DNO ASA

Good morning. My name is Bijan Mossavar Rahmani.

I am the Executive Chairman of DNO ASA. Welcome to the Company's First Quarter 2016 Interim Presentation.

I am joined this morning, as I am always at these presentations by Bjørn Dale who is our Managing Director and by Haakon Sandborg who is our Chief Financial Officer. We are off to a good start in 2016 and with improved performance across a number of financial and operating metrics.

First and importantly, we’ve had our first quarterly profit from operating activities since mid-2014 of $8 million a modest amount by clearly a turnaround for us. And we are on track for increased profitability in the 2016.

Our financial performance has been of course bolstered by higher oil prices. But also importantly by seven consecutive monthly payments for oil produced in Kurdistan, the last three payments of which have been in line with our contractual entitlements under our contract.

This normalization of payments has led to set up investments by DNO at the Tawke Field with production expected to continue to climb in 2016 following the drilling of production wells, new production wells and workovers of ten wells, ten existing producing wells during the course of the year. Among of the three key foreign operators in Kurdistan, we have solidified our lead as first in oil production, we are responsible for about or account for 50% of the production of these three companies.

In terms of oil exports, we are number one and we account for 60% of the oil exported from Kurdistan that is produced widely three key operators. And also in terms of proven reserves of oil where we account for about 50% of the total for these three companies.

Our proven reserves numbers of the Tawke Field increased just over 20% last year to 387 million barrels on improved confidence about primary recovery from the Tawke Field though our probable reserves numbers declined with partial recategorization of some of those reserves to contingent resources. We continue to rationalize our portfolio to focus on core assets while evaluating growth opportunities including new country entrees.

In terms of our first quarter operational highlights, our operated production last quarter was just under 100,000 barrels of oil equivalent a day, 97,000 barrels of oil equivalent per day to be exact. Of that of course Tawke Field represented the most single most important part at just under 92,000 barrels of oil per day, just over 87,000 barrels of oil a day from Tawke was exported through Turkey by pipeline.

As those of you who follow DNO or this market now, Kurdistan production was and exports were impacted by extensive closure of the Turkish portion of the export pipeline during the second half of February and the first half of March and of course impacted our production and our exports as well. Once pipeline operations were returned to a normal state and restored and following the successful completion of the first set up well workovers at Tawke, Tawke production climbed again to just under 119,000 barrels a day in April of which almost all was earmarked for exports and that is the rate of which we are now conduction our production operations where producing about just shy of very, very close to 120,000 a day currently from Tawke and nearly all of that is earmarked for exports.

Our Oman production the other operating country that’s where we currently have production averaged 5,300 barrels of oil equivalent per day during 2016’s first quarter. In terms of our financial highlights and Haakon will go into a lot more detail on our financial results.

First quarter oil revenues were at about $50 million of which the Kurdistan sales represented $47 million. This was the fourth consecutive quarter in which DNO’s revenues totaled $50 million or higher.

So we’re very pleased with that. We have planned capital investments in 2016 totaling about $100 million, and all of is funded by cash from operations.

We continue to strengthen our balance sheets and we exited the first quarter with a cash balance of $262 million, up from $238 million at the end of 2015. And we are very pleased with that as well.

Much of this of course is depends on and as a result of the improving payment situation in Kurdistan, since September of 2015, we have had seven monthly payments from Kurdistan totaling $175 million of which $128 million was net to DNO and the balance to our partner in the Tawke Field. In the first quarter, we had three payments totaling $65 million again net to us a $48 million for Tawke deliveries both to the domestic and to the export market.

The new 2016 payment arrangements that are in place now in Kurdistan are based on contractual entitlements and some payments towards the reduction in the receivables of DNO and other companies. But these payments provide regularity and predictability of payments and therefore incentivize companies importantly DNO to make new investments which we again have started to make and our committed to making tied again to the regularity and predictability of these payments.

Higher oil prices of course helped and these have boosted DNO’s monthly entitlement revenues. But also importantly these higher oil prices and higher revenues from exports improved Kurdistan’s ability to pay the companies.

So that’s - those are hope the direct and an indirect positive impact from high oil prices in terms of our operations in Kurdistan. The payments received during the first quarter reduced our booked receivable for our share of past toppy deliveries to the domestic market by about $2 million and you’ll recall that we have only booked our local sales; we have not booked our exports.

But at - this is an important and growing sum towards drawing down the booked receivables for local sales and we believe that at current prices and current production levels, we should be able to reduce that figure that balance by about $10 million a quarter. We have also had discussions with Kurdistan.

I was in Kurdistan myself last week and we have now agreed that we will set up a process to verity our receivable figures importantly for our exports through a joint audit. Ahead of discussions to be held hopefully expeditiously to set a payment plan including their terms and modality and schedule for recovery of our unbooked receivables towards exports.

And that is a very sizable number and we now are focused very hard on again verifying jointly the assumptions that have gone into those figures including the price of oil in the export sales. And once those numbers are verified and as those numbers are being verified, we will engage in discussions as to a mechanism and terms and schedule for payment of that receivable through DNO.

And that is of course an important next step for us in terms of ritualizing and normalizing our Kurdistan operations that accounts. We have our foot back on the accelerator in Kurdistan.

We have at Tawke one rig currently active and we have plans to add up to two more rigs by mid-year. So a fairly active drilling and workover program for the company.

We have already completed three of these workovers in the first quarter which helped reverse the decline in field production and in fact we’ve added - we have secured part of our existing production but added 10,000 barrels a day in incremental production in 30 days and at a cost of $1.5 million. To put on a perspective, this additional 10,000 barrels a day of production at current prices adds $10 million a month to Tawke export revenues.

So this is again record time and record low cost and sometimes when we put out full on the accelerator, it feels like we are driving a Ferrari. We have five more well workovers planned in the second quarter to in the fourth quarter for total of 10 workovers.

We have five new production wells planned including three into the main producing reservoir at Tawke, the Cretaceous reservoir and two in the shallower Jeribe reservoir as well as one water disposal well which is part of our plans to put in water handling capacity at Tawke which will be required as we continue to produce on the field and step up our production. We do not currently have a water production problem.

Wells do start to produce water, but putting these the new disposal well and additional water treatment facilities is cautionary but important because this is an issue we will address as the field continues to be produce down. The new investments that we are planning will of course halt the natural field decline but add additional production and our expectation is that during the course of 2016, we will increase production from 120,000 barrels a day to 135,000 barrels a day.

These investments are of course remained contingent on regularity of payment to us but we have every confidence that will continue. And as of payments come in, we are committed to doing more.

And the more we do the more production capacity and after production, we will be able to put into place. In terms of other drilling activity, we are now starting in 2016.

We’ve started really at the end of last year. We are starting to gear up to do more like others in the industry, our peers but also larger companies following the drop in oil prices and the crisis in the market.

We hit the brakes, we cut back costs including staffing costs, operation cost, capital cost to try to again weather the crisis, we believe and we’ve set before in the last year, we fully we’ve weathered that crises and we’re ready to get back in the business of growing the company. We have a third quarter spud dates commence what our drilling date for the Peshkabir-2 well in the Tawke license to appraise a previously made Jurassic discovery and to explore a Cretaceous horizon at to the Peshkabir discovery, we expect that the drilling will be completed by year end and if successful, we will be in a position to bring that Peshkabir field into production fairly quickly using existing infrastructure on the Tawke license.

In Oman, the drilling of an exploration well on Block 36 has commenced and is progressing and we expect to reach target depth of 2,700 meter by the end of May. I believe as of last time, we’re about half way down towards that target depth.

This exploration well has been drilled on our Block and the prolific Rub al-Khali basin, which is in Southwestern Oman bordering Saudi Arabia and Yemen. It’s a perspective area in North Sea heavily drilled and explored but it’s also a huge surface area in terms of the license of more than 18,000 square kilometers.

So we will by the next quarterly presentation I believe we’ll have results from that first exploration well to report on. With that I’ll turn over to Haakon to go into more depth on financials.

Okay, good morning, everyone. I would say that compared to the previous quarter, it’s going [ph] up here reporting on the much improved financial results for the first quarter this year.

As such, we are now again showing solid operational cash flow and we probably strengthened our cash balance through this quarter. As you’ve heard increased earnings visibility and normalization of the payments in Kurdistan is the main reason here explaining this good financial performance but of course we’ve had higher oil prices also contributing to better results.

So here for our key figures, we now show a stable quarterly revenues at $50 million or higher for the last four quarters. And as you know these payments - these revenues reflect increasing export payments in Kurdistan and but this is offset by lower local sales in the region.

As well that’s lower revenues from our Oman production in this period. From the first quarter this year, it’s important to note that under the new payment arrangement with the KRG, the net back oil price that we are receiving for Tawke deliveries is again paid directly to the Brent oil price.

So we have been gaining on a monthly basis from a stronger oil prices in this quarter. So despite and the drop in Tawke production that we see now from the pipeline closure in February and March guided by basically with a high oil prices able to keep disable revenues for this quarter.

Otherwise the quarterly net back cash flow is stable at around $25 million per quarter and that reflects the stable revenues and the sort of low and stable cost situation on both lifting cost filtration and admin expenses. To the right, you can see that unlike prices in the fourth quarter, there are no impairments in Q1, so we thereby show an operating profit of the $8 million this time.

Moving here to our P&L and starting with the revenues. The monthly payments from the KRG as you know for Tawke production now consist of one part for contractual entitlement and one other part that is paid towards the contractor receivables for past deliveries.

This later part is calculated as 5% of monthly net back revenue from production at Tawke. I’d like to note that for Q1 that we have applied the DNO’s share the 5% payment to reduce the booked local sales receivable in our balance sheet and that means that this part of the actual payment from the KRG is not included in the revenue for the quarter, but it severs to reduce the balance sheet item.

So we will follow this procedure going forward and the aim is to more this balance sheet item down then by applying the 5%– share of 5% to the booked receivables. On the cost side, our Q1 cost of goods sold have on year-on-year basis been reduced by $31million from Q1 last year.

And this reduction comes from mainly from the lower lifting cost in both Kurdistan and Oman. We will recall that we are going through some significant cost reduction measures over the last year and this year, but also lower cost because of the shutdown over production in the Yemen.

Now effective from January this year, we have also decided to change the basis for depreciation for the Tawke PSC from two be proven and probable reserves to one be proven reserves. The reason for this change is the rapid depreciation we have had on the Tawke asset with a 2p DDNA rate and that’s because of the conditions we have had on the payments et cetera in Kurdistan.

We think that with 1p DD&A profile, we will now see a less aggressive depreciation of this long term asset. So they change to a 1p rate contributes a drop in DD&A in the first quarter.

As we can see here other expenses fairly stable in the quarter. And net finance this time is straightforward, it consist of interest expense and amortization of previous loan fees.

So in sum here for the first quarter, we thereby show a much improved and much reduced net loss of $4.9 million. As we discussed during our Q4 presentation, and that’s we’ve heard today, we plan to step up investments again this year.

And the program for this year carries capital commitments of around $100 million for DNO’s share. And the main part of this program is again targeted for the Tawke Field and we have no new production wells, water handling facilities, workover activity and other types of development work.

And of course we also look forward to drilling the important Peshkabir-2 well later on in the year. I’ll add some questions on the waiting of the investment program and it is really waiting towards the second half of the year, so we are off to a fairly slow start with $5.6 million of CapEx in the quarter.

That’s mainly for the workover activity in Kurdistan but we also started drilling the exploration well in Oman on Block 36. In addition just to give you some impression on other activity, we are also quite active in exploration work also in Tunisia and had done a lot of work there and we now see a good potential in the offshore Sfax license that the DNO holds in Tunisia.

Now this is clearly the main slide for me today and we are finally back to showing a solid operational cash flow of $31.7 million in the quarter. And - but this cash flow, we are able to cover all cost and investments and we also increased our cash balances by $24 million in this quarter.

I think that’s very good and in my mind as it should be given the way we are generating substantial values on the quarterly basis in the company. Of course I have to admit that there is some support this time from working capital movements in the quarter.

And I think with some payments we have received in Tunisia and Oman and also other items that have reduced trade other receivables by $12.3 million in the quarter. But we’re continued to pay down and we also reduced payable there by $3.3 million through this period.

Just to again point out the effect of the application of revenues that I discussed in Kurdistan, the reduction in the book part of the local sales receivables and you see the net amount here is due to the application of that part of the revenues towards the reducing this receivable. So on this basis, our cash balances have increase and we are up to $261.8 million at the end of the quarter.

So this increase in cash reduces on our net interest bearing debt further and it comes to a level of $138 million now at the end of the quarter. As I like to say, we have maintained a solid balance sheet with the low leverage as before.

We also see that the value of our financial assets have increased to $20 million in the quarter. That’s basically supported by FX change and share price improvement for these assets.

To the right, you can see that the equity ratio remains at a solid level of 43%, so we are happy with keeping that stable. And in summary, we are very pleased with the good start of this year.

And we now see the encouraging effects of steady payments in Kurdistan. We also supported by higher oil prices and the current good production levels and prospects are increasing production.

And on that basis, we continue to see a positive outlook for Gulf in both revenues and cash flows going forward this year. So we look forward to carrying out the investment plans this year and to report the results to you after the summer as we progress.

So I think with that we are basically through with the presentation. I’ll close down from here and we’ll open up for a Q&A session here.

Henrik Madsen from Arctic Securities. Given that you are back into positive free cash territory at high oil prices and resumption of exports should probably continue that trend for quite some time hopefully.

And on the flip side, you have debt outstanding trading at quite a little cash prices and yields roughly about 20%. Is it on the table or you are evaluating the potential for buying back some of your bonds at a discounted rates?

As I was telling that question, we are looking at various uses of our cash, first and foremost to grow the business, to look at the new industry investments. We are quite active now in new ventures looking for new assets that we have add to our portfolio to build more volume.

So that’s one very highly prioritized use of our cash. We also look at the bond side as you indicate and I think that’s an interesting opportunity depending on where the trading levels are.

That’s something we have been following quite actively. And as you may know we also look at the share buyback.

So we did some limited share buybacks in Q4 and Q1. So all these three main areas are important to look into, so we continue to that and look at the results and see where we can best use our money.

But we do like to maintain a very solid balance sheet with a good cash balances. So we always looked at the liquidity side of the business also.

But yeah we’re looking at across the range here.

Thomas [ph] from Pareto Securities. You previously talked about $12 discount to Brent, now we’re seeing prices going higher, can you give an indications on how you can see that moving forward?

You’re asking where we see prices going or leases discount going?

Yeah, if you could talk that also, but discount to Brent?

This discount so far has been an absolute figure rather than a percentage of the price for Brent. And we have no indication that would change.

So as price for Brent has gone up, our net back has gone up, because again that discount is fixed, part of that discount is related to the transportation costs and those numbers aren’t related to the price of Brent. And typically is differential also to great extend insensitive to the Brent price.

But if that’s changes in the future, I don’t know but so far that the fixed discount has been fixed and has not changed and we don’t expect that to change moving forward if anything we would hope to be squeeze that a bit if we can.

Okay, also on the reporting you are stating that obviously at higher prices that helps, and Q4 analyst lunch, you also talked about how is working to get down their costs for running the country and also there have been reports on the U.S. funding.

Could you talk a little bit that 45, 50 how you see the ability to pay the contract that is improving?

Well again as I say the prove is not putting, you note that payments have been coming up, coming in. Now as you’ve indicated seven consecutive months, the first part of that was in fixed amounts since the start of this year it’s been according to entitlements.

And I have every indication and every confidence that will continue and impart because it’s well understood in Kurdistan that oil is the only source of revenue right now foreign exchange revenue, that’s an important part of that is oil has produced by the international oil companies and that international oil companies will make investments to produce only if they have the revenue stream to support it. So that’s I think very well understood.

And I think the results of our own start of the investment program supports that that once we have the confidence that the payments were regularized, we will start investing and as we start investing we are creating significant value, so all that’s understood and all that provides an underpinning for the continuation of the payments arrangements. But on top of that as you’ve noted that there has been a lot of belt tightening in Kurdistan, the government discussed that, they have announced certain reductions in their expenditures, they have - there’s also been outside support for Kurdistan.

You mentioned the U.S. side, there are ongoing discussions with international lending agencies for support for Iraq including for Kurdistan.

So I think all of this is positive, it’s - it doesn’t replace what Kurdistan was receiving from the Iraq budgets several years ago, but it’s enough for Kurdistan to be able to pay the companies and meet their own security and other needs where we’ve soft of looking beyond that now and we’re focused very hard on the recovery on our receivable both the booked and the much, much larger unbooked portion of that receivable. That figure is a very, very sizable number, it’s very important number for us, but it’s a number that we have to again fine tune.

And I discussed putting to place joint audit arrangement that’s for us that’s routine where companies are supports their spending. But also here we need to get supporting information from the Kurdistan side as to whether the prices we have made for exports were accurate.

We believe they are very close. But the exact prices we need to sit down and sort out.

Once we do that then we will have a number that both sides agree on with respect to the receivable and getting that receivable recovered is hugely important to us, it’s something like, it’s some like Kurdistan government is committed to do. They recognized that there is a debt to the companies where our debt to us is probably the largest of any of the operating companies because we’ve had the large production.

But that is certainly that we are again focused on getting back. That’s - it’s the easiest billion dollars that we can drill into, that’s a workover as these things go.

It’s better something again that look very significant again value to us once we agree with the Kurdistan government how to manage them. I think it’s doable.

An important part because we are still creating so much value by the volume of oil that we are producing and contributing to the Kurdistan’s export. So I am optimistic there is a lot of challenges in Kurdistan, security challenges first and foremost, political challenges both in Iraq that we’ve seen now last accelerating this past weekend political challenges in Kurdistan that despite people that’s going to next door, there is a lot going on.

And we try to be part of the solution not part of the problem when it comes to dealing with these issues, but notwithstanding those challenges and those immense difficulties. Our operations continue, we’ve continued to operate during this period.

Obviously we are concerned about security issues, security for people, security for our facilities but we feel that’s we have in place proper arrangements. As I mentioned I was in Kurdistan myself last week and our management goes in and out, we have people there, I go in regularly and obviously we feel that it’s safe and that we are in a position to continue to operate and add to our investments and to our production.

So I think the challenges exist but we understand them and under the circumstances we try to manage them as best as we can. So with that we have again discussed this stepping up of activity, stepping up of investments.

But as I’ve said, we continue to have a foot on the brake and foot on the accelerator. And I described Tawke is being a Ferrari.

You hit the accelerator it goes but also having very powerful brakes. When you need to stop you hit the brakes and it stops.

And so we will continue to manage our investments bearing in mind the most importantly payments arrangements and also security conditions and other conditions which require us to step up or step down as appropriate.

Teodor Nilsen, Swedbank. One question on cash flow, hopefully you mentioned of course the cash flow is strong because of the working capital reversal in the first quarter and to your where the quarter the receivable that then I guess the main portion of reversal of other receivables, so who we expect the development of the working capital going forward?

Well over the last many quarters, we had a sort of reductions of our payments as you may recall and built up quite a substantial accounts payable tradition with the expansion on Turkey as part of the contractor payments we discussed with the various suppliers. We had being that graded extended the repayments on the payables.

So we have been reducing quite substantially on the payables over the last quarters. So we’ve done that - most of that repayment of the full built out now for Turkey, so that’s more or less down now.

So we expect to see less effect on the payables now going forward. These situations on the receivable side, we had some payments outstanding on the license transaction in the Tunisia.

We got one payment on that now in this quarter and expect another one in the coming quarters. So there is some improvement on that receivable side.

In Oman, we - before we record the built up in our lift as - under the receivable part so when you get actual shipments in the Oman, it’s sort of done on the periodic basis, not constant shipments but once you see a shipment by a crude listing going out a Monday will then be a reduction of that receivable in the book, so that’s also something that you will see coming forward with periodic lifting from Oman. So there are number of elements that goes into this but I do expect going forward you would see less of this drain on the working capital compared what we had last year now for the coming quarters more and more situation.

Of course if we come into what we think now it’s a period of much more activity with the wells and all the things we are planning to do now in a built out in the growth phase you normally then overtime we’ll see a built up in the accounts payable again. So this of course goes in and it’s like with the activity levels.

But I think long answer but to your question I would say that it’s going to be that it’s going to be a more normal situation now in terms of you know normal variation in the working capital.

Okay, thank you. And then like more broadly and on the strategy going forward, you previously discussed that you are looking for joint venture in both Iran and generally in the Middle East, you didn’t discuss that today.

So don’t you spend another time on like new joint ventures or if you always in your room, thought on that.

We’ve indicated, we further we are looking at other opportunities and new country entrees or repeat that today. We don’t have anything to report on currently and when we do we will of course do so, but we are actively looking at other opportunities both within our footprint and bit beyond it as well.

It’s quite active.

Do you spend any time on Iran?

Do I know? I don’t.

Okay. Thank you.

There is one question here from Ruth Brooker [ph].

Depreciation for proved reserves and why is the depreciation gone down in Q1?

Yeah, the background here on the change from 2p proven and probable reserves to 1p rate is basically that with the situation on the payments in Cretaceous, we’ve had a sort of have been paid before entitlement that we should be getting under the production sharing contract. So we have been paid less.

So we basically had in the depreciation calculation, we sort of maintained a higher entitlement volume at all times that are used to calculate the depreciation. So with the low production sharing contract entitlement, basically the accounting effect is that we have rapidly depreciated the PP&E the property plant and equipment value are Tawke asset.

Much more rapidly, then we have depleted the reserves. Just to give an indication, the PP&E, the asset value in our balance sheet has been depreciated by something like 60% since we started in Kurdistan whereas the gross to reserves have only be in the reduced or produced by 20%.

So basically the background area is that we have seen this too much depreciation rate on the booked value of our plant and the equipment in Turkey. The question from Michael is basically is there a decline?

Well, with a 2p proven and probable rate due also include future CapEx in your calculation with the 1p you only have the - basically the existing PP&E value in your asset value. So we think basically when we move to 1p rate, we will see decline in the DD&A charge in the quarterly basis.

We should think it’s much more sustainable, it’s something we really see as they are adopted to the profile of this field and the long term life that we have remaining here. So the difference is basically do you include future CapEx or not?

And with the 1p, you don’t in the calculation.

Well then thank you to everybody for coming to our presentation. I’ll see you next time.