said over quite consistently the last year or so, we have divoted towards our shareholders. was respecting our bondholders, and we're hoping that all investors are now getting a decent return for their investment in the company. Paul, can you not wish to add something on the dividend, and then move on to the other question?

I think the dividend has been covered in a good way. I think, Taylor, you asked about working capital, and you called it release, or I call it a positive adjustment or a change to cash flow from working capital movements. There have been several things happening over this year. We have had the North Sea situation with different licenses and the working capital adjustments within the partnerships. We're talking about repayments during underlift that we have with our contracts that will move our payables up and down. We also have different situations in our sales and lifting arrangements in Kurdistan. that we are currently doing with the local sales. We will see movements, especially on the trade payable side, relating to the sales arrangements in Kurdistan that have been adding to net positive over capital change over the last two quarters. You asked when will that be reversed, that you said. Well, we are looking at that and we don't have a clear exact answer on when this will be reversed. We have a position that we wish to discuss with KRG on the working capital side. That's one thing that we are also working on. It's a combination of the things that, as always, move our working capital up and down quite significantly, both the MRC and Kyrgyzstan. I don't think I'll be more specific than that, but that gives an idea of what we are looking at.

Okay. Thank you.

Tom-Erik Kristiansen, the floor is yours. Please unmute.

Tom-Erik, thank you for taking my questions. Tom-Erik from Pareto here. I have three questions. Firstly, you decided now to be more vocal on what you need to see or not see in order to sanction new investments in Kurdistan and you move drilling out in time. Is that due to the company seeing progress on the negotiations and something that could happen there and therefore feel that this is the right time to be more public on your demands? Because I guess this is thoughts you have had for a while. So that's the first question is why this is coming now. and secondly if you do not drill new wells at the talk block what kind of decline rate should we be thinking of going into 2025 on production there how long can you maintain current levels and then the last question on norway you commented on the progress towards the development concept on the ua troll area Is there a big challenge with different blocks and different incentives given ownership structure? And if so, is that something that you know can take part in resolving? How do you look at that situation?

Thank you.

Yes, I'm not sure about all the questions, but I can start with the And the first point on, I think you were saying that you didn't feel we'd been as vocal on setting out our requirements for restarting exports. Was that the first point?

No, specifically, I see you where today, you know, is all new investments in Kurdistan, including drilling of wells, should restriction be applied to pricing, revenue split, advance payments, those kind of things. It's a bit more outspoken in public, but probably something you told KRG before as well. So why is this kind of a bit of a new communication now? Is that because you see some progress on the exports negotiations? Is something actually happening now, do you think? Or is it just to talk as we've seen in the past?

Yeah, well, I think I touched on this in an answer earlier that I think that the main motivation for that comment related to the disruptions in the local market that we've seen recently, which reportedly have been due to political squabbling in the region, which we think is a poor reason to disrupt the oil industry in a difficult time. So that I think is one of the prime motivations. But of course, it's just a reminder It's probably a timely reminder with that from Baghdad. Are we going into a period of more uncertainty? We hope not. We have navigated such periods before. But of course, we always, as we like to say, have one foot on the brake and one foot on the accelerator. So if the investment climate is is put into a good place and past debts are dealt with, we will be drilling, as we always have done. We're a long-term partner with the region, and once the environment is right, as you've seen time and time again with DNO, we'll be back drilling. At the same time, we have the other foot poised over the brake, such that if things get more difficult, we will cut back costs and mitigate the exposure for our shareholders. And so, I think that's the . The decline, well, I think that's a great, a very interesting question for us all at the moment, because I have been very surprised how our team has been able to maintain production at the Turkey PSC this year without drilling. Now, in terms of decline, we've put out the numbers in Q3 that were associated with the new wells. So you can calculate the decline of the prior wells. The variable is the well intervention and work over activity, which I also highlighted, through which the team is doing a tremendous job at maintaining, minimising decline rates

Trollier area.

So I think the Trollier area, indeed all of our developments in the North Sea, there are multiple factors at play. Sure, different owners is part of that. Is that a decisive issue? I doubt it. It's a contributor. If that were the decisive issue and there were solutions available with DNO will most definitely be playing a role. We are trying to play as constructive a role as we can to move these things forward. And we are impatient. We feel that in the Norwegian sector and the North Sea that there's very thorough work done at looking at all of the options available for all developments. But we feel that perhaps more respect should be paid to the time value of money rather than trying to optimise the physical concept. One should also have an eye on the clock and bear in mind that all the companies have already sunk quite considerable investment into those blocks in terms of exploration and appraisal. And that's the impatience that DNO has. But we work hard to bring that voice into all the licensed groups in a constructive manner. We do a lot of technical work in-house to help move discussions forward. And we're working very closely with all our partners as well as the, I can't remember the new name for NPD, HAVTIL is it? Norwegian Petroleum Directorate, sorry, the new title escapes me for a moment, and the Norwegian Offshore Directorate. Thank you, Josip. Apologies to anyone who works there for my forgetfulness. So we're determined to move these things forward and we will keep working in that manner. And indeed, if interest realignments are part of that, we will be at the table and working to make that happen.

Thank you very much. Yeah, it looks as if Steen Schmitz wanted to ask his questions.

I'll give you one more chance if something works.

Please unmute yourself.

If that still doesn't work, then we'll take the last question, and that will come from Yvonne Hagen again, and we'll wrap it up after that, I think.

So please, go ahead.

Excellent. Just one quick one on Boschica. How should we think about that going forward? It seems like there was quite a bit of a disappointment with the well.

Yeah, I think it's fair to say that the well was not what we hoped for. And so we need to look at how to take that development forward. The results are still pretty fresh. And so we haven't landed our conclusions yet. I think I mentioned previously, it's also a factor of local sales. Whereas, of course, when we went into the FTP, We're assuming exports to international markets. We've got some technical work to do, and both the technical work and the development of the business environment will feed into our thoughts as we prepare for our 2025 work programme and budget on that block.

Okay. With that, I think we're...

about time to end this uh finish call and uh thank you all for taking part and uh for the good questions and uh we all look forward to see you again next border that will be next year okay thank you thank you