DNO ASA

Good morning, my name is Bijan Mossavar-Rahmani; I am the Executive Chairman of DNO ASA. And I welcome you this morning to our presentation of our Q4 2017 Operating and Financial Results and our Interim 2017 Results as well.

I would be joined in the presentation by our Managing Director, Bjorn Dale; and Haakon Sandborg, our Chief Financial Officer; and other colleagues from DNO. To begin with the corporate overview and our operational highlights, which is my portion of the presentation, we’ve had in 2017 and also in the last quarter strong operational financial results and also a strengthening of our balance sheet.

So we’ve been quite pleased with the results. During a year that had its own set of challenges particularly with respect to operations in Kurdistan.

Notwithstanding those challenges are operated production in Kurdistan has held up well. It’s currently running at about 113,000 barrels of oil a day of which the Tawke field our principal operator’s field has been producing or contributed 97,000 barrels of oil per day and the Peshkabir field, which is put on production last year another 16,000 barrels of oil a day.

That is our current running production at figures. We remain the leading international operator in Kurdistan in terms of active rigs, in terms of the number of wells drilled, and two we drilled in terms of production and also in terms of oil reserves and currently we contribute around one-third of overall exports – oil exports from Kurdistan to global markets.

We receive 12 monthly payments for our exports in Kurdistan in 2017 totaling $380 million net to DNO. We had in 2017 operating profits of $521 million, compared to $6 million in 2016, so you see the significant increase in that metric.

This is on the back importantly of higher in entitlement production and recognition of $556 million in historical receivables that were dealt with in our receivable settlement last August, which we have previously reported to the market. We further strengthened our balance sheet by removal of certain other payment obligations in the Tawke license, which were pursuant to the settlement agreement I just referred to.

At the year-end 2017, our net cash position was $30 million versus a net debt of $139 million at the end of 2016 and we’re pleased with that reversal as well. In terms of operational highlights, our operator production 2017 averaged 113,500 barrels of oil per – equivalent per day, up from 112,600 barrels of oil equivalent per day in 2016.

Which Kurdistan represented 109,000 barrels of oil per day and Oman 4,500 barrels of oil equivalent per day, because at Oman as you know those who follow the company we also have some gas production. Our company working interest portion of those numbers, the production averaged 72,300 barrels of oil equivalent per day last year and our entitlement production averaged 27,300 barrels of oil equivalent per day.

We drilled 14 wells across three operated fields in Kurdistan. We fast tracked the discovery of the Cretaceous reservoir in our Peshkabir field.

And I’ll talk about that in a slide or two, but also I wanted to note that our cumulative production in the Tawke field is now approaching 230 million barrels, so that number is a significant number now and growing of course. In terms of our financial highlights, I think this chart is a significant wanted tracks pay – monthly payments received by DNO, with the net DNO figures since January of 2016.

You will see in 2016, there were a couple of gaps in the monthly payments, but that in 2017 as I mentioned before we’ve been paid every month and you see those numbers starting to climb towards the latter part of the year. In part because of the additional contribution from the Tawke and Peshkabir fields net to DNO’s interest because of the increase in our working interest in those two fields again pursuant to the settlement agreement, but also you’ll see some of that effect is also of course somewhat higher oil prices globally and steadier production.

Our total export payments net to DNO received during the year was $380 million, compared to $210 million in 2016. We exited the year with a cash balance of $430 million, compares to $261 million at year-end 2016, plus $58 million in treasury shares and marketable securities that figure a $58 million compares to $22 million at year-end 2016.

Our outstanding bond debt remains $400 million. We have our foot back on the accelerator in Kurdistan.

We plan a 50% hike in our Kurdistan spend in 2008 versus 2017. The figure of about $250 million dollars nets to DNO on the back of continued export payments.

To put that figure in a different perspective, our 2018 spend in Kurdistan will be three times what we spent in 2016. So we are significantly increasing and stepping up our program and our investments in Kurdistan.

The receivable settlement last year increases our stake in the Tawke license, which includes Peshkabir and Tawke from 55% to 75%. We are active at the currently drilling well at Tawke – the Tawke-48 well, which is targeting the main Cretaceous reservoir in the Tawke field.

We expect that well will be completed towards the end of this month. We are finalizing plans now with our partner to drill four more wells at Tawke, some of these will be the Cretaceous wells, or those will be the shallow Jeribe wells, but we do have an active program at Tawke, plus other investments we’re making to high grade facilities and so on.

In our Benenan field in the Erbil block, that’s if you recall our – the heavy oil field, we have reentered one of the existing wells Hawler-1 well and we have sidetracked on a multilateral – three multilateral sections in that well plus a dual completion, both of these are tactical achievements. These are the first ever multilateral wells source or sections and do a completion completed in Kurdistan.

And we – the rig has now moved off of that well and we expect to test in the coming weeks. And if that is successful, we’re able to move that heavy oil to surface.

We will be planning additional drilling in the Benenan field as well. So an active program hopefully on that license and that field as well in 2018, 2019.

Most importantly, we’ve been fast tracking – we have fast track the Peshkabir discovery, we brought that discovery on stream in less than six months and triple production to over 15,000 barrels of oil a day by the late 2017. In some respects this is very reminiscent of the way DNO before my time made a discovery at Tawke and brought it on production in record time.

So we’re replicating Tawke in that respect that the Peshkabir gives some of the lessons learned from our Tawke fast tracked development and applying those lessons and experiences to Peshkabir as well. We are now producing from two wells of Peshkabir.

Peshkabir-2 well which has been producing at about 5,600 barrels per day and Peshkabir-3 well at about 10,000 barrels a day. Those wells are holding steady in terms of production, which is very, very encouraging, but to put those production numbers in perspective and the economics of this field of perspective.

We’ve already produced a cumulative a total of 2 million barrels from the Peshkabir field that has an estimated export value of about $100 million and that’s twice the investment that we’ve made in that field so far. So the – you get a sense of the velocity of both production and dollars and perspective in terms of the investment required to generate that flow this is very impressive.

We have six wells planned at Peshkabir in 2018 to boost production. We have targeted production – doubling our production to about 30,000 barrels a day by this summer.

And of course as we drill more wells we hope to ramp up production in 2018 even further. And one of those wells we will test the deeper Triassic horizon, there are – there is a additional exploration in a sense to be done at Peshkabir, other horizons we want to test, but obviously our focus to date has been on the capacious, but we hope to do more at Peshkabir.

We also have some gas production at Peshkabir, I think we touched on this before. And we are now considering our initiating engineering studies to move this production of gas from Peshkabir.

Some of the solution gas but there’s also we think a gas cap and to moving this cap to Tawke to initiate and enhanced oil recovery program at Tawke and be able to recover more production of oil from the Tawke field. So that’s another significant program that we are now looking into and hope to initiate as well.

And of course, we’re building a new focus area here and Norway in particular. And that’s being fast tracked in certain respects as well.

DNO was awarded participation in ten exploration licenses under Norway’s Awards in Predefined Areas or the APA licensing around 2017. I understand in terms of the awards we were fifth among the companies.

So we’re pleased with that and will be again continue to build on our – on this new focus area for the company, which has importantly exploration elements for us. Of those licenses seven are in the North Sea, one in the Norwegian Sea, and two in the Barents Sea.

This adds to the existing nine licenses offshore Norway and the UK in our current portfolio, which six on the NCS, and three on the UK Continental Shelf. We drilling Val d’Isere prospect in the UK Continental Shelf with the partners Apache and Edison in which we had a 22.5% working interest.

This well was drilled to 3,600 meters by the operator, but encountered no hydrocarbons and therefore was plugged and abandoned and the rig moved I believe last week. Notwithstanding, we’ve – that stopping of our toe on that well, though we are fully committed to continue to build our portfolio and in particular in the Norwegian Continental Shelf and are pursuing additional stakes including exploration development and production assets and we will have more to report on those efforts as we move forward.

Thank you.

Okay, good morning everyone. So I remember saying a year ago, what our quarterly presentation in February that we for 2017 expected higher production, better oil prices, improve the payment regularity in Kurdistan and thereby also increasing operational cash flow.

Further, we said that the time that we also supported by a strong balance sheet with a focus on new growth opportunities and on increased investments in 2017. I think personally it’s good to look back now and confirm that we actually delivered on these expectations and goals.

And that last year, thereby was a very good year for the company. So on the next few slides let me go through and discuss these points in more detail.

Here, this slide shows the recovery we had in revenues last year, increasing by 72% to $347 million. This increase was backed by solid production, higher oil prices and as I said regular payments in Kurdistan and by increased entitlements following the KRG receivables settlement.

Net of a provision for obsolete inventory of $19 million that we took in the third quarter last year against lifting cost. Our operational cost base remains low and fairly stable.

So thereby with increased revenues, we saw a much stronger net back cash flow in 2017, increasing to $232 million. Operating profit for 2017 includes the recognition of $556 million in other income from the receivables settlement.

This amount has been already includes the 20% increase stake in the Tawke license, the 3% override on gross revenue and also removal of liabilities that we had towards the KRG. So I think it’s very clear that in short we had a strong progress on our key financials last year.

And importantly, we also structurally changed our revenue base through the receivables settlement and strengthened our revenue outlook and base going forward. As Bijan mentioned and also through our corporate acquisition and reentry in Norway last year, we are now building up a new important business unit for the company.

Now we are turning to our P&L statement for the fourth quarter to the left on this slide. And here you can see the increase in revenue that I have discussed.

There are cost of goods sold, our lifting cost are stable for the quarter $22 million but our DD&A. Our depreciation charges primarily increased to $35 million that comes as a result of the increase to book value of our property plant and equipment in the Tawke license based on the receivable settlement.

Just worth noting on that basis we do expect higher non-cash DD&A costs going forward. Our exploration expenses increase to $24 million in Q4 that’s mainly due to seismic acquisition costs and other exploration activity for our Norway subsidiary.

Admin and other costs were at the normal levels for the quarter and on this basis our operating profit came in at $25.7 million due to the tax refund for exploration costs we have here in Norway we saw a positive tax amounts of $15.7 million and thereafter net income of $30.6 million for this quarter. To the right you will see the numbers for the full year and other than the higher revenues the main items I would mention here – include the increased cost of goods sold mainly due to the higher DD&A charges and also the inventory provision we took in the third quarter.

We also had a significant increase in the impairment of oil and gas assets last year and that was due to a revised assessment of our licenses in Oman and in the urban license in Kurdistan. Net finance for this year consists primarily of bond loan interest naturally and amortization of fees and settle for the loan.

Well, the taxes reflect again the exploration tax refund for Norway. So including the other income from the receivable settlement net profit reached $495 million for 2017.

Here we present our operational spend as we call it this is consisting of CapEx exploration and the lifting cost. And as you can see, we are more than the doubled last year to an operational spend level over $259 million.

CapEx came in at the guided level of $130 million that was mainly for drilling our 14 new wells and facilities development in Kurdistan that you heard today that includes the fast track development of the Peshkabir field. We also drilled one sidetrack well and carried out the well reinstatement project in Oman last year.

For 2018 we aim to further increase CapEx spending to around $150 million and the main investments here will be drilling of new wells and further facilities development again at Tawke and Peshkabir fields. In addition we will now also step up exploration spending to a level of around $100 million that is because of the increased activity in Norway primarily but also in the Kurdistan and wells in UK and Tunisia in addition.

So when the add on the fairly stable lifting cost we project an increase in our operational spend level up to close to $340 million for this year. Here we look at our cash flow and through last year we restored cash flow back to solid levels that we saw in the previous years with an increase in operational cash flow of $240 million that takes us to a level of $388.8 million for the full year.

As you can see, we thereby more than tripled our cash flow from 2016. So I have mentioned the cash flow increase is driven by high revenues and also by a fairly stable cost base.

There is also in addition some support from working capital changes this year as we have reduced inventories and outstanding trade receivables across our business units. And on top of that there was also an increase in trade payables in Kurdistan and in Oman last year due to the activity.

As discussed, we increased CapEx to $130 million last year. Shown here with a net number of $127.8 million but further we also bought back on the shares a value over $24 million and that item is included here under the tax and finance amount of $41.9 million.

So after covering all the costs in our CapEx our cash balance is still increased by $169 million to end that is substantial level of $430 million at year and. Now for our balance sheet and capital structure this is a strong cash build means that we are now – as you heard net cash positive versus our bond debt in the amount of $30 million.

In addition the value of our financial assets has increased through share buybacks and share price growth to a value of $58 million at the end of Q4. Also important to see that as we discussed in our half year presentation back in August our equity ratio has now strengthened significantly that comes through the increase in equity from the receivable settlement in Kurdistan.

And it’s good to see equity back at a high level of 62% on our equity ratio. So again, as I’m sure that you have picked up already today we are pretty pleased with our operational and financial progress last year.

And based on the expectations of continued high production regular payments in Kurdistan and the current oil price outlook we do expect further increase in our revenues and cash flow this year. And we combine that with our solid financial position we will remain focused on new growth both through development of our existing assets but also through trying to then engage in new asset opportunities through the year.

So with that I think that ends our presentation. And I’ll open up for a Q&A session.

Anders Holte, Danske Bank. Just wanted – if you could shed some more details on your how you allocate your capital, because it seems that’s – we’re gathering cash which is all very good but I guess what we’re seeing is that production at Tawke seems to be falling off a little bit.

So my question remains how do you prioritize spending more at Tawke and trying to fight the decline versus storing cash in balance sheet. And also is there anything if you talk, it appreciates, take into consideration when it comes to the perceived [indiscernible].

Thank you.

Good morning, Anders. Thank you for that question.

As we’ve stated today we are planning drilling of significant number of wells on Tawke license. We shifted the focus away from Tawke to Peshkabir last year in part because Peshkabir seem to us a low hanging fruit and we wanted to get as much production into the system as possible.

Both because it’s a made sense from our point of view, but also contributed to additional volumes of crude into the export markets in support of the Kurdistan regional – regions efforts to generate further revenues which of course is also helpful to us, because it enhanced our ability to pay for us the – our entitlement share of those exports. At Tawke, we really hit the brakes in 2015, 2016 when there were payments issues and we said that at the time that we have – we said, we have one foot on the accelerator and one for the brake and as revenues come in.

We will spend more and if they don’t or there is uncertainty we will spend less. And we end up our spending less at Tawke.

We had some plans that we had talked about in that period, about exploring the Tawke deep we thought there was additional up potential both deeper and shallower at Tawke. We still believe those opportunities remain to be tested and we plan to do so.

So having really just hit the brakes at Tawke for couple of years, and the shift of Peshkabir where we’re not coming back and revisiting Tawke during this period of course has been natural fuel decline, that happens whether the decline rate and after the high rate at Tawke is 10%. So we’ve talked about this three years before, that it was more or less that to be in lined with fuels of similar characteristics, elsewhere.

And of course at some point and that has to be, as you said faults by doing with additional wells and fuel wells and also by again looking for other opportunities within the field deeper and shallower. But also with time, water will come as well.

And we have not had this issue yet there are some water production at top we but nothing that has been significant, but at some point the water would come and we’ve been careful not to pull the wells too hard we had in place, a certain level of water handling capacity. And that’s also meant the more measured approach to the top the production.

Those investments are now being made and by midyear we should have sufficient water processing capacity of Tawke, that if the water comes. We won’t have the truck back the wells we can deal with it as we go forward.

So part of the issue at Tawke in terms of our production levels has been again not having made these investments for the reasons that I’ve described. But of course, there is a natural field decline but Tawke is still producing just 500,000 barrels a day that’s still a very impressive number.

We’d like to see it higher. And we will be making those investments this year to see whether these investments fights the decline and the reduce the decline or stabilize production or hopefully even increase production at Tawke.

But any increase again would be to be just natural gravitational pull back doors and lower numbers because that’s the nature of these fields. The Tawke field in certain respects, it’s a mature field and if you’ll able produced 230 million barrels by and by some definition is mature.

But there’s still work to be done at Tawke and with the predictability and visibility of payments and regularity of payments. We have a lot of cash coming in and what better place to spend this cash than in Kurdistan.

And then including at the Tawke and Peshkabir where we are further incentivized by the fact that we announced 75% of this field. Previously, we were carrying the Kurdistan regional government about 20%.

So we are paying 75% but had entitlement to 55%. Now we’re spending 75% and getting 75%.

So we have interest to do that. We have as part of our agreements five-year override arrangement we have – we already have every incentive to do more on Tawke, but we have been more so because of these other considerations.

So we’re committed to and now we have the resources to do more and I’m hopeful, we’ll show some reversal of those trends and about how much and how fast what we will have to wait and see. But meanwhile, Peshkabir ramp up continues and we’ve now gone back and the heavy oil block to see whether some of these new techniques that are not uncommon elsewhere.

But new to Kurdistan can make a difference in terms of our ability to produce some of that heavy oil and the heavy oil on Kurdistan is a huge, huge resource and no one’s been able to crack open yet. And we’d like to be the first in that respect as well that we will see.

Teodor Sveen-Nilsen from SpareBank 1 Markets. First a quick question on the exploration.

How much of your expected 2018 exploration spending it will relates to Norway.

It’s going to be – well, we have guided around a $100 million in total for the year spread over Norway, Kurdistan, U.K. and Indonesia.

To your question, that amount will be $100 million, a bit less than half of which will be for Norway. That means that we spend that money and we get that 78% tax refund back.

So in terms of actual cash out over a period of 12 months that’s going to be then reduce by the tax refund.

Okay. And thank you.

And then just on the cash flows, Haakon you said that, you’ve expected high year cash flows and high revenues for 2017, I guess that’s also somewhat related to the oil price outlook. But assuming that 2018 production and oil prices will stay at 2017 level, is there any reason for that improvisational cash flow should be different from where it’s $340 million reported for 2017?

And the cost oil balance older items that we should aware?

The main effect Teodor is of course, if you say in your example stable production no change in the oil price. If so that – of course would be a higher oil price than what we had last year.

I mean – yes, so that’s one effect. But the receivable settlement agreement has changed license interest as you know.

So it changed our license interest as you know to 75% and we have the extra 3% override, we didn’t have add that for the full year, last year, we don’t have that effectively for two months – three months last year. So you don’t have to think about that.

Adding up to your revenue coming into this year that’s one of the reasons, I’m saying that we expect increasing revenues and cash flow. We do expect, as it has been for years the OpEx the operational cost to be fairly stable with some one-off [indiscernible] but fairly stable and that very low levels in an industry context.

So with that structural change, we have in our license agreement that is one of the main drivers for our expectations.

Okay. Thank you.

And the final question for me, pull up from Anders Holte’s question. Just to put another way, we’d like to positive outlook on Peshkabir and assuming some of declining on Tawke, this is still fair to assume higher gross production from both two fields in 2018 versus 2017.

Yes.

So thank you very much. We will see you at the next quarterly presentation.

Thank you.