DNO ASA

Good morning. My name is Bijan Mossavar-Rahmani, I am the Executive Chairman of DNO ASA.

And I am joined today, as I am always at these presentations, by Bjorn Dale, who is our Managing Director; and by Haakon Sandborg, who is our Chief Financial Officer. Welcome to DNO’s Half Year 2018 Interim Results Presentation.

It’s been a very exciting half year for DNO in 2018. We’ve been very busy across our operations and principally, of course, in our core operations in the Kurdistan region of Iraq.

And we will be speaking to our activities, our operations in Kurdistan, elsewhere across the portfolio, and also our financial results for the half year with some discussion of where we are going from here with respect to some of our operations. So welcome to this presentation.

I will start with the corporate overview and the operational highlights, and Haakon will pickup with the financial portion of our presentation. As we’ve shown on the slide, we have our foot on the accelerator in Kurdistan in terms of our level of spending, our level of operational activity and our production, our investments and the growth of the company with respect to its several licenses in Kurdistan, where we are involved in early exploration, in development of discoveries, and continuing operation and production from our flagship Tawke field in Kurdistan as well.

So we’re active across the range of exploration and production operations. And we remain and have been, for some time, the leading international oil company in Kurdistan, where we now operate 2 largest fields in terms of production with a 75% operated interest.

Those 2 fields, Tawke field, the flagship field; and Peshkabir, the field on the same license, which we have put in production since last year, together are currently producing about 120,000 barrels a day, which represents over -- just over one half of total production in Kurdistan by international oil companies. And we now represent about 1/3 of total exports of oil from Kurdistan.

So a fairly significant operation for us, and -- but also for Kurdistan. We expect through continued fast track development and drilling at the Peshkabir field that we will add another 15,000 barrels a day to Peshkabir production by year-end, which will bring us up to about 50,000 barrels a day of production at Peshkabir.

And this is record production in record time by any metric. We will now having made these -- taken these steps at Peshkabir to bring Peshkabir on production at these rates, we will now shift back to the Tawke field and step up development activities there concurrently with continued operations in terms of further drilling and development at Peshkabir.

We expect with the restarting of drilling at Tawke, and we’ll go into this a little bit both in terms of workovers of existing producing fields, wells, but also drilling of additional wells. Four wells planned in Tawke to be spud this year, 2 at the main Cretaceous producing reservoir, and 2 in the shallow Jeribe reservoir, which is also on production to reverse the natural field decline and hopefully move production, the production needle at Tawke as well.

We are also commencing operations, drilling operations at the Baeshiqa license in Kurdistan, and I’ll come back to that in a few slides as well. We have been receiving export payments for our oil from Kurdistan, the oil that is moved through Turkey to the Mediterranean and other markets, and a fairly reliable and predictable and regular matter now for a period approaching almost 3 years.

In the first 7 months of this year 2018 through July, we received $330 million net to DNO, which is 60% up on the same period last year, and much of that is importantly driven by higher world oil prices. With these reliable revenue receipts and our strong growth prospects across the portfolio and principally in Kurdistan, we have announced plans today for annual dividend distribution to shareholders of, on the order of $50 million equivalent, subject to shareholder approval and have called for an Extraordinary General Meeting of the shareholders in September to put this to a vote of the shareholders.

So we’re very pleased with that. I believe, this is the first time in 13 years or so that DNO has planned to make dividend distributions, and we’re pleased to be in a position to do that.

And again, it’s a reflection of our confidence in the growth prospects and the ability of the company to do so. I know in many of these quarterly and other meetings with shareholders, we’ve been asked about dividend distributions, and we’ve indicated that when the time is right, we would look at it and we feel, the board feels strongly now that this is, the time is right to take that next step, and we’re pleased to announce those plans to do so.

With respect to operational highlights, our first half operated production was just over 110,000 barrels a day of oil equivalent, of which Kurdistan represented 106,000 barrels a day and Oman 4,600 barrels of oil a day equivalent. And we express Oman production in barrels of oil equivalent, because there, in Oman, we produce both oil and gas.

Our company working interest production averaged 76,800 barrels of oil equivalent per day in the first half of the year, and our entitlement production, for those who follow that metric, averaged 29,000 barrels of oil a day equivalent. Our projected 2018 operational spend across the portfolio is $310 million for the 2018 projected, of which 75,000, 75% of that is in Kurdistan.

This number, of course, is based on certain assumptions about implementation of projects in 2018 or second half of the year. But we’ve had some savings this year from lower drilling costs for the oil program that we had planned for.

And there’ve been some projects that have been slightly lower prioritized and moved into 2019. But our activity levels have been what we had anticipated they would be and should be for this year.

The spend includes 13 wells in 2018, of which 6 at Peshkabir, 5 at Tawke and 2 at Baeshiqa, and these are wells both that have already been drilled or are being drilled now or are expected to be spud and commenced drilling by the end of the year. We have 3 drilling rigs active in Kurdistan, and we will add another 1 next month.

We are by far the most active driller in Kurdistan among the international oil companies. With respect to our financial highlights, while again Haakon will go into these numbers in more detail, our revenues in the first half of the year were $289 million, which is up from $158 million in the comparable period last year.

Kurdistan export payments represented $278 million in the first half of the year, up from $181 million in the first half of 2017. We exited the first half of the year with a cash balance of $584 million, which compares to $430 million at the exit point in the same period last year.

In addition to our cash on hand, we have another $288 million in marketable securities and treasury shares, which is a significant number, a difference compared to the mid-year 2017 figure of $58 million. Our outstanding bond debt remains, as previously announced, at $600 million.

Coming back now on our license-by-license discussion of our operations in Kurdistan. At Peshkabir, we more than doubled production to 35,000 barrels a day, following the startup of the Peshkabir-4 and Peshkabir-5 wells in July.

We have completed drilling of the next 2 wells, Peshkabir-6 and Peshkabir-7. These are completed this month, and they are about to undergo a rigless test production lasting several weeks after which they will be put on full production.

And I mentioned this is rigless because moving off the rig, moving the rigs off to do out the drilling on, in other locations. We have 2 more Peshkabir wells scheduled this year.

Peshkabir -8 will spud in about 10 days. One of those rigs is moving over to that location.

And Peshkabir-9 will spud in October. So a very, very ambitious and aggressive drilling program at Peshkabir and with very, very good results to date.

We, of course, are in process of trying to understand how, the performance of these wells and the knowledge we have gained about the field at Peshkabir, how that impacts our previously published reserve estimates for Peshkabir. Those numbers will go up.

By how much? We don’t know yet.

But obviously, as you drill these wells, and you will learn more information you derisk the field, and we shall have a better idea later this year. And as we do that work, the Peshkabir-6 well has been a key well.

We’ve drilled it deeper and it’s been a key well in terms of trying to obtain additional information, and we will know more about the -- both the main Cretaceous reserves in the Peshkabir field, but also the deeper Triassic reserves once we have completed the testing of this well. So we’ll have more information about reserves later this year.

As I indicated, we restarted development drilling at Tawke. The workovers to date, the activity to date at Tawke has stabilized Tawke production at about 85,000 barrels a day.

That’s moving up a little bit. And how much further Tawke production moves beyond the 85,000 barrels a day at current levels will depend, of course, on the success of the 4 wells that we have drilling.

But these fields as they mature, they go into a natural decline. And the challenge for operators is to try to slow down that decline, arrest it and hopefully to reverse it.

And we’re focused now, like a laser, on Tawke as well. One of the things we will be doing at Tawke is, the Tawke field itself produces no gas or very minimal gas, but there is gas production at Peshkabir.

There’s a gas cap and commingled gas at Peshkabir, and we have a plan in place to move that gas from Peshkabir over to Tawke, and inject it to Tawke as part of an enhanced oil recovery project, which will allow us to produce more from Tawke, if not immediately, in terms of current production, but in terms of ultimate recovery of the oil at Tawke, and that will be an important investment for us, an important project for us and the engineering work for that has been engaged, and that project will speed more activity on the Tawke enhanced oil recovery project in 2019, but really starting this year. At Baeshiqa, you may recall, for those you follow the company closely, that about 1 year ago, we announced that we were coming into the Baeshiqa block, which was a block that was operated at the time by ExxonMobil with partners at Turkish Energy Company and the Kurdistan Regional Government.

And we came into that block and picked up a 32% working interest in the block. So that’s 40% paying interest because the government is carried typically in these exploration projects.

But we joined the partners, and we have now put into place a drilling program. It’s again a fairly aggressive program in terms of timing.

But we have plans to drill 3 back-to-back wells at Baeshiqa. There are 2 very significant so far untested or undrilled structures on the Baeshiqa block and we hope to test both of those.

And while our fingers are crossed, we are hopeful that we will see positive results in our drilling activity. The first well, we expect to spud sometime in September and that will be a quicker well.

It will test the shallow Cretaceous reservoir at this location. And once that’s done, we will move to the 2 much deeper wells that will test multiple reservoir systems.

So that’s exciting, and again that introduces, into our portfolio in Kurdistan, a very significant exploration project. So again, we are producing more mature field at Tawke.

We have a new field that continues to be developed at Peshkabir, and we now have an exploration activity or exploration project that we’ve engaged in Kurdistan. So that’s again all very, very exciting.

We continue to build up our new focus area. As you know, we announced an entry into the North Sea, both on the UK side, but most importantly on the Norwegian side.

The Norwegian Sea, Barents Sea, the North Sea, I am always reminded that it is more than just the North Sea offshore in Norway. But you recall the acquisition of Origo and then the application for and assignment of a number of licenses through the APA rounds, but also a fairly active program of adding licenses, swapping licenses and building up a strong portfolio, which now totals 21 licenses offshore Norway plus 3 licenses offshore the United Kingdom.

We’ve also previously announced that we’ve taken a strategic shareholding in Faroe Petroleum. And today, we indicated and announced that given the size of the stake, which is 28.23%, it’s very substantial shareholding in the company and a significant investment for DNO.

We have requested the Faroe Petroleum Board to call an extraordinary general meeting of the company to consider our request for board seats and representation at the Faroe Petroleum. We continue to pursue additional Norwegian continental shelf assets, including producing assets.

So a strong commitment to this new focused area on part of the company. Meanwhile, we continue to rationalize and consolidate our portfolio elsewhere to divest noncore assets and to focus on Kurdistan and to focus on offshore Norway.

We completed the sale of our Tunisia assets to Panoro Energy as previously announced. We retained an interest through Panoro, in which we’ve now taken a shareholding in their -- in the Tunisia activity on our former assets.

And we’ve also announced that we have exited our block in Somaliland. And again, these were noncore assets to us, and we’re focusing principally now on Kurdistan and on offshore Norway.

With that, I turn to Haakon.

Okay. With that, so good morning, everyone.

I think at this half year presentation, as you heard now, we’re in the first part of the presentation. We are certainly pleased to say strong progress on many fronts for the company.

We have high production and we have strengthening oil prices and they contribute to increasing revenues and cash flow. And we have also been diversifying through successful new field development and through new exploration licenses.

And we have made significant financial investments in this year-to-date period. So quite a lot going on.

We are also pleased to note strong support in the bond market for our new bond loan that was completed in the second quarter. And we had the subsequent alignment of the terms for our other outstanding loan in June.

So I think through these developments, we have further enhanced our financial strength, and we enabled the company to step up investments to accelerate the growth as we move forward now. To comment further on this year-to-date progress, let’s start by looking at our key figures on this slide.

The growth in revenues year-to-date in Kurdistan compared to the same period last year comes partly from higher oil prices. We estimate the revenue effect of the oil prices of adding $30 million year-to-date compared to last year.

But of course, even more important are the effects of our receivable settlements agreement with KRG last year through the increased license interest and overall in the Tawke [PUC], contributing close to $75 million in increased revenues year-to-date compared to the same period last year. So the importance of this structural change in our Tawke PUC interest is thereby clearly confirmed through the increased entitlement production and revenue that you see year-to-date this year.

To that, we also have had more expenditures and we have $28 million higher cost oil year-to-date this year in Kurdistan. Our revenues from Oman amount to close to $12 million for the first half of this year.

That’s up $2 million from last year year-to-date. And we see that backed by higher revenues and fairly stable lifting costs, which are increasing netback cash flow that you see here of $191 million.

That’s for the first half of this year, and it’s up 73% from last year same period. So it’s quite a big development now, quite a big increase in cash flow as you see here.

These factors naturally also feel the stronger operating profits of $76 million year-to-date, up $50 million from last year same period. I move now to our profit and loss statement to look at this in more detail.

Let me show an 83% increase in year-to-date revenues compared to last year to the level of $289 million, backed by the factors that I have mentioned. At the same time, our year-to-date cost of goods sold have also increased by $83 million.

This is primarily due to a 86, $76 million increase in our year-to-date depreciation charges. This comes as a result of the increased value our proprietary, plant and equipment in Kurdistan and Tawke license, following again the receivable settlement with KRG last year.

Our year-to-date lifting costs, which are the other part of our cost of goods sold, are up by $7 million from last year. And this increase is mainly driven by increased operating expenses at our Peshkabir field.

It’s worth noting that on a per barrel basis, our costs remain low at $2.06 per barrel in the first 6 months of this year. We are stepping up exploration, and exploration expenses were, as you can see, coming up now year-to-date and also through the quarters this year.

They were high in the first quarter this year because we had a provision in our Tunisian company of $14 million booked as exploration, expense exploration. But we see now with our strategy of increasing in Norway that exploration activity and expenses are increasing in that business unit as well.

And in total, year-to-date expense exploration is up by $35 million from a low level year-to-date last year. It should be noted and bear in mind that in Norway, we get the tax refund, 78% tax refund on exploration cost.

So after tax, the net exploration cost in Norway is, of course, much, much lower. If you look at, again, the main elements going down on the profit and loss statement, we had low impairment charges in the first and second quarter of this year.

That contributes to the solid operating profit of $76 million, up threefold from last year. The year-to-date net finance consists mainly of bond loan interest and amortization, fee amortization plus we took a charge of $3.4 million this time relating, related to the bond loan transactions that we had in the second quarter.

The year-to-date positive tax figure of $10.6 million reflects the tax refund on exploration costs in Norway that I mentioned. So year-to-date, we have a net income increasing substantially to $61 million and that’s largely driven by the higher revenues that we have seen and achieved this year.

To touch on the bond market and what we did in the second quarter, we are pleased to receive solid support, as I said. We placed a new bond loan of $400 million at the end of May.

The way we did that, we had $200 million of the previous DNO01 bond loan rolled into the new loan. So the net increase in bond debt is $200 million for a new total of $600 million.

As we were at $400 million before, we go to $600 million outstanding bond debt now. The terms of the new bond loan offer greater flexibility for the company, and we were thereby pleased to receive strong bondholders support for amending the terms of the DNO01 bond loan when we had called the bondholder meeting at the end of June.

So we think that these transactions add further to DNO’s strong track record in the bond market. If you look at it, we’ve been now issuing 15 bond loans over the last 17 years, and all along we have been maintaining full compliance with the loan agreements and with our debt service obligations.

So it’s something to be proud of from our side. We like to discuss our operational spend, which consists of CapEx exploration and lifting costs.

And these 3 elements increased in the first half of this year to $124 million. And with the high activity levels and increasing investments now going into the second half of the year, we maintain, as you heard, the estimate for a total operational spend of $310 million for the year.

And as we’ve also seen to date, the main investments include drilling of the several new wells and development work at the Peshkabir and Tawke fields. But with increasing activity, I should mention one thing, by the way, on the CapEx side is that we, as Bijan mentioned, we have been able to drill more efficiently now and cheaper than forecast.

The estimate for the year is $11 million in savings on the drilling costs this year compared to the estimate. And there has been some changes in project plans on the facilities CapEx side.

So that’s kind of why we took our estimate a bit down on the CapEx for the year from $150 million in the previous quarters now to $125 million. So it’s partly because of more efficient drilling and cost savings.

So it’s a good development. With the higher exploration activity, we will see higher expenditures in that sector.

We have now, we’ll now soon start up exploration drilling in the new high potential Baeshiqa license. And we also have, as I said already, increasing exploration activity in Norway, wherein we see increased cost before the tax refund effect coming in after.

So it sort of stays a bit the same level as before, changing a bit between the 3 different components, but very much as we’ve seen in previous years. It’s sort of a back-ended effect, most of the investments take place in the second half of the year.

That’s why we see most of our activity in a typical pattern for our company in Kurdistan. Now, we like to look at our cash flows.

They are pretty good. And year-to-date operational cash flow is at solid level of $192 million.

If you look into the details, that’s pretty good, because the working capital changes this time are very minor compared to other years. So it’s a very sort of, in my mind, clean working, clean operational cash flow without any real working capital impact.

And net of working capital changes year-to-date cash flow from operations is up by $57 million or 43% compared to last year. So that’s pretty strong growth.

And then, other than the year-to-date CapEx, the main financial investments in the first half of the year has, obviously, been the purchase of shares in Faroe Petroleum. We spent $186 million on that investment to build the position of 28.2%.

That’s the position as a major shareholder in this company. The net year-to-date cash from financing of $213 million, that you’ll see in our cash flow.

They consist of the net new bond debt of $200 million, that’s the issue cost for doing the new transactions, and then plus drill down on the exploration refund facility in Norway of $24 million to get to the net effect of $213 million. But with a strong cash flow, again, and following these investments and funding transactions year-to-date, our cash position increased by another $154 million to $584 million at the end of the second quarter.

So in short, a solid cash flow and cash build year-to-date. And we think, absent any unexpected movements on the oil price, we are on track for further growth in our free cash flow after both CapEx and cost.

And here we have our balance sheet, if you want, or our capital structure. We have seen the significant cash build over the last many quarters.

And with that, we show a net debt position limited to $16 million versus our increased bond debt of $600 million. In my view, that’s clearly a strong position.

And as you heard, in addition, we have the value of our liquid financial assets increasing to $288 million at the end of Q2 following the share purchase in Faroe Petroleum. We are seeing that we have growth in our total asset values, our book values.

So the equity ratio declined from 62% to 55% from the year-end to end of the quarter, second quarter. But I think, as before, I can say, without a doubt, that we maintained a solid low leverage balance sheet as before.

So in summary, I think, through this half year report, we have absolutely delivered on the expectations of increasing revenues and cash flows so far this year. And backed now by our ongoing investment program and our solid financial position, we expect further growth for the company in the second half of the year.

And we also see a very positive long-term outlook for the company. So with that, I think I’m going to round off, and we will head into some Q&A.

Thank you.

So there is a question from the web asking what is the status of the Erbil license?

The Erbil license? Before I talk about the Erbil license, we had another comment.

It was a comment on the tans on the DNO faces. I see a lot of tans, tan faces in this room.

Much of these tan faces are fuel tanks, and some of these are field tans for those of my colleagues who spent summer, again, executing on our activities in the warm sun and sand of various locations, which we drill. But it’s good to see everyone here.

Thank you very much for coming. With respect to the Erbil block, we didn’t comment on that specifically because there wasn’t much to add to what we’ve previously said.

As you recall, the Erbil block is a block on which resides significant heavy oil in place, and this is a feature that is across that part of Kurdistan. No one has been able to crack this heavy oil resource base in Kurdistan.

A number of companies who are in the adjacent blocks tried and some of them are no longer in existence. It’s a difficult one, but the resource base is significant.

And DNO has been trying to unlock this, find a key to it anyway. We had previously announced that we’ve gone back into an earlier well drilled, a Hawler-1 well and drilled some multilaterals, and we’re trying to see how we could make the oil flow.

There’ve been some positive results and some undetermined results to date. We put that well on production.

We’ve been surprised that the oil that we’ve been producing flows naturally to surface and then remains in a form that can be transported by truck or by pipeline, and we’ve been exporting some small volumes in terms of daily test production from that well. We’ve now gone back in and reduced some workovers and some other, trying some other things with that well, but the oil does flow to surface and it moves.

Previously we thought we would need to dilute it with lighter crude, that doesn’t seem to be necessary now. But the production rates remain small.

And we’re going to keep at this to see again whether we can get these wells to produce at a point which would make a larger commercial development of the resource base possible. At these current world oil prices, something in excess of 1,000 barrels production a day should make these wells reasonably viable.

These are not Peshkabir type or Tawke type producing wells. The oil is deep.

Had it been shallower, it would have been possible to do more with less. But we’re still at it.

And my hope is that towards the end of the year, we’ll have more to say as we’ve done more with this well and tried some new techniques, different kinds of pumps and so on. But the Erbil block is still very much in our portfolio and it gets our attention.

And we will, again, come back as we get additional information that will provide more insights to you.

Anders Holte, Danske Bank. Just a question on the management board development in Faroe Petroleum.

If you can shed more light on the timing of that board meeting? And of course, anything you might be able to share with us in [indiscernible] with Faroe Petroleum?

On the timing, what we have requested is that the board of Faroe Petroleum call an Extraordinary General Meeting of the shareholders. That, I, Bjorn may have more of a sense as to the schedule.

Typically, boards have some discretion with respect to when they will call for EGMs, and then that triggers a certain period of time before the, all shareholders are informed and then an EGM is held. Bjorn can say more to that.

I can, what I can say is that with respect to the DNO Extraordinary General Meeting, at which the DNO board will recommend to shareholders the dividend distribution that we’ve outlined, we’re doing that in a warp speed. And our expectation is that, that EGM, DNO EGM here also will be held, I believe, on the 13th of September.

So there is some discretion on part of the company and board as to whether shorten that or to extend that. Perhaps, Bjorn can shed more light on the Faroe Petroleum protocols.

Yes. We expect that to takes place within the next seven weeks.