DNO ASA

Good morning. My name is Bijan Mossavar-Rahmani.

I'm the Executive Chairman DNO ASA. Welcome to our 2018 Interim Results Presentation, which will incorporate, of course, our fourth quarter 2018 financial and operating results as well as provide a peek or a quick look at our 2019 program as well.

I am joined this morning, as I am at all these presentations, by Bjorn Dale, our Managing Director; and Haakon Sandborg, our Chief Financial Officer, who will do the financial presentation part of this morning's event. We are also joined on the screen by the original founders of DNO and some of the early shareholders.

This is a photograph from the 2000 and I have go back in time, this is 1971, the August 1971, the first Annual General Meeting of DNO, and we've used this slide as a reminder of our roots. As you know, DNO has reentered Norway and the North Sea 2 years ago, and more recently with the Faroe acquisition that we'll talk about, but this is a reminder of DNO's roots and the fact that we are in an important sense coming home again.

Let me start with a quick overview of DNO for some who may not be as similar with the company. DNO is the leading international oil company in Kurdistan -- the Kurdistan region of Iraq where we have a 75% operating interest in the two largest producing fields in the region, which contribute about one-third of the total exports from Kurdistan to global markets.

We are now firmly established in Norway on the back of the Faroe Petroleum plc acquisition that's now been completed. And this combination of DNO and Faroe places DNO -- a new DNO among the top three listed European-independent oil and gas companies in terms of production and also reserves.

We have strong operational and financial metrics. Our operated production in January of this year, 2019, averaged 128,000 barrels per day.

And we have a full-year 2018 revenues of $829 million and a net profit of $354 million. More on these numbers later.

But we also are pleased to have a robust balance sheet with a low leverage. So overall, we're very pleased with our operating and our financial metrics going into 2019.

In terms of our operational highlights for 2018, our operated production averaged almost 118,000 barrels of oil equivalent per day that includes some gas production as we had last year in Oman, which was up from 113,500 barrels of oil equivalent a day in the previous year 2017. In 2018, Kurdistan represented 113,000 barrels of oil a day and Oman 4,500 barrels of oil equivalent per day.

So the substantial part of our production, of course, it came from and continues to come from Kurdistan. Our Company Working Interest production averaged 81,700 barrels of oil equivalent per day last year, which was up from nearly 74,000 barrels of oil equivalent per day in 2017.

We're active last year operationally in terms of our drilling programs. We drilled 12 wells across the two operated licenses in Kurdistan, including the first exploration well at the Baeshiqa license, which is the third license that we currently have in Kurdistan.

Our cumulative Peshkabir field production, our second largest producing field in Kurdistan, approached 10 million barrels cumulative in less than 18 months after first coming on stream. So for those of you who have being following the company, we've brought that discovery at Peshkabir on production in record time and have been growing production, and of course drawing down the reserves, producing reserves.

The larger, older field, the legacy field, Tawke, on the same license since inception has produced by the end of 2018, a total of 255 million barrels of oil. So it gives you a sense competitively of the two fields and where they are in terms of the field development.

Peshkabir, the younger field; Tawke, the more mature field. A quick look at our financial highlights for 2018.

As I indicated, our revenues were almost $830 million versus $347 million in 2017, so a large jump. We received export payments from Kurdistan totaling $628 million versus $380 million in 2017.

As of Q4 2018, our export revenue recognition changed from a cash basis to an accrual basis and more in line with our peer companies in Kurdistan and elsewhere. But this resulted in a one-off booking of an additional $183 million in our Q4 accounts.

So as you look at our accounts, you need to be, again, cognizant of this change in our accounting methodology for the Kurdistan exports. We exited the year with cash balances of almost $730 million versus $430 million at the end of 2017 plus another $281 million in treasury shares and marketable securities that was up from $58 million at the end of 2017.

So a large buildup of cash in 2018, and of course, a significant part of that was deployed and is being deployed for the acquisition of Faroe Petroleum, and Haakon will speak more to those points. 2018 was also an important year because that's the year we initiated dividend payments to our shareholders.

And we announced this morning that the second tranche of the dividend payments will now take place towards the end of March of this year. In Kurdistan, 2018 was a year of stabilization in a political sense and economic sense, but also a ramp-up in oil sector activity, not just by DNO, but by other companies.

Conditions -- security conditions, financial conditions, oil search conditions, again all continued to improve during the course of the year. Kurdistan exports of oil, the blend that combines our oil and oil produced by other operators, both the international companies, but also Kurdistan entities, have now been sold and marketed in the Mediterranean for about five years and in a sense of these have now been established, the Kurdistan blend is an established blend in the market.

It's being de-risked. And of course, all this is very helpful in terms of our ability to move the crude into all the markets and receive reliable and regular payments for those exports.

This again does not only bolster our position financially, operationally and that of the other companies in Kurdistan, but we're now seeing after many years, new companies starting to look at Kurdistan again and looking at Kurdistan opportunities, and new entrants coming in, all of which we welcome because it further establishes Kurdistan as a oil-producing region and brings with it service companies and investor interest and additional opportunities for us to grow our business as well in partnership with other companies. We are now drilling actively in Kurdistan with four rigs.

We are mobilizing a fifth rig to support the largest drilling campaign in Kurdistan's history, which will include up to 20 wells drilled or operated by DNO on our own on account on behalf of joint ventures in which we have the operatorship. And these are both exploration wells and production wells.

So very, very active drilling program in Kurdistan by DNO and DNO's partners in 2019. As for DNO itself, we are very much committed to Kurdistan, and we are committed to out-drill, out-produce and outperform all other international oil companies in Kurdistan combined.

A bit more detail about our operations in Kurdistan at the Peshkabir field. We produced in January an average of 54,000 barrels of oil a day from 6 producing wells at this field.

Peshkabir has generated more than $750 million in gross revenues or four times the spend to-date since the startup of field operations, of which more than $200 million is net to DNO. So a very impressive operation in terms of the speed of which it was brought to market, the cost at which it was brought to production and the revenue generation for DNO, but also for the Kurdistan regional government and also our partner in the block, in the license.

We continue to drill the Peshkabir. The latest well drilled and completed, the Peshkabir-9 well will be placed on production later this month.

And following this, we move onto drill a 10th well at Peshkabir, Peshkabir-10, and we expect to start drilling that well, the rig is now on location, next week. We will start drilling as part of our field drilling program for 2019, which includes four wells at Peshkabir.

So we will see a ramp-up in Peshkabir production once the P-9 well is tested and brought on production. At Tawke, last month our average production was 74,000 barrels a day.

We have completed 3 wells in the last quarter of 2018 and one of those wells, the Tawke-52 Cretaceous well will come on stream shortly. For those of you who follow the company, you'll recall that we produce on two reservoirs at Tawke: one a shallower one, and one a deeper one.

The deeper one, the traditional and the larger contribution comes from the Cretaceous producing zone or reservoir. And so we will add another one of the Cretaceous wells shortly.

And that will, of course, impact our numbers in the next few months at Tawke. We do have an active drilling program at Tawke.

Tawke production has tailed off as these mature fields -- as happens at these mature fields. And to try to maintain production and stabilize it and perhaps add a bit more to our net production and to our reserves, we have a very active drilling program.

We will be drilling up to 14 new wells at Tawke in 2019, and again, that includes the Cretaceous wells, but also the shallower Jeribe wells. On -- and we also want to do more exploration at Tawke.

There are deeper horizons to be tested at Tawke. And now with the regular revenue generation with strong performance, we have the financial wherewithal to do more at the Tawke, and we're going to go explore a bit more at Tawke by drilling a deeper Tawke well later this year to see what reserves may be present and commercially producible from deeper horizons on the -- in Tawke -- part of the Tawke license.

DNO again has a 75% operated interest in the Tawke license, including the Tawke field and the Peshkabir field, together with our partner London-listed Genel Energy, which has the balance of 25% working interest in the license. At Baeshiqa, the Baeshiqa license contains 2 large structures with multiple reservoir targets.

We drilled the first well, the Baeshiqa-1 well last year to a depth of just shy of 1,500 meters, targeting the Cretaceous reservoir at this location. We had hoped to test the well at the end of last year, but because of extensive rains in the region and an unusual winter, not just in Kurdistan, but elsewhere in the Middle East and Europe, this had an impact at the sites.

There was a lot of water coming in, and we had to do some remedial work at the site, and this is delayed us, but we hope to be able to go back down now into the well and begin testing later this month. So we will hopefully have more to report on the Baeshiqa-1 well test results in the next couple months.

Once -- and we will test and also commence drilling of a deeper Baeshiqa well targeting the deeper Jurassic and Triassic reservoir targets hopefully also later in February. That well will take much longer to drill and to test, but this is an important well for DNO in Kurdistan because it is an exploration well, and we want to be back again in the business of exploring in Kurdistan and not just developing and producing.

We're looking for the next Peshkabir or the next Tawke. But exploration is something we do well in Kurdistan, and we are back in that business as well with this block.

We are also planning a third well at the Baeshiqa license that will spud later towards the latter part of 2019 and that also will test the deeper Jurassic and Triassic reservoirs. If we are successful at producing that shallower Cretaceous reservoir where in Baeshiqa, and we'll know that after we've tested the Baeshiqa-1 well, then perhaps we will consider doing a fast track Cretaceous development at Baeshiqa even as we are exploring the deeper horizons elsewhere on the block.

At Baeshiqa, DNO again is the operator, and we have a 32% interest in that license. Our partner -- two partners are ExxonMobil, which have also 32% interest in the license; the Turkish Energy Company has 16%; and the Kurdistan Regional Government has the remaining 20% interest in that license.

A few words about our acquisition of Faroe. We have now, as of this week acquired more than 96% of the Faroe shares.

We have initiated a compulsory acquisition of the remaining shares of Faroe. For those of you we followed this rather noisy transaction, our final cash offer was 160p per Faroe share, which valued the company at about $813 million at the prevailing exchange rate, although the overall acquisition cost to DNO was only 150.5p per share after factoring in the nearly 30% of the shares that we'd acquired last year at a much lower price.

So our average acquisition cost was almost 151p per share. The integration of the two companies, Faroe and DNO, the organization is well underway.

Once this is -- we companies come together, we will have a combined team of almost 1,100 colleagues spread out, again, across offices in Europe and the Middle East in Oslo, Stavanger, Erbil, Dubai, London, and Aberdeen, and some small offices as well. Our expectation is that we will delist Faroe from its AIM listing in London next week by February -- or on February 19th.

And after that and with the completion of the final acquisition of the remaining shares, we will proceed with the integration of the -- not the organizations, but the -- in a corporate sense this spring. We are very excited that about the Faroe transaction.

This transforms DNO -- the new DNO into a more diversified company with a strong second leg in the North Sea. And again, I hasten to add as I've said before in this presentation, this is not a pivot away from Kurdistan, but rather it's a pivot to Norway.

So our Kurdistan commitment, our Kurdistan operations continue full speed, but we want to replicate some of those successes and deploy more people, more time, more funds to exploration, production and development opportunities in the North Sea and most importantly, here in Norway. And I expect our original founders and shareholders that showed earlier would be pleased to see that, as I know a lot of our shareholders here in Norway and elsewhere have been quite pleased to see this transformation of the company.

The Faroe acquisition, of course, is complemented by organic growth in Norway that DNO initiative a couple of years ago, with acquisition of, then of Origo exploration and now DNO Norge, so we are already active in exploration in Norway. In January of this year, DNO was awarded participation in 18 exploration licenses, of which five are operatorships under Norway's awards in predefined areas, the APA license round.

We're very pleased to have picked up as many licenses, including operatorship in Norway. This adds to an existing portfolio of 22 licenses offshore Norway and the UK, of which 21 are on the Norwegian continental shelf and one on the U.K.

continental shelf. And again these are the DNO parts of the North Sea portfolio.

This is complemented by Faroe's portfolio, which includes 44 Norway licenses and 12 UK licenses, plus eight additional Norway licenses awarded under the 2018 APA round to Faroe. Including Faroe's drilling program for 2019, DNO, the combined company expects would be to drill up to 10 wells in Norway this year.

So a very active drilling program in Norway as well in 2019 to complement our active program in Kurdistan. And again, this map shows the licenses held by DNO and by Faroe.

As I have indicated, that Faroe acquisition bolsters DNO's portfolio, but also our operational capabilities in Norway. We pick up attractive exploration, development and production projects and a very experienced team with extensive knowledge of the North Sea.

We're very pleased by that. This leapfrogs DNO into the ranks of the 5 top companies in Norway in terms of licenses held.

Now we will hold a combined entity in the new DNO 90 licenses offshore Norway, of which 22 are operated. So a very impressive acceleration of our involvement and participation in Norway.

This provides a platform for pursuit of other transactions, standalone transactions, bolt-on transactions, including producing assets. So we are actively in a market looking for opportunities to grow not just organically, but by bolt-on acquisitions, combinations.

With the greater financial capacity of the combined entities, we will take -- look to take larger stakes in permits and we will be in a position to ramp up and accelerate some of the development projects that we've already -- that Faroe has been involved in. And other projects that come along, we will -- we want to speed up our exploration development production program in Norway, and we're setting pretty ambitious but achievable targets, which we will talk about in the coming weeks and coming months.

The combined entity also opens up new financing opportunities for the combined entity, and is expected to lower the weighted average cost of capital not only to DNO, but in terms of the Faroe assets as well. So the combined entity will be in a stronger position to access better financing to support our growth here in Norway and the North Sea and elsewhere as well.

A quick peek at our 2019 program combining all the wells that we have currently in our drilling program. We expect to drill or participate in drilling of up to 30 wells across our portfolio in Kurdistan and Norway.

And again, these include exploration wells, development wells and production wells and this is the highest number of wells in the company's 47-year history. Our planned 2019 capital expenditure program, excluding the Faroe portfolio, is on the order of $220 million, and that's up from $138 million in 2018.

We are fully funded in Kurdistan and Norway. I mentioned we are pursuing other bolt-on acquisitions and other standalone acquisitions to complement this exploration, this very active exploration and development program.

And we will be releasing pro forma financials and also 2019 investment programs and budgets for the combined companies in February and March to provide more insight into our plans moving forward and also metrics for the combined new entity.

Okay. Good morning, everyone.

To get started, I would to also like to remind you that we, last year, at our results presentation in February. We were celebrating our reentry into Norway at that time through the acquisition of Faroe -- sorry, of Origo exploration in 2017.

I think now a year later, we have, through the acquisition of Faroe Petroleum, delivered on our strategy of also acquiring significant production to further strengthen our position in Norway. And as you heard, with this important transaction, we are clearly becoming a larger and much more diversified company.

We also continue to develop and grow our successful operations in Kurdistan. And you have heard through new field development, high production and we also look forward now to engage further in exploration upside in this region.

And on this basis and with some help from higher oil prices, we show strong growth in revenues and financial results for 2018. And I think all in all, it's been quite a remarkable year for us in DNO.

We have mentioned that from Q4 2018, we have changed our revenue recognition criteria in Kurdistan from a previous cash basis now to an accrual basis. And this follows more than three years of regular payments for our oil exports from this region.

And again, with this change, we have recognized an additional $183 million for oil deliveries in Q4. But important, net of this one-off effect in Q4, we still doubled our revenues last year to a level of $646 million.

This revenue increase is partly driven by the higher oil prices I mentioned that added, all else equal, an estimated $187 million given to our sales. But also, as we'd like to point out, the now higher increased entitlements that we have in the Tawke license are also important.

They come as you might remember from the receivables settlement agreement in mid-year 2017 and these entitlements contributed additional revenue of $140 million in 2018. Our cash operational costs or lifting costs remain both stable and low.

On an annual basis and with the increased revenues, we thereby show a much stronger netback cash flow in 2018 that more than doubled to $489 million net of the revenue accounting affect in Q4. In terms of our operating profit, it is hard to beat 2017, where we have other income of $556 million recognized from the receivable settlements agreement that year.

But still we are showing a very solid operating profit of $377 million for 2018. So that's good.

Let's now look at the Q4 results in more detail. On this slide, you see the Q4 numbers to the left and the full year numbers to the right on this slide.

Again, net of the one off revenue effects, our Q4 revenues are up 9% from the third quarter. And that was mainly due to increased export volumes.

Our cost of goods sold are up by $13 million in Q4 from Q3. This is primarily due to an increase in lifting costs that can from higher activity at the Peshkabir field in Q4.

There were also some accrual adjustments that we took in the third quarter. So it's not really comparing equal here, but there is an increase that we have recorded from Q3.

Q4 exploration expenses are also up and that's due mostly to data acquisition in Norway, while what we call admin costs are up due to transactions costs for the Faroe acquisition process in Q4. So this gives us an operating profit of $230 million for the quarter and after finance and with the tax refunds we get in Norway, we show a net profit of $230.3 million in Q4.

Moving to the full year numbers. To the right on this slide, you see here at the increase in revenues that I have already discussed.

The increase in cost of goods sold that you see here is all due to higher noncash DD&A. That's coming as a result of the increased book value, our property, plant and equipment in the Tawke license that came after the receivable settlement deal in 2017.

Like to point out that lifting costs on the other hand are down $6 million to $90 million in 2018. You see an increase in our exploration expenses as 2018 reflects a full year of exploration program in Norway versus only a half year in 2017 at the time we bought Origo exploration.

You see low impairments contributing to the strong operating profit for last year, while net finance is up on higher interest expense falling from our a new bond loan in Q2 2018. We have increasing or higher tax revenue from tax income from our NCS activities.

And finally you see net profit coming in at a strong level of $354.3 million for the full-year. We like to look at our, what we call operational spend consisting of CapEx, exploration and lifting costs.

And these increased 13% to $293 million last year. This spend included CapEx at $138 million that was mainly for drilling and development at the two main fields, Tawke and Peshkabir in Kurdistan.

For 2019, we are planning a further significant step up in the operational spend to the level of $420 million, which includes increased CapEx at $220 million. As you can what Bjorn presented, the CapEx program covers an extensive drilling campaign at the Tawke and Peshkabir fields.

But in addition, we will have the Peshkabir gas project and other development CapEx in our investment program for this year. I would like to say bear in mind, though, that the production drilling and development in the Tawke license, the investments here are cost recoverable under our production sharing contract such that we will recover this CapEx quickly as increased cost oil, so it's important to bear in mind.

Exploration is included at also a high level of $110 million in our forecast for this year, mainly for DNO and Origo at $75 million, and that includes participation in five exploration wells. A rough estimate of tax refunds in Norway for this program would be projected at $45 million that will then thereby reducing net after tax spend on this program.

The exploration program also includes testing of the first well in Cretaceous, which we hope to get started on quite soon and also drilling of the two deeper wells in the Baeshiqa license in Kurdistan. This is a pretty big investment program for 2019 for DNO, and I'd like to note that it includes exciting exploration projects both in Norway and in Kurdistan.

We -- the spend estimates that we show here are not including any spending in our new Faroe portfolio, but we will revert to that quite soon as the integration process moves forward and we sort of firm up these numbers that we can present to you a bit later. Now here again is what I think you should really focus on for our Kurdistan business as our operational cash flow increased further by 40% in 2018 to a very solid level of $472.1 million.

2017 by itself was also a year with strong cash flow growth. So we are back to delivering increasing cash generation and high free cash flow from our Kurdistan operations.

As I have mentioned, this cash flow increase is driven mainly by higher revenues, but also combined with stable cash operational costs. The investment activities that you see here include the CapEx I mentioned at $138 million, while financial investments were high at $201 million included in this red amount.

And this was as we acquired shares in Faroe Petroleum for $185 million back in April in last year, and we acquired for additional $12 million in December last year. This brought us to a holding in Faroe of 29.9% at year-end.

The tax and finance here consists mainly of our new bond loan in Q2 last year and summary payments under our exploration loan facility. When we combine these cash flow items, we show an increase in cash of $298.9 million to a high level of $729 million at year-end.

So let me -- based on this, we have a strong cash flow, and have a cash build over the last years. And thereby, at the year end, we have built a very solid capital structure with net cash versus debt, high financial investments and as you can see here, strong equity ratio at 61%.

Now of course, we have made good use of our cash balances in January and February this year by buying Faroe shares for an additional $559 million to get to the current shareholding above 96%. Following that this strategic investment, we still maintain a solid cash position in DNO currently at around $180 million.

We have, in January, also established a new 12-month bank credit facility for $200 million. And that -- the purpose there is to secure that we have ample short-term liquidity at all times.

Through the free cash flow from Kurdistan after all CapEx and expenses we also expect to, again, steadily increase our cash position through 2019 as we have done in the past. Looking at our, a new Faroe portfolio, there is a significant cash balance also in this company and there is also a substantial reserve-based lending facility that we wish to maintain.

Between its cash, its cash flow and the RBO, the Faroe portfolio is in our fully funded for this year. We will rework an information memorandum on the trend through Faroe acquisition at the end of February, at the end of this month and also provide additional updates on our combined operations in Norway over the coming months, as Bijan mentioned.

But to sum up, our focus is now on securing a positive and effective integration of the Faroe and DNO organizations and go forward to build value in Norway both through exploration and production. In Kurdistan we will continue to build on our proven business model through the infield drilling campaign and also through drilling key exploration prospects in 2019.

So in short, we have an exciting year ahead of us and to me, I think it looks good, really good. So thank you for now and we will open up for questions.

Yes, it's Anders Holte from Kepler Cheuvreux. First of all congrats on the well-executed Faroe section.

I'm always pleased to hear that Haakon has a positive outlook for the combined entities. Now my question is quite quick, and it's related to the Baeshiqa update that you penciled in on Bijan.

Now you mentioned a potential fast-track development, did that get that right? And that -- will that mean that you have seen the oil reserves that you had initially at the back of your mind when you first started the well?

And can you give a bit more color on actual outlook of total size of the Baeshiqa prospects?

Anders, thank you. No, I was also struck, you're right; Haakon's usually a very reserved person.

For him to say it's good, really good, that's quite a lot of excitement. On Baeshiqa, and we also have some questions that have been coming in online about Baeshiqa and an explanation not just on what we are doing, but what this weather-related issues have been.

So let me start with that first part of it. Again weather patterns have been unusual this year in a lot of places, including in Kurdistan where there's been considerable amount of rainfall.

When we came in and took over operatorship of the Baeshiqa license, there was an existing drilling pad that hadn't been -- had been built earlier, but had not been used. We made some civil works at the site and brought on the rig and started to drill and everything went fine until the rain started to come.

And this created washout and we had to then pause to repair, do civil works. And as you know, the area of Baeshiqa in Kurdistan is in the middle of nowhere in an operational sense, near front line -- the old front line at Mosul.

It's not Oklahoma, and to bring in equipment and people and service companies and gravel is challenging, it's time consuming. It involves making security arrangements; it involves all sorts of support and infrastructure services just to bring people and equipment and to deal with this.

And that's hard to do when the rains are continuing to come. So it's taken us much longer and I've been frustrated.

When you drill a well, you want to go and test it very quickly. So it's been frustrating for all of us as well, but it's been -- these things happen and you deal with them as a robustly and as quickly as you can.

But again the area is challenging from a security point of view, from lack of roads, the washout washes roads out, you've got to then bring in and fix the roads. So it's been -- it's taken more time than we would have liked.

The rains have now subsided. We have moved the rig over; I think we moved over not many meters away to begin the drilling of the main Baeshiqa well.

As I indicated, the main targets at Baeshiqa are the Triassic and the Jurassic. We knew there was a likelihood of a Cretaceous shallower horizon on this location.

We know the Cretaceous well from Tawke and Peshkabir, so we wanted to test the Cretaceous at this location as well, with the idea that if the Cretaceous produces, we can put these shallower 1,500 meter wells on production quickly. Our partners ExxonMobil and Turkish Energy Company have the deep pockets and DNO's aren't as deep, although they've gotten deeper this past year.

Thank you, Haakon. But our model has been drill, if it's -- you find oil, put on production, track it, generate revenue and then drill -- use those funds to the next well, the next well and bring in test packages and accelerate the development.

And this is not just in our interest as a company; it's the interest of Kurdistan to see more revenues. So the thought was -- and the design of the deeper wells would not have permitted us to test the Cretaceous.

So we agreed with our partners to come in and drill a shallower test well on the Cretaceous and then proceed with drilling of the second well. The problem we've also had with this is that typically, we will drill these wells if they are -- if they show oil.

We will typically go in and produce from the zones and -- but also acidize some of these zones to -- which we've done typically at Tawke and Peshkabir. Because the second well is so closely located to the first well, we didn't want to acidize the -- that zones of the Cretaceous that could affect the drilling of the other wells.

So the idea was start the second well, case the Cretaceous, then come back and test the Cretaceous by acidizing in the first well. So a bit of a complicated -- not really complicated, but we have synchronized the drilling.

And then when the rains start to come and affects the pad location and roads, and it's complicated things from a timing point of view. There was a question that came on from the web that is this resulting in a lot of costs that you're incurring?

Well, no. The standby costs aren't that great, the remedial costs.

It's not a cost issue as much as a logistical issue because of the lack of infrastructure in the area. So now the rains are -- have subsided, the rig is located on the second well location nearby and the plan is to hopefully go in and start testing, first without acidizing, but then later with acidizing the Cretaceous in the first well and as we drill the second well.

And once the second well is down to the appropriate depth and we've cased the Cretaceous, to come in and do whatever additional acidizing we need to do. So we're back now on the program.

It hasn't been a question of a lot of standby costs, I mean some amounts, but not significant. The biggest cost is to our own -- we hope to find out what we have there sooner rather than later.

So but I think we're now back on track. So we're pleased to proceed with Baeshiqa now.

Karl Schjøtt-Pedersen, ABG Sundal Collier. Two questions, if I may.

First of all, for the production guidance for 2019 and maybe also looking further ahead, given your high drilling activity in Kurdistan, how would production look like in -- and what would it look like in 2019, 2020? And the second question, how do you envision your capital structure going ahead given all the various tranches of debt both in DNO and also in Faroe?

Let me respond to the production one, then I'll ask Haakon to respond to the second part of the question. It's hard to give guidance, in part because some of these wells could be much more prolific than we expect them, some of them less so.

But I would just suggest that leaving Baeshiqa aside, that if on the Tawke license we can exit the year at the same rate that we entered it, roughly 125,000 barrels a day combined with the two wells, we'd be very, very pleased. But we'll know as we bring on production some of these new wells and see what rates they can produce it.

But clearly Tawke, as we've said repeatedly the last several years, this is known to everyone, that Tawke is a mature field. It's defined.

These things -- these fields define the 10%, 15%, 20% a year. The challenge is they keep drilling.

There are still opportunities for in-field drilling and step-out drilling that -- which is why we have such an extensive program to try to maintain Tawke as close to where it is now as is possible, but also now moving to exploring additional opportunities at Tawke. Peshkabir is producing over 50,000 barrels a day.

We're bringing more wells on production there. We'll know a bit more about the Peshkabir decline rate that will happen at some time, too.

But I think if we can keep the combined license production at about 125,000 barrels a day, I think we will have -- we will be pleased with that. There'll be bumps along the way, not just because we're drilling and as we bring additional wells on production and we -- numbers go up a bit as other wells decline, they go down a bit.

But of course, because our exports are through a single pipeline system to Turkey, as you know, that -- those pipelines from time to time are shut in for -- our throughput is reduced to deal with repairs and pump stations and so on. So some of our numbers will fluctuate based on export availability.

Typically, pipeline shutting in doesn't affect a company's production levels, especially at these sort of rates we produce. But it's our only pipeline out and our production rates are so high that even though we have storage at the field, we've rented storage capacity, it's -- you fill up, you fill storage very quickly at 120,000, 130,000 barrels a day.

There isn't enough storage to put a week, two weeks, three weeks production into storage and release later. So we're in a sense also -- we'll see some improvements as the pipeline shuts in.

But when pipelines shut in, you don't lose production, you just defer it. So hopefully, we'll catch up.

But I think that's a long answer to an important question.

And your second question was on capital structure for the combined entity?

Yes, both the capital structure and if you have any capital structure targets for in terms of net debt-to-EBITDA or any other targets to look for?

Yes, that's a good question. Of course, DNO itself has been very active in the bond market for many years.

We've done, I think 15 in the bond issue since the last -- over the 17 years. I always like to add to that statement that we have been in perfect debt service and compliance for all those good bond loans.

So we have a good track record in that market. To me, that is going to be a major part of our long-term debt funding there still in the bond market, it's well-suited to the kind of business we do.

So we'll be active in that. It's going to be a major part of the long-term debt.

Of course, now with our re-entry into Norway, we want to do more on the banking side, on the bank financing side. And the one example is this initial $200 million short-term liquidity facility or securing our liquidity that we have now established.

There is -- I can just cover that on the same time, there's a question on the web on that facility, what is it. And it is for 12 months.

It is secured by some of the shares in Faroe and it's drawable in several tranches. And it's just basically to sort of firm-up the position that we always are covered for the next months while we are building up our cash again.

So we will be more on the banking side, and we like to be now more active in reserve-based lending. We will build a portfolio of producing assets that we can borrow against that we have bought that through the Faroe acquisition.

And we want to buy more of these producing assets. And reserve-based lending is attractive in terms of flexibility on draw-downs and that can sort of be on the standby basis available when you need it.

But it comes with added maintenance and work, of course. So it's going to be a balance with the longer-term bond loans.

We also like to be very liquid on the cash side. We have had high cash balances for many years, and we will continue to be keeping that.

So we're taking a careful approach to this. You asked about what sort of ratios do we use?

Our bond loan agreement is based on a 30% equity ratio to total assets or total balance sheet. And that is basically what we use.

You could turn that around and sort of do a debt ratio, but that's what we follow to be sure we are well above the 30%. Currently or at the year end, we were at 61%.

So a combination now of the bond side, new bank debt, good cash recovery, that's what going to be our position.

There was a question about the Peshkabir to Tawke gas injection program on the web, let me say a few words about that. We had announced earlier that we have plans to take Peshkabir gas, and Peshkabir field produces gas, I think currently at just over 20 million cubic feet of gas a day from the existing wells that's being flared.

We don't want to flare gas. And we have a program -- investment program at a cost of just under $100 million to use some of the existing pipelines that we have to move Peshkabir gas to Tawke and reinject into the Tawke field to increase recovery of oil from Tawke.

And this program is underway. And I think by the end of 2019, we should be well along.

[Indiscernible] is that about -- fair statement. This will help us recover more oil from Tawke.

How much more oil, we will see. But even if it's a few percentage points on top of the recurring recovery rate, that'll be very, very good use of funds and use of the gas.

We can do the math very easily, if we produce another 10 million barrels of oil from Tawke at $50 a barrel, it's $500 million in gross revenue from that activity and compared to under $100 million investment and capturing and reusing gas rather than flaring it, that makes a lot of sense. That number, of course, doesn't all go to DNO.

That -- a majority of that goes to the government through the fiscal system, but it'll still be a very good use of funds. And that program, again, is underway.

One question from me. Tom Erik Kristiansen from Pareto.

On Peshkabir, which obviously has been a huge success in 2018, can you add some color on how you see reserves and resources developing on that asset drilled last year and when you can do more on the total resource figure and the potential of that field, which seems to be growing a lot more than expected?

Good. I just -- a quick reminder, Peshkabir was a great success; well, so was Tawke.

So this has a history of bringing these fields on quick production, and so we're very pleased with that, and that's a record we want to keep replicating in Kurdistan, certainly, perhaps elsewhere. We will be issuing probably in the next couple weeks or so our annual statement of reserves and resources.

I don't want to take the fun out of getting the final numbers out and reviewed. But with respect to Peshkabir, we've said before, as have others that the original Peshkabir numbers we published last year were very, very conservative.

They're based on very, very early drilling, and there's an expectation that the Peshkabir numbers would go up. By how much, again, we will know when the reserve numbers are released.

But clearly, we were conservative on Peshkabir and showed more -- less in the way of proven reserves, the 1P reserves and more in terms of the less, at that point, identifiable or measurable numbers in the 2P, 3P, 2C categories. But by how much, again we will -- next couple weeks, I hope we will be in position to release those numbers.

And second question for me on dividends. Given the cash flow you have again right now also with the second leg in Norway as well, have you made any thoughts yet to the potential to increase those in 2019 and potentially 2020 as production increases from that resource base as well?

What we had said in response to this question over the many, many years that I've been sitting up here is when we give dividends; our response always was that as an exploration company, the best use of much of our funds is to keep trading value through drilling. And we also say that when the time is right and we have what we feel is a strong position to make dividend payments, we would do so.

We felt we were in this position last year, and we initiated the dividend program. The shareholders that approved the dividend payment for 2018 and now for first half of this year, so 1 payment.

So the authorization was for the 1 payment that we now will be completing in March, rather than an ongoing. So we have to go back to shareholders again.

You can assume that we wouldn't have done the dividends on a onetime basis, that we felt at the company was in a position that we could sustain a dividend program, but on what basis at what amounts, I don't know. I'd still be, as a shareholder, I'd still feel that it's good to have dividends, but to be able to grow the numbers, we would have to be in a position that we feel as a company, as -- the board will have to be comfortable making the recommendation to shareholders.

Shareholders will have to be comfortable approving it. So we'll see how things go.

But my hope and expectation would be that we would continue a dividend program over many years to come. But are we going to scale it up, I don't -- I think we're not in a position to make any statement about that now or any commitment to that now.

We'd have to, I think make a pretty large discovery somewhere and be sort of the next level in terms of size and financial -- certainly financial strength to become a dividend machine. We're an exploration and production mentioned, not a dividend machine.

So we have to balance those.

Trond Omdal, Fearnley Securities. Haakon, you mentioning that you were planning five wells in Norway, excluding the Faroe.

Can you say anything about the timing, prospect size, ownership share or will you publish that later? Second question related to Benenan there's very brief that you -- in the report that you're ongoing testing, further activity will have to wait result from Baeshiqa and the Tawke license.

And finally, you say that the Kurdistan blend is now firmly operated in the market. The discount you're guiding you've given, will that change also with the change in blend between Tawke and Peshkabir?

Okay. To start on the Norwegian wells, I checked with our exploration head sitting just behind you, Nicholas, would it be okay to mention the wells, we are going to present those in greater detail when we have the combined budget between DNO and Faroe Norway.

We will present that in more detail quite soon. But the wells that we are planning now are doing is [indiscernible] well and we have the [indiscernible] Gabriel and Gladzheim are the wells that are included in those five wells.

I'm not sure it's going to be appropriate for me to give any pre-drill estimates and all that, leave that to the operators. We are a participant.

So we will come back and give you what detail we can and then also the wells that our new Faroe portfolio is planning in Norway for this year. So with that, at least we can give you those names in more detail.

But these are the wells we are going to work on this year for DNO Norge's portfolio. So let's get back to you a little bit more.

The other ones?

Further plans for that, are that awaiting results of Baeshiqa?

We've been doing work on the Erbil block. We have gone back into a -- that's not been a high priority for us as we've been dealing with some of the other licenses in Kurdistan.

We have been producing out of one well very small amounts of oil. As you know, the Erbil block has substantial in place resources of heavier oil, deep heavier oil.

That's very prevalent in that part of Kurdistan. No one has unlocked the technical/commercial challenge of producing deep heavy oil in that area.

We've been at it for some time. We're not there yet, but this well is producing a few hundred barrels on and off a day.

We are doing different things in terms of trying to pump it and using a lighter oil as a diluent to do it. So we're working at it.

But we aren't in a position yet to -- we haven't unlocked the -- while we're producing it and it flows to surface, we're not there yet. And that -- this heavy oil will never produce at the sort of rates that the Cretaceous produces at Tawke and Peshkabir.

The question is can you drill these deeper wells with the expectation of producing 500 barrels or 1,000 barrels a day and have it be a commercial venture. We don't know that yet.

But in our case because we are producing from these other fields much easier well, oil, it's a question is where do you deploy your capital. We don't have unlimited capital and where is the best uses of capital.

So how do you make even a technical success a commercial success in the full. For capital, we don't have an answer, but we're on the license and we're devoting some time and effort and money to it.

The question on the Kurdistan blend, you said the question was that we're saying it's now well established. Yes, we have experts working for DNO following the trade in this blend and who buys it, where is it going, which shipments are made, et cetera, so we have a good track on that.

And we see that it's bought by many refineries along the Mediterranean coast, and it sort of spreads up also into Eastern Europe. And we've seen shipments going all the way through Western Europe, all the way to Sweden.

So it's sort of more of an established and good quality that is in good demand from several clients, several refineries across Mediterranean and Europe.

But your discount guiding, you don't see the discount that has been, is that -- will that stay in the same range or do you see that changing?

I -- there is a sort of a set discussion with our host government, the KRG on how the discount is set for our own shipments. It goes on the individual operators' deliveries in terms of technical qualities on the oil.

And ours is based, the discount is based on that formula in part and also on a tariff for the pipeline cost of the pipeline tariffs through Turkey. Whether we will see any real change on that, it's currently around between $12 and $13 discount, including the tariffs.

I'm not quite sure. I would expect personally it's going to stay in that range.

Bijan, any news on that?

Couple of responses. First, the de-risking is not just about refineries liking this crude and planning to their own refining processes around the use of this crude, which has taken place, but this crude has also been de-risked in sort of political legal sense.

If you recall when these exports were started, there were some refineries and traders who were reluctant to take it, the discounts they demanded were much larger to take on the legal and sort of the general political risk, as they saw it or the noise, as they saw it. That's now, of course, not as much of an issue today as it was in the early years.

With respect to the tariff or the discount, which includes a tariff and quality discount because of the heavier Tawke crude, we have agreed with the Kurdistan government on a -- as did the other -- all the other operators, a certain discount that takes into account their quality differences. But certainly in our case, there is a look back provision, that we will agree to this discount to get the process moving and the payments regularized.

But there is a process that's anticipated that at some point we will sit down the government and do a look back as to what were -- because these discounts also change with seasons and so on, so the actual gap between Kurdistan blend and, say, Brent moves as it does between Brent and WTI. This is normal and ours is flat.

So at some point, there'll be a look back to see whether the assumed discount between Kurdistan blend and Brent was indicative of market conditions at the time, and there'll be some adjustments made if necessary and appropriate, to it. So there is that look back provision that if the discount at some time has been too large or too small that we'll adjust for it.

But I expect this level will -- is probably the right level and that's what we base our own plans and revenue estimates and certainly, our invoices on. We're happy.

But there is a provision to look back and make some adjustments up or down and that'll be -- we'll move. And when we all decide it isn't worth doing and we'll just stay with what we have or if we feel there's been periods when this discount was too deed, that we would then look to have an adjustment made.

And that's important and you've seen that in our results that it's working for us and for the government.

Well, thank you very much for joining us. We'll see you in six months.