Oslo Aug 20, 2015 (Thomson StreetEvents) -- Edited Transcript of DNO ASA earnings conference call or presentation Thursday, August 20, 2015 at 8:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Bijan Mossavar-Rahmani DNO ASA - Executive Chairman * Haakon Sandborg DNO ASA - CFO ================================================================================ Conference Call Participants ================================================================================ * Henrik Madsen Arctic Securities - Analyst * Teodor Nilsen Swedbank - Analyst * Moris Lorensen E24 - Analyst * Oyvind Hagen ABG - Analyst * Kjetil Bakken Carnegie - Analyst * Trond Omdal Pareto - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Bijan Mossavar-Rahmani, DNO ASA - Executive Chairman [1] -------------------------------------------------------------------------------- My name is Bijan Mossavar-Rahmani; I am the Executive Chairman of DNO ASA. Welcome to the Company's second quarter interim presentation of operational and financial results. I will be joined in the presentation this morning by our Chief Financial Officer Haakon Sandborg, and Bjorn Dale who is our Managing Director is also here and will join us in the question-and-answer period after the presentation itself. Let me begin with the operational review and forward strategy portion of our presentation. First, with respect to second quarter operational performance. We have had very strong operations metrics in terms of our production in the Company with a record gross production in the second quarter of 2015 of nearly 162,500 barrels of oil equivalent per day, of which our Company working interest production was just under 100,000 barrels of oil equivalent per day, up 37% from the first quarter of 2015. So, very strong operations results. In Kurdistan, the Tawke field output in the quarter averaged 153,346 barrels per day, which is up 46% from the first quarter. We hit a new Tawke field daily production record on the 31st of May, of just over 180,000 barrels, again on a per day basis. Tawke, therefore, remains the number one field in Kurdistan, both in terms of its daily production levels and in terms of its proven and probable reserves. We delivered during the quarter just over 118,000 barrels per day at the Fish Khabur, on the border of the Kurdistan Region of Iraq and Turkey, on instruction from the Kurdistan Regional Government for pipeline exports to the port of Ceyhan in Turkey and these deliveries for exports were up just under a third as compared to the first quarter of 2015. So larger volumes there as well. In addition, we sold 31,378 barrels a day on average into the local Kurdistan market in the second quarter, which was up from about 8,700 barrels a day in the previous quarter. So about two and a half times higher a figure in the second quarter in terms of our cash sales into the local market than the previous quarter. So the number is up there as well. Elsewhere, in Oman, our gross production averaged just over 9,000 barrels of oil equivalent per day, of which the Company working interest was just over 4,500 barrels of oil equivalent per day. Our, third traditional producing area, Yemen, remained suspended, production in Yemen was suspended when as you know, because of the deteriorating security situation, we declared force majeure in our producing blocks and moved our expatriate staff out of Yemen and effectively closed down the field operations although the facilities have been secured and are currently secure. And we will wait to see how the security and the general political conditions in the country evolve, before making a final determination as to our -- the status of our operations and presence in Yemen. This is a slide that we show every quarter, that breaks out our Company working interest production by country of operation. And within Kurdistan, by local sales versus deliveries for export through Turkey, and again you'll note that the numbers were higher than this past quarter, higher in 2015, the first half, higher than 2014, 2014 higher than 2013. So we have been operationally on a upward trajectory, we're very pleased with that. But of course, there are other important challenges that you're well aware of in terms of payments and I will come to some of those issues in some of the forthcoming slides and we will address some of those in the question-and-answer period as well. But operationally, I'm very pleased with the progress we've made and are proud of the work that our colleagues at DNO, in the different business units and in particular in Kurdistan are doing. Other than our work in Kurdistan and in particular our Tawke expansion project, to get Tawke production capacity up to 200,000 barrels a day, which we successfully completed. 2015 has been a year of consolidation and rationalization for DNO as it has been industrywide, and you're all familiar with the challenges and the -- that the industry has been facing because of dropping prices. We at DNO acted early and quickly to consolidate our operations in response to the very dramatic drop and continuing drop in world oil prices, and also the lower sales into the Kurdistan markets as we were instructed to put more oil into the export markets for deliveries to Turkey by the Kurdistan regional government itself. We announced some time ago that we had set our priority in 2015 to align our spending with our earning; I think we've been quite aggressive and successful in doing so. Examples are a scale-back of our capital expenditure program for the year, down to $80 million of which $49 million have already been spent in the first half of the year. We cut back operating costs, including staffing, and for a overall saving of about $50 million a year from mid-2015, so quite aggressive in that respect as well. We also moved to strengthen our balance sheet, first through a NOK975 million equity raise in March and then again with a $400 million bond issue in June of this year. Meanwhile, we continue to high-grade our overall portfolio by focusing on core assets and shedding or dropping others. Again, all in line with what the rest of the industry is doing. So there is no surprise here, just that we moved quickly and moved aggressively to try to ensure that we were positioned for growth as we exit this very difficult period of 2015. And I'll come back to that in a minute as well. One of the other things again we did was in Yemen declaring force majeure, and shutting down the operations of the producing fields and exiting a non-operated exploration block in Yemen. We also withdrew from two blocks in Oman, that were not producing blocks, and not strategic certainly, and not blocks that we wanted to maintain in a period of consolidation, and again rationalization, of our overall portfolio. We now are poised, as I just mentioned, for a resumption of growth in 2016, and for that we have a four-pronged strategy. First and most importantly, we will work to normalize our payments for all of our production in Kurdistan, moving forward, and also to begin the process of recovering our receivables for exports that have been made in the past for which DNO has not received its full entitlement. So the normalization of Kurdistan payments is a high-priority, and it's a low-hanging fruit in a sense for the Company because the sums are substantial. And with the recovery of those sums I think that is a very important part of our -- of our efforts, and I am very confident that we will be successful. As these payments in Kurdistan are normalized, we expect to resume our investments in the Tawke field, which are important to maintain production at that field as is the case in most oil fields, where one has to make additional investments to maintain production levels or increase production levels, and we will target that as our payments are made more regular. Besides that we still have a very, very strong and significant asset base in the Company, I think we have something in the order now of 16 or so licenses, all operated by DNO. And we have quite a bit to do our existing portfolio and we will tackle the appraisal and development of those assets. But we'll also be looking for new country entries as opportunities become available. So, after a year of consolidation and belt tightening, we think we are leaner and meaner, and with full expectation to reenter a period of growth commencing in 2016 irrespective of again oil price movements; oil prices will bounce around, they may go a bit lower and they may come back. We're not making bets on oil prices, the projects that we are pursuing can withstand even lower prices than today, we'd of course be thrilled to see higher prices but we're a Company, it's a low cost Company and we will be a survivor in a low cost -- low oil price world. If it comes to that, our strategy for 2016 and beyond is not based on a significant recovery of oil prices. I'll say a few words about each of these four prongs of our strategy. First, with respect to normalization of payments from Kurdistan, the value of our current production in Kurdistan is on the order of $175 million per month. So we are making a significant contribution first to the Kurdistan region of Iraq's revenue stream, but it helps put into perspective what we are doing in Kurdistan and what the Tawke field means. And it puts into perspective the timing and extent and ability to recover both our current entitlements from our production and also our unpaid receivables. And with these sorts of numbers it's not -- it's a doable measure and we should speak of it more about that. But in the meantime, our revenues accrue to us as you know from our local market sales which are cash sales, that are split 50-50 with the Kurdistan Regional Government, a bit more for some of our refined products in terms of our entitlement, but in the second quarter our sales totaled $47 million in terms of revenues to us which compares there quite favorably with the first quarter when our revenues from these sales were only $14 million. The balance of our receivables for DNO share of Tawke production is approaching $1 billion. In the last quarter we said the figure was between $500 million and $1 billion, but we are now giving more precise figures and exact figures, this number has been growing because we've been producing so much more oil, and the more oil we produce if you're not being receiving your own entitlement, this receivable number keeps growing. So it's in a sense good news and bad news, but the receivable is now just under $1 billion at the end of the second quarter, of which $829 million we have not booked. As you know, we don't book this receivable, but we do book the receivable from our refinery and local sales and that amount is $118 million, so total again just under $1 billion. As you know, for those of you who follow DNO and the market, the Kurdistan Regional Government announced earlier this month that it has plans to allocate monthly payments to DNO and to the other operators from its independent sales of oil through Turkey, from September and onwards. I don't have any more to say on that point other than to refer you to their statement, they have not said what the amount will be and what the allocation will be. We'll wait to see what the next announcement from them will state in this respect, but obviously we are in discussions with them and in dialogue with them and this is obviously a welcome news for all the operators. We continue to discuss with them a longer term approach to this issue and are discussing with them our need to receive our share of export revenues as per our contractual entitlements and to do so on a predictable and ongoing basis. So that it's not something that comes up periodically, it has to be regularized, it has to be made in a manner that is consistent, transparent, predictable, so we can plan our investments at Kurdistan among other things. I have just returned from Erbil. I was there over the weekend; had very, very good meetings. There is strong recognition in the Government of Kurdistan that the companies, the operators, including DNO, have been very supportive during a very difficult period in Kurdistan in terms of security issues, in terms of economic crisis, in terms of the difficult discussions between Erbil and Baghdad for -- on the export -- who exports and how payments are handled and how revenues are handled. There is a strong recognition that the companies have stood by Kurdistan and they've been supportive but that they have needs to and are entitled to their share of revenues as per the contracts. And that the companies all have significant receivables and the needs and that's without a regular payment schedule, the companies are not in any position to continue to invest, and without those investments obviously production, exports and revenues will drop even further. So there is a recognition of this and the recognition of the need to sit down with the companies and come up with a arrangement, again consistent with the contracts that allow the companies to get on with their activities in Kurdistan and with their activities overall. So that's very, very positive and I am quite optimistic that the appropriate measures will be put into place in the coming months to provide for that. In terms of DNO's operations in Kurdistan, as you know, our infrastructure has been designed to ensure flexibility in terms of where our oil goes; we are unique among the companies in this respect. We have the ability with our two pipelines to put upwards of 300,000 barrels a day to Fish Khabur, which is the export hub to Turkey. And it's not just a significant volume in excess of what we can produce currently, but it also provides, with the two pipelines, redundancy in case one pipeline for some reason is inoperable for a period of time, that the other pipeline provides again backup for us, that's very important. But in addition to that we have very, very substantial tanker loading capacity of the order of 125,000 barrels a day if for some reason the export system isn't working. And again for those of you who follow DNO and the events in this market, in the last weeks there have been periods in which the pipeline in Turkey that carries Kurdish oil has been disrupted for different reasons and during those disruptions we were able to put significant additional volumes into the local market, because we do have this capacity and this flexibility. And again, this is very, very positive for DNO and is very positive for the oil infrastructure in Kurdistan. I should also add, and this is sometimes forgotten, that even though irregular in terms of payments, DNO has in fact received considerable revenues from Kurdistan operations since inception. In fact, we received $1.2 billion in net payments from Kurdistan since start of operations in 2007 and the bulk of this has come not from exports, but from local sales, about $1 billion of this has been from local sales. So we have been quite successful in terms of generating revenue through local sales. Local sales again, pricing of oil in the local market is below that of the export markets, so we've left money on the table, but there has -- we have received money, considerable sums again during this period. We show this breakdown, you'll see that every year we've been operating in Kurdistan we received payments. Some years are very significant payments; for example 2012, $333 million that year to DNO. But with the economic crisis and some of the political difficulties that has trailed off in 2013 and 2014 and the first half of this year. But we hope to reverse that trend and to move up again, but this is -- I think it's an important reminder that with all of the problems and the doom and gloom in terms of payments, we have received significant payments from Kurdistan over the years. And have full expectation that we will do so in the future and hopefully at much, much more significant rates consistent with our contractual arrangements. At Tawke, again we ramped up production this year following the completion of the Tawke 200,000 barrel a day capacity project. We've added electric submersible pumps, ESPs, in 15 of 30 Tawke wells to enhance reservoir management and performance. And these 15 wells account for the bulk of our field production, 85% of the field production. But I emphasize again that we will have a need for future development wells, water disposal wells in order to sustain production, although the timing and the extent of these new investments will be tied and are tied to the Tawke revenue stream. I mentioned high-grading our portfolio, and we -- our future plans. We have plans for drilling in 2016. We continue to acquire and process seismic data across our portfolio. We're considering a well in Oman Block 8, an additional well to increase oil and gas output from the West Bukha field. We have an exploration well in a large block we acquired several years ago in Oman Block 36. And again we're now identifying drilling targets and hope and expect to drill a well in 2016. We continue to -- our exploration and appraisal program in Tunisia and we have a well planned in Tunisia in 2016, and we are looking to diversify further our portfolio with new country entries and importantly within our MENA footprint. Among the new country entries in MENA that are under consideration by DNO and many other companies, needless to say Iran offers interesting opportunities, but at such time as international sanctions are removed and we're able to consider and pursue such opportunities. We believe that DNO is uniquely well placed because we operate oil and gas projects, onshore and offshore, in three neighboring countries and with some specific synergies and opportunities. Of course our fractured carbonate reservoir experience in Tawke and in Kurdistan are applicable to increased recovery from existing fields in Iran and develop the new ones. So that's another point of interest. Also our history of fast track, low cost project implementation in challenging areas would be applicable to Iran, should those opportunities open up with sanctions removal. And coincidently, DNO includes several senior individuals with subsurface drilling contract negotiation experience in Iran which they acquired, and they're tied there with other European companies including Norwegian companies. And that again -- so there is a knowledgebase in the Company that would be quite helpful and would put us ahead of perhaps other companies that are looking at a new country entry in Iran. But again, I have to say that pursuit of any such opportunities is contingent on removal of the applicable international standard sanctions that could occur by the end of the year, but of course that's beyond our ability to influence or have any additional insight on, but 2016 could be a year of -- for us to look at Iran. There are other countries that are -- we are looking at as well, but I think the important message here is that we're looking to grow and to get back in the business of growth at DNO [as from] 2016 and that's quite exciting for us. That ends my portion of this. Haakon will handle the financial review. -------------------------------------------------------------------------------- Haakon Sandborg, DNO ASA - CFO [2] -------------------------------------------------------------------------------- Good morning, everyone. Well, I hope you all have enjoyed your summer, and hopefully [believing] you're now rested and ready to focus on our second quarter financials. And compared to the quite weak first quarter that we had this year, we made good progress as you have seen in the second quarter with higher local sales in Kurdistan more than doubling our quarterly revenues to a level of $55 million. Still, at gross local sales of just over 31,000 barrels per day in the second quarter this year, we are quite a long way below the higher local sales volumes we had in the first quarter last year. In addition, the year-to-date revenues this year also reflect lack of export payments in Kurdistan and the production shut in Yemen from March this year. As you have seen today, our gross export deliveries from the Tawke field increased by another 31% in the second quarter to level of 118,000 barrels per day, thereby providing a substantial export volume of 10.7 million barrels in the second quarter. And again, we are, in our financial accounts, prudently recording all the production costs, but no revenue from these exports until we see cash export payments. In our cost of goods sold, the higher production volumes are [feeding] an increase in our non-cash DD&A cost to a level of $35.6 million in Q2. But if you adjust for these costs, we have a positive netback of $10 million in the middle part of this slide. The revenue level that we have in the second quarter and the high DD&A costs are obviously major drivers for the negative operating loss of $23 million in the quarter. If you now move to look at the details of the second quarter P&L, we will again see the increase in sales from the first quarter, and -- but even so you can see compared to the second quarter last year we are quite much lower level this year, for the reasons I just discussed. The cost of goods sold increased by $4 million in the quarter and that's through the combination of $10 million in higher DD&A from the higher production, but that was offset by $8 million in reduced lifting costs, mostly in Kurdistan, but also in Yemen and Oman. As Bijan discussed already today, we have been working to reduce our operating cost and also our G&A cost. And under the current market conditions we will be focusing on further cost reductions this year. Net finance is a big item in the quarter at cost level of $15.9 million, and that's partly because we closed on the new bond loan and also exercised the call option to -- on the previous debt -- or the previous bond debt. So these transactions led to net one-off costs of $3.9 million and also to increase interest expense in the quarter. Further, we had a write-down of $5.6 million on the shareholding in RAK Petroleum, due to or reflecting further share price decline in the quarter. So after tax, we thereby show a net loss of $39.9 million. To the right here, you will see the year-to-date numbers. And the main item again compared to last year -- for this year is that we have a big drop in booked revenues, of -- a difference of $175 million. And that's coming mostly from the lower sales -- local sales in Kurdistan, but also from lower sales in Yemen and Oman. In the first quarter presentation that we held this year, we discussed that we have been through a period of high investments in the Tawke field for the capacity expansion there. And we said we would reduce spending now that this major project has been completed. On this basis, we guided on the last quarter of -- an investment level of around $100 million for this year in total. And of that about $60 million are committed expenditures and the rest is purely optional for the Company. Now, you see from this slide that CapEx was lower in the second quarter and year-to-date total investments amount to $48.6 million, and almost all of that has been going into Kurdistan and -- to complete the Tawke expansion. In view of the year-to-date cash flow and the weekly oil prices, we are now further reducing our short-term cash outlays and revising our CapEx spending this year to a projected level of $80 million. This is obviously a very much reduced investment level from prior years, and as before, we are focusing on curbing our spending from our operational cash flow. To increase our investments again, we will need to see increasing paid revenues and cash flow coming from our substantial production at the Tawke field. And I think with the high spending flexibility that we have in DNO, we are in position to quickly ramp up and sustain higher investment levels, once cash flow is again strengthened. If you turn now to our capital structure. We did as we discussed in the first quarter presentation, by returning to the bond markets in May and June to raise new long-term bond debt. So we closed on this new $400 million bond loan in June and we also completed the prepayment of our two previous bond loans in early August. And the net proceeds from the new bonds will be used for field development and also for general corporate purposes. In terms of execution, we were pleased to see that there was good interest for the bond placement among international bond investors. But market yield expectations were such that the loan pricing was structured through a combination of a fixed rate, coupon rate, and [on issue of] discounts. And I won't say that this was exactly cheap funding for us as issuer. But still in the current market, I think it was good to get this done, and the new bond loan strengthens our cash position and our financial flexibility. We have now also effectively refinanced the old bond debt that has a loan maturity in April next year and replace that with the new bond debt that carries a good five-year maturity. The pricing structure for the new bond debt, means that we will be paying a fixed rate of 8.75% per year and I think that's a manageable running rate and the debt service level will then be manageable going for the next five years. At least until we reach the loan maturity when we then have the issue discount to deal with. This is our cash flow for the quarter, and we have a negative operating cash flow. After tax and interest, over $52 million in the quarter. One of the main factors impacting this cash flow was a negative $56 million change in working capital coming mainly from reduction in trade and other payables of $35.9 million. And that was also then combined with a buildup in current assets of $18 million. The reduction that we see here in trade and other payables comes after these liabilities increased over the last quarters as we completed the Tawke expansion project. And we think this -- we see that these payables will be further reduced in the third quarter under the various contract payment terms that have been agreed for the contracts. The buildup that we have here in current assets is mainly due to increase in inventories and in short-term receivables. There is also a $3.5 million increase in our local sales underlift, or more precisely our receivable from local sales in Kurdistan in the second quarter to a level of $118 million. This increase comes both from local oil sales and also from the Tawke refinery output in Kurdistan. For the local sales, the effect here is that with max [cost oil], as we have now under the production sharing contract. The contractor entitlement at Tawke will be slightly over the current 50-50 split that we have with the KRG, and then that's at the current R-factor level for those of you that are familiar with the production sharing contracts. So, in the short term, it's going to require and take a recovery of the cost oil carry forward position through increasing volumes to work down these local sales receivables. For the refinery part -- for the refinery production, we expect that better payment terms going forward, will stabilize the receivable issue for the refinery output. Otherwise, and not to be forgotten, the other main cash flow effect is the increase in cash balances that you see on this slide that comes through the proceeds from the new bond loan. And the cash thereby increased to $450 million at the end of the quarter. So with the increase in cash and net interest bearing debt level of $130.7 million, we maintained a solid balance sheet with low leverage. Through use of the bond loan call option, we repaid the remaining outstanding amount of about $181 million of the previous bond debt earlier this month. So the remaining debt now is the new bond debt of $400 million in the new loan. For the financial assets in the Company we divested our treasury shares, that's part of the equity issue in March this year, and the shareholding in RAK Petroleum is now the remaining financial asset with a market value of $22 million at the end of the quarter. The equity ratio is here lower at 39% in Q2, but we do expect that this ratio will be increasing up again in Q3 basically on a slimmer balance sheet following the debt repayment -- prepayment that we did this month. So, my conclusion is that we are good now on the capital structure and on the balance sheet. This takes us to the end of our presentation, so I think we'll then close up here and move to Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Henrik Madsen, Arctic Securities - Analyst [1] -------------------------------------------------------------------------------- Hi, Henrik Madsen from Arctic Securities. Could you guide possibly on if there's a potential for further reduced CapEX into 2016, if export payments remains limited and in terms of what levels you could see that CapEX drop to, to protect your balance sheet? And secondly, given the export pipeline disruptions that we've been seeing recently, could you guide somewhat on what kind of local sales levels you're seeing now, and if those levels can be maintained going forward as well to generate cash flow? -------------------------------------------------------------------------------- Haakon Sandborg, DNO ASA - CFO [2] -------------------------------------------------------------------------------- Okay, as we come back to -- I'm sorry, what we focused on is that -- sorry, it's on now I hope. To really try to be sure that we can cover most of the spending levels from our cash flow, it's been a focus for the Company for many years. And we have been doing that for most of the last 5-6 years but with some exceptions like last year. So we don't want to come back to that situation that we are trying to -- have to fund investments into the various countries from outside, from corporate. We want to see that we can cover most of it from running cash flow. So how far low we can go or what level we will expect for next year really depends on what we see of cash flow. We're done with all the commitment work in Kurdistan. So, really up to us what we see in terms of cash flow and payments coming through and what spending levels we are willing to go to. So I don't think we have discussed exactly how far low -- how low or lower we can go, but you know, we're forecasting $80 million total this year which is mostly Kurdistan. And a big part of that was for the Tawke expansion completion, and as that is done now we can really -- we can cut back quite a lot further for next year if that's required, if we see lower cash flow. -------------------------------------------------------------------------------- Bijan Mossavar-Rahmani, DNO ASA - Executive Chairman [3] -------------------------------------------------------------------------------- All right. As Haakon said, again in Kurdistan, CapEx is -- and any spending will be directly tied to revenues. We made that very, very clear publicly and in Kurdistan, as the other operators in Kurdistan. We also indicated that we have wells planned in Oman and Tunisia. In Oman, the offshore well from our producing block because of the high cost recovery factor there, the recovery of the expenditure is rather quick, little less quick today that oil prices are lower, but we do recover that from production. The exploration block is an onshore well that we estimate costs about $15 million or so, but we're also looking to [bring] partners to that project. In Tunisia we have a well planned, but we are also completing a farm-in arrangement previously announced with a partner and that will generate significant cash to us to cover part of our cost of that well. So, we're very mindful on the one hand of the need to get back on the growth path, but on the other hand to make sure it's done very prudently from a financial point of view and in a measured way. And we haven't mentioned this, but we're also on the lookout for the possibility of picking up producing assets, by producing assets elsewhere that are financeable on their own merits. There is no financing available currently for Kurdistan operators, for different reasons, but financing is available elsewhere and we'll be mindful of that as we look for other areas of growth. You asked about our capacity to put oil into the local market. As I indicated before, physical point of view, we can put 125,000 barrels a day into the local market. So there is no physical constraint, at least from our side, sometimes tankers, road tankers aren't available in that -- to carry those volumes quickly. So our restraint is mostly tankers that can come to pick up this oil on short notice. But our ability to put oil into the market is significant, it's 125,000 barrels a day. And the size of that market is significant because while we call it a local market, in fact it's not the domestic Kurdistan consumption market, this is the market that comprises Kurdistan traders and non-Kurdistan traders with tankers, who pick up this crude and deliver it either to refineries in the region or to export markets. So it's a -- there could be -- the limitations are mostly tankers rather than our capacity or the market's capacity to pick up that oil. There have been days during this period which I think we've put 40,000 - 50,000, 60,000 barrels into the market on a given day. We're currently putting about just over 20,000 barrels a day on average into the market, and that could pick up. But our discussions in Kurdistan are more with respect to exports and recovery of our allocations and entitlements for exports because export pricing is $20 a barrel or more higher than sales in the local market. So, it's to our advantage, to our partner's advantage and to the Kurdistan Regional Government's advantage that we put more oil into the international market, so long as we are receiving our entitlement payments. -------------------------------------------------------------------------------- Teodor Nilsen, Swedbank - Analyst [4] -------------------------------------------------------------------------------- Teodor Nilsen, Swedbank. It's very positive to see that you actually assign a number to the [accounts] receivable. So, what has changed over the past quarter? Has your confidence with regards to the payment increased recently? -------------------------------------------------------------------------------- Bijan Mossavar-Rahmani, DNO ASA - Executive Chairman [5] -------------------------------------------------------------------------------- Yes, to the last question. To the first part of the question, of course, as this number became larger it was more, I think, pressing for us to disclose it, and both in terms of the discussions with the Kurdistan government and they're aware of the numbers of course, but also as it gets larger and larger, it's important to the market is also in tune. So I -- (inaudible) it's getting larger because we're putting so much more oil into the market. And as I said, it's a two-edged sword; on the one hand if you -- the more oil you put in the more value you're creating, but the more this imbalance is growing. So that was really the reason we, in the past, also haven't because we weren't booking it, we weren't reporting it on an ongoing basis. Other operators in Kurdistan book these as -- on the balance sheet, we haven't. So there has been no need in that sense, or no pressing need for us to disclose but as the number became larger and as the discussions now are ongoing about the recovery of these numbers, of these amounts from production and export moving forward, we just felt it was appropriate and the timing was right for us to report these numbers on an ongoing basis moving forward. -------------------------------------------------------------------------------- Teodor Nilsen, Swedbank - Analyst [6] -------------------------------------------------------------------------------- So, in terms of timing what should we assume for 2016 payments since we haven't booked on old balance sheet yet, I guess there's still some uncertainty about -- if you're seeing some cash, I guess, [consensus], cash flow estimates are way too low. Any comments around that? -------------------------------------------------------------------------------- Bijan Mossavar-Rahmani, DNO ASA - Executive Chairman [7] -------------------------------------------------------------------------------- Well, the government again early this month announced that payments mechanism starting from September, and I think their words were that there'll be a -- for the rest of the year, there'll be payments to the operators to cover their ongoing costs. It wasn't clear specific what that was. I expect there'll be a payment, and a monthly payment, based on past experience, maybe $75 million to $100 million to be spread across the companies based on the size of their production. My guess is, it's -- those are the numbers you should look for. But that announcement also said that in 2016 there would be a more robust payment mechanism. I think that's in part will of course depend from their mind, their thinking on oil prices, and other things that are going on in terms of their discussions between Baghdad and Erbil. But from our point of view, it's important that we become even more proactive, which we are now, in coming up with an arrangement. And we've explained that we've done our share of belt-tightening and everyone's in this together and everyone needs to belt-tighten. And that without our revenue, a predictable consistent revenue stream, we're not in a position to continue to invest in Kurdistan. And if we don't invest in Kurdistan, production is going to come down, that's not in anyone's interest. The other reason, of course, we're more, I think a bit more vocal on the issue of these receivables is that as we look ahead in terms DNO's strategies the quickest, largest return to the Company is these receivables, $1 billion, it's about the size of our market equity. And if we can recover that in the next year or so that's a huge slug of money coming to the Company, it's the fastest, quickest way DNO right now can create value for our shareholders and cash flow to support of our operations. And that's again, that's $1 billion, it's a lot of money. And on top of that getting the full entitlement for our ongoing production that's significant money as well, it's about $50 million a month give or take. So we put those together, this is a significant, that's where our -- very, very important of our growth is there, and there are not a lot of companies that are in that position. And I think it's important to convey that as part of our discussion of our forward strategies. -------------------------------------------------------------------------------- Teodor Nilsen, Swedbank - Analyst [8] -------------------------------------------------------------------------------- And then finally, regarding Iran, you talk about maybe entering Iran. What kind of deal should we look for and is there any chance that you actually will make any investments there in 2016? -------------------------------------------------------------------------------- Bijan Mossavar-Rahmani, DNO ASA - Executive Chairman [9] -------------------------------------------------------------------------------- We haven't said that. We've only said that as we look for new country entries, an obvious one would be Iran in a post-sanctions world because we're, again we surround Iran in terms of our assets in Kurdistan, in the UAE, specifically in Ras Al Khaimah, and the Saleh field, the Saleh field infrastructure, but also in terms of Oman where as you know, DNO has a shared field -- operates a shared -- the Omani side of a shared Iranian-Omani field. So we're in the neighborhood, and we deal with some of the same challenges and we have infrastructure and opportunities. So it would make sense for us. But there has been no specific project identified and no discussions held with respect to projects. We just have to wait and see what happens and the timing of sanctions removals, if those are completely removed. And at that point, we'll be in a better position to find out what sort of things Iranians are looking for, what sort of contracts they're offering, and then what makes sense for DNO to pursue if we're in a position to do so. So I think that's 2016 discussions, because at the earliest I believe sanctions will be removed, the certain sanctions, at the very end of this year. So in 2016, we can have a conversation about those, if there's more clarity. But as we look in our footprint area, Iran is the obvious country of entry. It's going to open up, when it opens up and we and so many other companies around the world will be looking, except we're already in the neighborhood, which puts us in a position to perhaps move more quickly if the opportunity arises. -------------------------------------------------------------------------------- Teodor Nilsen, Swedbank - Analyst [10] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Moris Lorensen, E24 - Analyst [11] -------------------------------------------------------------------------------- [Moris Lorensen from E24]. I was wondering first of all, have you been in dialogue with the Iranians at all? And secondly, I was wondering if you could comment on the security situation, we've seen some increased tension between the Turks and the Kurds recently. Does that affect you in any way in addition to the other geopolitical situations that we've seen with the pipelining? -------------------------------------------------------------------------------- Bijan Mossavar-Rahmani, DNO ASA - Executive Chairman [12] -------------------------------------------------------------------------------- I have no word to say on either of those two topics. There is -- other than to say that our operations in Kurdistan remain secure. I was there myself for several days this weekend, I felt safe. But we're also cognizant that there are security issues and we have enhanced security protocols in place as we've had since the ISIS crisis started. But you know these political and security challenges exist, we are -- most we can do as a Company is to ensure the security and safety of our people first and the security of our assets. So we're doing the best that we can under difficult circumstances for everyone. -------------------------------------------------------------------------------- Haakon Sandborg, DNO ASA - CFO [13] -------------------------------------------------------------------------------- We will take one more question, up here. -------------------------------------------------------------------------------- Oyvind Hagen, ABG - Analyst [14] -------------------------------------------------------------------------------- Oyvind Hagen, ABG. On the local sales, could you confirm that you're actually getting paid in accordance with new 50-50 split at the moment? -------------------------------------------------------------------------------- Haakon Sandborg, DNO ASA - CFO [15] -------------------------------------------------------------------------------- I don't think I got through, but I was discussing how it works now. We get 50-50 split on a cash flow basis, yes. So that's being done. But in the background, we still run the production sharing contract, calculations and reconciliations to be sure we have a long-term settlement of these numbers. So yes, getting paid on the 50-50. All the 50% that goes to the contractors, of course there is a split between the contractors, but we get our fair share of that according to the production and sharing contract terms. So there was -- as I discussed, a [unknown] increase in the receivable on the local sales and refinery of $3.5 million. But that's the difference between the 50-50 and what we should have been getting. So yes, answer is yes on the first. And just be mindful that we are still running the production sharing contract to settle this. -------------------------------------------------------------------------------- Oyvind Hagen, ABG - Analyst [16] -------------------------------------------------------------------------------- Exactly, yes. -------------------------------------------------------------------------------- Haakon Sandborg, DNO ASA - CFO [17] -------------------------------------------------------------------------------- Our local sales have always been on a cash and carry basis, always. This is important to us. But as I mentioned briefly, one of our refinery products we're not getting 75% rather than the 50%, and another way to enhance our cash flow from Kurdistan is to up this percentage we get. Historically, at least to about two years ago, we were getting the local sales were being allocated based on a production sharing contract, that's why we didn't have this receivable. But when the ISIS crisis hit, the Kurdistan Government asked us to reduce our take and fixed it at 30%. We then negotiated to move it up to 50%, 75% on one of the refinery products, and that's another area, and discussions to move that bringing up to 75%, even 100%. Of course that will be another source of enhancement of our cash generation in Kurdistan. -------------------------------------------------------------------------------- Oyvind Hagen, ABG - Analyst [18] -------------------------------------------------------------------------------- Thank you. That's very clear. And on the $829 million that you have in unbooked receivables for export volumes against the KRG, has that number now been confirmed by the KRG as well in your discussions with them? -------------------------------------------------------------------------------- Haakon Sandborg, DNO ASA - CFO [19] -------------------------------------------------------------------------------- Specifically, no. Although the KRG has repeatedly said that there is a large receivable owed to the companies, I think on various times they've mentioned numbers like $3 billion, which was consistent with our numbers. But our numbers are based on ARP, as you look at -- that we generate these numbers, you have to have the volumes on any given day and the pricing. We know the volumes and the volumes are confirmed with the KRG. There are [chits] exchanged when you deliver the oil. Pricing, they have not disclosed pricing. We know what brent does, we have a sense of the Kirkuk blend pricing. Our oil goes in and mixes with the other with Tak Tak and Genel's crude and some Gulf Keystone's and Kirkuk oil. Our crude is on the heavier side compared to Kirkuk and to Tak Tak. So there has to be some time, we just sit down and work out what these differentials are going to be, that has not been done. We're making our best guess as are the other companies based on brent pricing and Kirkuk blend pricing and their contribution. So there'll have to be a time when we sit down and reconcile these whether this number ends up being $700 million or $900 million, we don't know, but there has to be proper then reconciliation, and that's been put off. But I think as the companies get more active in trying to find a mechanism and timing for recovery of these payments, those discussions will have to be advanced and the carriage will have to be more forthcoming to the market perhaps or certainly to us, with respect to pricing, which they haven't been in the past for number of different reasons. That's been a bit of a black box, but if you're on the outside, you can look in and make certain guesses and we have reported to them our numbers and our calculations. So they are aware of what our numbers are. They have not objected, but I expect there will have to be reconciliation and some fine tuning of the numbers. And my hope is that that will take place now sooner rather than later. -------------------------------------------------------------------------------- Oyvind Hagen, ABG - Analyst [20] -------------------------------------------------------------------------------- Thank you. And on the level of uncertainty, it's $700 million to $900 million, or is it perhaps even $500 million to $1 billion or? -------------------------------------------------------------------------------- Haakon Sandborg, DNO ASA - CFO [21] -------------------------------------------------------------------------------- I didn't say that our numbers are now quite clear as what they are. The -- any level of uncertainly has to do with the calculation of what they actually receive for the blend and for our understanding of what that blend comprises. We know the source of the production pipeline, but we don't on any given day are we 30% of the blend, are we 40% of the blend, 20%, we don't know that. And without that knowledge we can't do a full calculation of the differentials. So we're doing the best we can. We're not setting up a high number to negotiate it down or low number to negotiate upward, doing the best we can in terms of the calculation of the number. We may be wrong, we may -- we're hitting a lower price or higher price, we don't know. But we have our calculation, we give it to them, they have not objected. They have made statements about their debt to the companies that would be consistent with the kind of numbers that we have and the kind of numbers that Genel reports on a regular basis and Gulf Keystone. So in that sense, there has been no -- at this point no difference. They haven't said that these numbers are wrong to us. They haven't said to the market that this -- that doesn't exist. I mean I'd say, all the statements are consistent, but what are the exact numbers I just don't know, it could be a bit higher, it could be a bit lower, I don't think by a lot. But there's no range that we're talking number of $700 million to $900 million, and I wasn't trying to suggest that. I wasn't trying to suggest that. -------------------------------------------------------------------------------- Oyvind Hagen, ABG - Analyst [22] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Haakon Sandborg, DNO ASA - CFO [23] -------------------------------------------------------------------------------- And very last question to Kjetil Bakken, Carnegie. -------------------------------------------------------------------------------- Kjetil Bakken, Carnegie - Analyst [24] -------------------------------------------------------------------------------- Any chance that the KRG will allow the companies to export their own oil in the not-too-distant future? -------------------------------------------------------------------------------- Bijan Mossavar-Rahmani, DNO ASA - Executive Chairman [25] -------------------------------------------------------------------------------- Yes. In the past they've proposed that to us. And as you know some of the producers do in fact export by truck. Some of the truck -- tanker trucks move into Turkey and export, but there has been no direct export using the Kirkuk-Ceyhan pipeline. That only the KRG has been using. The companies do export by tanker truck through traders. I don't know the exact volumes and so on. But that's not been blocked by the KRG. But the export pipeline has its own complexities, but perhaps those are becoming easier to resolve as the KRG now on an ongoing basis, exports independently very significant volumes of oil. They're now exporting, on a given day 50 -- 500-, 600-, sometimes a bit more, thousand barrels a day. And a year-and-a-half ago that wasn't happening, a year ago that wasn't happening. And perhaps that creates a channel for the companies to export directly using the pipeline or a channel that would allow the KRG to allocate certain portion of what is exported by them to the companies or a continuing export by the companies by tanker truck. No one has said the companies can't export, the problem has been that the infrastructure goes to Turkey, and it's under contracts, the agreements between Turkey and Iraq that are quite complicated, and the companies not wanted to go into uncharted territory in the legal sense and other respects. But the KRG has been doing it, and doing it not quite steadily and consistently, and that's all very, very positive. Does Trond have a question? He always asks the difficult questions and we don't want to avoid those. -------------------------------------------------------------------------------- Trond Omdal, Pareto - Analyst [26] -------------------------------------------------------------------------------- Trond Omdal, Pareto. From the KRG published export reports, it seems they have, in single day it's been up to more than 700,000 and there seemed to be plans to reach that level on a sustainable level by end of year. Does those fluctuations -- are those mainly linked to Kirkuk and Bai Hassan area, and when you are very confident on getting payment, is that also linked to a higher sustainable export level from KRG by the end of the year? -------------------------------------------------------------------------------- Bijan Mossavar-Rahmani, DNO ASA - Executive Chairman [27] -------------------------------------------------------------------------------- And another difficult, very good question. I don't -- I'm not privy to the exact contribution of the different sources to the overall KRG, their volume is -- we know what we produce and what we make available for export. So I can't speak to the other numbers. Our confidence is obviously if KRG was earning more money, it will be easier to do -- to do more with [respect] to the companies and the higher volumes means the higher oil prices or higher exports. Oil prices are well below what anybody thought, and all of us thought a year ago, including the KRG. So, I think the plans they have to pay the companies were thrown off by the drop in prices. Revenue increases from higher volumes helps, make it part of the difference, but I think that the -- ultimately our confidence arises from the fact that the KRG, has the best of faith, they have a strong understanding of what the companies have done. There is a strong understanding of the importance of the companies for Kurdistan, especially the original companies. DNO, Genel, Gulf Keystone, a lot of the new companies that came in to Kurdistan in the last three/four years have left or have stopped operating or have stopped drilling. There has been a tremendous retrenchment of activity in Kurdistan on the oil and gas side. The number of rigs has dropped by a tenth of -- to a tenth of what it was before. And there is an understanding that the current companies, the original companies are the ones that are sure to make investments and grow their operation in Kurdistan, but that they need revenues and the revenue stream. So, there's good faith, there's good solid understanding, the question is how to do it? And the question is how to make sure that the belt is tightened not just by the companies but by Kurdistan and I think they have ways they are working -- ways to accomplish that. And that gives us confidence but it's largely because they understand how important we are to their economy and to the growth in export volumes which they can control in certain way, wherein they can't control the price of oil. And that's the mutuality of interest, I think, that gives me the confidence that this will happen, and happen more quickly perhaps. Now that they're -- the companies are all in the same position, have all made the same statement, that we need revenues to be able to grow. Without it, we all -- we know they won't grow, but in fact, our production is going to drop off, and I think that's clear. The answer has been clearly received and it's real and it's going to be driving decisions, I think, on both sides. Of course, as the revenues are increased, we will need to, we will have to and we will want to, actually -- to invest more. For us, this $1 billion receivable is low hanging fruit, but so is -- so are the other opportunities we have at the Peshkabir well, we want to drill. We have the Benenan field, there's a lot for us to do in Kurdistan. And the future of the Company, importantly, is in Kurdistan, and here are our growth opportunities although we'd like to be diversified. So, all of this again makes sense, and usually when things make sense they can be made to happen. -------------------------------------------------------------------------------- Trond Omdal, Pareto - Analyst [28] -------------------------------------------------------------------------------- Does that (inaudible question - microphone inaccessible)? -------------------------------------------------------------------------------- Bijan Mossavar-Rahmani, DNO ASA - Executive Chairman [29] -------------------------------------------------------------------------------- Yes, yes, yes. -------------------------------------------------------------------------------- Haakon Sandborg, DNO ASA - CFO [30] -------------------------------------------------------------------------------- Thank you very much. See you at the next quarterly review.
|