DNO ASA (DTNOF) Management on Q2 2020 Results – Earnings Call Transcript


DNO ASA. (OTCPK:DTNOF) Q2 2020 Results Earnings Conference Call July 30, 2020 4:00 PM ET

Company Participants

Bijan Mossavar-Rahmani – Executive Chairman

Bjørn Dale – Managing Director

Haakon Sandborg – CFO

Conference Call Participants

Christian Yggeseth – Danske Bank

Teodor Sveen – SpareBank 1 Markets

Bjørn Dale

Okay, so welcome to the DNO ASA Q2 call. My name is Bjørn Dale. I’m the Managing Director of Dno ASA. With me is Executive Chairman, Bijan Mossavar-Rahmani; and the Chief Financial Officer, Haakon Sandborg.

We will start the call with an introduction by Bijan, followed then by Haakon. Following this, we’ll have a Q&A session until 11 o’clock. All participants will be muted by default. If you’d like to ask a question, please unmute yourself by pressing star six. And please remember to mute yourself afterwards. Following the Q&A, there will be a media session. To participate in the media session, please contact our communications manager just dial your host by email or mobile.

With that, Bijan.

Bijan Mossavar-Rahmani

Good morning, everyone. This is the Bijan Mossavar-Rahmani. Thank you for joining our call this morning. I hope you are first, all well, and your families are well. This is a very difficult period for all of us. With our releases today, I think tell a very simple story.

We went into the, this market turmoil caused by the Coronavirus and its impact on oil demand and, and the industry with the – I would say prepared and that we have as a company have been through a — not exactly the same but similar challenges when all operations and in Kurdistan were impacted by ISIS. So in a sense, we’ve drilled for something, some similar challenges and we are very quick to move, to first secure our people, our help, their movements to secure our balance sheets and but to position ourselves to come back out of the crisis, ready to hit the ground running again for – to put the foot back on the accelerator as we as we say.

It’s been a difficult few months of retrenchment against securing people and assets, while preparing and in June, we saw opportunity to step up our activities in Kurdistan with some plan, but ready to, to execute well interventions which were successful. Thanks to a very dedicated team working on their very difficult Coronavirus restrictions in Kurdistan. And we were able to step up our production by about 15% in Kurdistan to what we’re now running just [Technical Difficulty]. So that’s been a significant part of our recovery story. That’s the recovery story with respect to our cash position and our liquidity.

And our balance sheet moving forward has also been greatly strengthened by the temporary or recent tax changes that will inject something in excess of $200 million. I think our latest estimate based on expectations of exchange rates and so on is about $215 million for the rest of the year with other payments coming in and refunds coming in next year, as well.

So I think that’s positioned us to now hit harder on the accelerator, which you’ve probably seen from the numbers. We’re going to step off activity in Kurdistan. We’re going to step up activity in the North Sea. So we’re back on the growths mode. The challenges continue, the Coronavirus challenges, of course, globally, has not been resolved, but I think that the impact on the industry the impact on demand, the impact on DNO will be much more, much less manageable.

This time around, but we’ll be ready for it. Our challenge now again, is as we gear up and increase our operations to make sure that our people and our communities in which we operate are kept as healthy and the virus free and infection free as possible.

Our ability to move fast in Kurdistan and hit the brake, and the accelerator at the right moments, of course, has been – is possible because so much of our operations are across the company, but all of our operations in Kurdistan are on shore. It’s much easier to move people around with equipment around, start stop as appropriate. So the onshore nature operations the fact that we’ve been through these operational challenges before have been helpful, but also we’ve — we have like that, in Kurdistan, we have like-minded partners. And our energy, of course, is our partner, a longstanding in our license, Tawke, and we’re thrilled that we have supportive and engaged like-minded partners that make all this possible.

I will turn to our CFO, Haakon Sandborg who will go to into somewhat more detail on the financials. But first, I’m available and then the, and again all this note that we are able to start strong, ease off accelerates in Kurdistan in particular as circumstances dictate and that’s always been our strengths as an operator in our – portfolio. Haakon?

Haakon Sandborg

Yes. Thanks, Bijan. And good morning, everyone. Can you hear me? Okay, good. Yes, thanks for attending the conference call. Today, I’ll just kind of start to summarize some of the main financial points that you will see in the maybe in our releases this morning. But our second quarter of course, we expect the extremely weak old faces. And that came after the price collapsed in March as the global oil demand dropped the sales team.

Now, we saw that the oil prices were especially low in April, and we did see some price improvements in May and June. But the average, Q2 realized oil prices were still only about half of what we achieved in Q1 this year. So if you look at the numbers, the drops in the revenues from Q1 to Q3, it’s a difference of $134 million to a lower level of $73 million in Q2. And this is predominantly driven by the lower realized oil prices that we are estimated to account for in the $90 million of the reduction from Q1 to Q2 is due to oil prices.

If you look at the remaining difference in the drop in revenues from Q1, over $44 million, as explained by a situation with a lower listed volumes for our North Sea production, that has an estimated revenue effect of $37 million in Q2 from the lower listed volumes. So on top of that to explain all the drop in their revenue. We have a $6 million effect of this lower entitlements of payments in Kurdistan.

But you will realize that the lower oil prices and the lower listed North Sea volumes explain the potential revenue reduction in the second quarter. I talked to some of the analysts this morning, and I think that once you add back the effects of the lower list enrolments they add back to estimated $37 million, we’re quite close to the expectations from the analysts side.

I’d like to mention also on the cost side, our cost of goods sold were down by $32 million in Q2 from the first quarter this year. And this is as we reduce or adjust our production costs by $24 million where the increase in the North Sea under this position.

So on top of that, we have a reduction in our depreciation, our DD&A costs over $16 million in Q2. And that’s mainly from the lower production. There are also some effects from updated the depreciation assumptions.

So we’re down on the cost side. But despite the lowest cost in the second quarter, the large revenue drop is the main reason for the decline in what you see in the results and cash flow throughout our reports.

As we normally do, we provide a lot of detail in our P&L and quarterly report. I won’t go through all of that, because maybe there’s a point to that. We have a bit of an increase in exploration expense in the quarter, as to the one dry exploration well in the North Sea by $10 million, called the Gabriel well, but you will also see that we have a significant increase in tax income to $44 million. That is due to higher tax losses and also include the effects of the new Norwegian temporary taxes in the second quarter.

But tax income, we still have a net loss of close to $64 million for the quarter. And then we have as Bjørn [Ph] provided some updates on our projected spending levels. We have provided some slides and that in the presentation in what we call the operational stent.

It’s largely in line in what we had discussed in the previous quarter, but there is some movement and some increase on the level of 520 last time to projected $560 million for the year. So it’s sort of a reflection of the recovery we have seen in the oil market, the oil prices and then more a regular KRG exports payments, but it was the – I think the reason why we want to carefully increase some of the plan spending to a bit higher level this year. It should be said that of course that this spend level that we saw on the 550 level is before the applicable tax refunds for Norway. And that these cash spend amounts in Norway will be quickly now recovered through the tax refund submitted in the new Norwegian tax rules.

Yes, I think, I’ll just move over to the cash flow, that you see in our reports and we had a cash flow from operations in Q2 of the $67 million, which I think stands out I’ll say quite a positive highlight that pertaining and relative to the other results in [Indiscernible]. So fairly good cash flow driven mainly by positive working capital changes so the $59 million, this comes from reduction of our receivables reflecting the payments of $117 million that we’ve received in Q2 from the KRG net to the — know, in the second quarter. So, these covered some of the previous invoices from October last year, but I also quote [Ph] entitlements in the March, April and May this year.

We have received now the — in this month in July we have received the net and document payment for June at an amount of $22.6 million net to DNO and this amount of course will then be included in our Q3 accounts.

Otherwise on the cash flow, we show our spending flexibility in reducing investments to a low level of $40 million in the market developments. And we assume the other main item on the cash flow we have within the net outstanding amounts of $138.5 million of the DNO or one bond as maturity engine.

So mostly due to that debt repayment, our cash balances were reduced to $427 million at the end of the quarter. We have a presentation slide on the new Norwegian tax rules. And we welcome data to measure positive development in June. So we show that the based on the past changes and the including the tax refunds from last year from 2019, we now project receipt of $206 million in tax refunds in Norway this year in the second half. And on top of that, the $9 million in U.K. tax refund. So for a total tax refund of $215 million to be received before year end this year.

We will maybe have a lot of the detail around the new and recent tax incentives that we will have in addition to a refund or expiration losses now also refund of all tax losses six times per year starting in August this year. So for instance, half of the losses for 2020 will be paid out in the second half of this year, and the balance will be paid out in the first half of next year. And the payment structure will go for tax losses for 2021.

We have projected that this new programs will mean a tax refund effect of $140 million for 2020 and as I said half of that 70 million to be paid this year and the rest next year. We will further receive $51 million for the cessation tax losses DNO North Sea Norge AS following the consolidation that we are done on the two Norwegian companies after the Faroe acquisition.

We also have the normal exploration tax for refund for 2019 in an amount of $85 million. That will go mostly towards repaying the loan balance underwriting exploration financing facilities. So again, all in tax refunds of $215 million this year, will provide significant positive cash flow for our North Sea business. We also project to receive significant tax refunds in Norway for 2021 of the estimated refund amounts will be determined after we have finalized our budgets and plans and the assumptions that are needed.

I think the main point here is to say that the accelerated tax refunds will significantly strengthen cash flow and liquidity for recent operations in 2020 and 2021.

Finally, to just complete some initial summary from my side. On the capital structure, we have a — feel like this is probably the cash balance of $427 million, as we saw in our slides. I think we’re in good shape on the leverage, but net interest bearing debt $537 million at the end of the second quarter.

We see that we will be close to fully funded on the Norway with a new tax renewals over the next two years, but we also have good headroom on our long term RBL above the current utilization. In view of the new tax rules, there’s also a question whether we will need to use the bank financing for exploration that will probably be less needed now for the next couple of years.

It’s worth noting that now that we have repaid the short term maturity on bonds. We only have long term bonds with maturities three to four years out, that add further to our credit string. We also saw a slight increase in our equity ratio in future to 33.3%. So I think that’s concludes some brief comments from my side. Of course, it’s been a very difficult third quarter in Q2, good to be done with that. And hopefully we now will look forward to return to more normal market conditions through the second half of this year.

I think we then have [Indiscernible] made some initial comments. We won’t have time to go through a lot of detail on top of what we have done, but maybe then open up the questions at this moment.

Operator

Question-and-Answer Session

Operator

[Operator Instructions]

Unidentified Analyst

Hi guys, it’s [Indiscernible]. Can you hear me?

Bijan Mossavar-Rahmani

Good morning. Yes

Unidentified Analyst

Good morning. Thanks for the update. I’ve got two questions. One on revenues, the other is on operations. The first is, I’m tracking the monthly numbers that are coming out from your partner, if I say and my models not quite working, I always assume there’s three variables because the oil prices, the entitlements most production. And my numbers are running too high, even when I correct say today’s given. So I’m just wondering if anything has changed whether, obviously, the benchmark crude price, but I start with on my screen is probably too high, but whether the $13 10 [ph] differential has changed. So I’m wondering if you can give any guidance on forecasting turnover fees Haakon? And then the other question is on. I’m very impressed with the increase in production to 115,000 barrels a day. But I’m, I’m assuming that’s all Tawke, so the question is, should you be worrying about Peshkabir? Thank you.

Bijan Mossavar-Rahmani

Bijan, here. Good morning. How are you?

Unidentified Analyst

Good, thank you.

Bijan Mossavar-Rahmani

So on the operations side, infact most of the increase is Peshkabir. We focussed on Peshkabir first. We have a similar well intervention program now being initiated at Tawke. Tawke and then both these fields, we have planned by the end of the year to do more drilling and opening up our wells that have not been that were — which is still in favour of Tawke. Tawke is just at 60,000 barrels a day barrels from Peshkabir. So no real change in the need in terms of a mix return of the two. But the focus in fact was on Peshkabir as some of the low hanging fruits interms of the nature of the interventions of the cost where Peshkabir and the work was done in the matter of three to four weeks. We did and I think a total of maybe a couple of million dollars’ worth of stand. The team has been terrific, especially working under these circumstances when we’ve had Corona virus. It’s been a big issue in Iraq as you know. We’ve had to bring in expats, quarantine them for two weeks, before releasing them to the fields and then be at quarantine on the way back. So extremely difficult circumstances, they did a terrific job or so five of them. And we’ll keep going. So we haven’t again quantified or given any guidance on where we think we’re going to last towards the end of the year, but we’re back in a spending, in a cautious spending mood, looking for low hanging fruits. There’s still more to be done, but we also have UNI on oil prices as available incentives to do very much with in the low oil price months. That $30 plus is still unchanged, but there is available I guess incentive to put more oil out very very low net backs to us or to the governments as that’s changed we changed course and I’d step up.

Because we have spend so little on those two, in Kurdistan we were not exhausting our cost recovery. We are spending little, so we were getting back less than one that we were getting historically, because we weren’t maxing out our cost recovery. So I know that some of the monthly payment levels have stopped not because the margin is – not because the $30 figure had changed or the payments were somehow skewed. That’s because oil prices were lower which you obviously you were paying attention to, but also because we were spending less again less back in cost recovery.

Unidentified Analyst

Okay, thank you.

Bijan Mossavar-Rahmani

Yes and I discussed maybe offline on the difference versus the on actual versus the model. But it’s been on conference. We still have the $13 discount for the delivery in Kurdistan being the equality of differential with the tariffs and the pipeline to sum upto 30. As you have seen, there’s been a unusual quarter in Q2 and with large discrepancies between data event and other event quotations on the oil price. It could be something there I would think, but only specific reason why you would have that change – that difference from your estimate through the actual. So maybe we could look at that in more detail.

Unidentified Analyst

Okay, I suppose the thing I was surprised by was the enticement number was slightly higher than I envisage, but I’ll scratch my head and look at that. Thanks for the color. Okay.

Bijan Mossavar-Rahmani

Okay.

Unidentified Analyst

Hi, guys. This is [Indiscernible] Just wanted to ask you regarding our production since July volumes are substantially higher than what we saw in the second quarter end. And on in the end of May, you’ve provided a updated guidance saying that you indicate 90,000 barrels per day average for the second half of 2020, absence of filling. How will this strong start to the second half of 2020 affect that guidance number? So that’s the first question.

And the second question is, should we expect higher under lift to be reversed in the third quarter of 2020?

Bijan Mossavar-Rahmani

I can address the Kurdistan side and then leave it to Haaken and Bjørn to address the present situation in the North Sea sector. In Kurdistan, again, there’s we’ve indicated a more severe contraction of the Tawke production driven in part by lower prices in part by Coronavirus related restrictions and limitations to what we could do.

One of the other challenges that we face and others face in this market is the contraction of the services industry, which we rely especially in Kurdistan and a number of service companies limited their ability to move people and announcements impacted by Coronavirus restrict travel restrictions. So our assumption has been very, very little in the way of interventions or real work, or workovers or drilling. And because of natural field decline in these fields is and in the industry, if you’re not spending enough to interventions and changing out pumps and the other things, production will drop off.

So that was really a — those numbers were driven by low activity, driven by low prices. Payments were not regular from Kurdistan and also limitations caused by the market and by health conditions. As we’ve gotten more comfortable with payments and with oil prices stabilizing and as rent $40 range. And again, conditions changing that are becoming more comfortable. In terms of movements, we now feel confident to make these investments and these investments will bear fruits. But just the logistics of getting people in out of Kurdistan and leaving the need to quarantine them for two weeks at a time. Besides the airports and airports in Kurdistan are still closed. To get people in we’ve got from all over the world, we have expats and all over being here today. We have to bring in into another location, charter flights to get people in and out of Kurdistan, and schedule. The operating conditions are still very, very challenging. I’ll make light of that.

And that’s why I said it’s been a terrific job done by our people on the ground and our teams to coordinate these movements to get this work done. And we had a lot of experience during the ISIS crisis, getting people in and out, securing them, dealing with sheltering and visas, and how to get people in and out, in a safe and efficient way. And that’s, that’s been reflected now in these results.

So that’s our first time then there is scope to do more. We wanted to do more, outdoor drilling. We’re active even when we stopped drilling at in Tawke license. Our activity level at our other exploration block, Baeshiqa continues. We then declare that we’ve now completed the third exploration well on that license and there is going to be testing during the month of – starting in the month of August. So that activity continues and again, under very very difficult circumstances and in that location, typical security circumstances as well. So lots of challenges, but we’ve addressed it before and hopefully we will be as successful and keeping people safe and asset secure and as we were in the past, but it’s day-by-day, looking at the challenges and trying to address them as they come in our direction.

Talking on there beyond on the North Sea and other lists, listing schedule.

Unidentified Analyst

Yes. Maybe you guys. Of course it’s a movement and — team now in the lower list of volumes in the second quarter.

Bijan Mossavar-Rahmani

It’s not like just one field is spread across several fields. We can mention some of the fields in the Ula area. Ula, Tambar, Ula being the recent field names. Some of the areas where we have not listed per share, and they also have a drag in some other smaller fields. So when it comes to the question where we see that full list realized in Q3, probably not because it’s going to vary across these various field on how often they have cargo listings that we will keep sharing. So I expect me to get some of it back in Q3, but not all of it. So it will really have to be the sum of all the parts to get to that, that answer. But it will be then realized that the market as when they are listed, and hopefully that will give us some positive effect that you also can, we can see that oil prices stay up that will improve again.

Unidentified Analyst

Make sense. And just going back to Kurdistan, trying to call it quantify that, that is definitely off to a very strong July production. And if you’re – to guide in the similar management as you did in the end of May period, absence of further drilling, it would be on average 90,000 barrels per day. Has that number changed? And if so, to what magnitude? And is that also explaining the slight increase in operational spend for 2020 from the then projected $520 million to the current guidance of 550?

Bijan Mossavar-Rahmani

It does. We expect to do more. We’ve indicated before that while our drilling is soft, we have two rigs now stacked on – and the license one at each field. And we’d like to drill. If everything stays the way it is now in terms of prices and the Coronavirus challenges, with respect to the movement of people and logistics. And if we have availability of service companies to support our activities, then our top expectation and plans are that we will start drilling again. At the top key we have a couple of wells we’d like to drill there this year. Start the drill this year and also at one — at least one. So if — again, everything else stays. If everything stays the same, which is seldom happens, we will see more activity and we also look at our exit date. But the Tawke license will be something maybe a little bit less than what it is now, but not much.

But I think that was hard for us to, to give guidance with the crystal ball and say, what — it’s kind of ours is going to do towards the movements of people and equipment and services. But we are — that’s a more active drilling program, some of which is reflected in those numbers is fully funded. And Kurdis saw this year we have the funds and we have the locations and we have know exactly what it is you ought to do, subject to these external events and developments over which we have less control, no control. We have some ability to respond to them. But ultimately, you can’t move. I’m taking this call. I’m in the United States. My wife and I have been in Norway since the Coronavirus and when I can get back to Norway again. So I mean, we’re all impacted by this. I’m sure, many of you are impacted. But all of your impacts about these limitations, restrictions as well. But you’re seeing us we haven’t gone home for the summer. Most of us would been active, and we’ll continue to be active. And we’re excited about what we do. And we’re excited about the results. We thoughts it come through this for a very different partner, as well as we have and we want more of the same that we’ll see.

Analyst

Okay. Thank you.

Haakon Sandborg

If I could add that. You had a question though. You mentioned the guidance on the spend level project and of course, we have a very dynamic situation when you put together exploration and capital of extreme abandonment. These estimates they will shift directly here. We did the provider some quite detailed guidance at the end of May this year in stock exchange release. And then when you look at the presentation from Q2 that proceed this morning if you recognize most of the numbers from our release in May on the guidance, but there is some variation So we will see somewhere traffic movements in my opinion, projected for 37 and then deploy in the North Sea, operational sort of where we were on the guidance, bid on OpEx at the moment, but these things to us is very quite dynamic and they’ll move around. So they’re largely keeping the guidance that we gave in the end of May. But with some increased mostly due to the now expected our planned to increased activity in Kurdistan.

Analyst

Okay. Thank you, Haakon.

Bijan Mossavar-Rahmani

Make one other comments with respect to our activities and purchased stocks. There are no sort of artists [ph] around the sense of artificial restrictions in what we can do in the sense that there are no limits on production by the government. The government would like to see us produce more rather than less. Our partners are very strong and Tawke are aligned with us. We all want to do more. We’re able to do more, we’d like to do more. So, there are no, again, limitations like photos or other artificial restrictions or bureaucratic barriers to decision making and fast acting. So in that sense, it again comes back to some of the other who are more global market related limitations to our interest and our desire to do more.

Analyst

Absolutely. Thank you.

Christian Yggeseth

Hi. This is Christian Yggeseth of Danske Bank. Can you hear me?

Haakon Sandborg

Yes.

Christian Yggeseth

Okay, perfect. Now, I have a few questions related to the temporary change of taxes in Norway. First of all, have you identified any projects in your portfolio that you can accelerate for sanctioning? And secondly, have you have you seen any changes to the asset pricing in the North Sea on the back of the change? And thirdly, have the tax change at all — changed your prioritization of capital allocation between Norway and Kurdistan for the next few years?

Haakon Sandborg

For Vega question, Bijan, I’ll start with you.

Bijan Mossavar-Rahmani

As to Triassic project, of course, we operate the Jurassic [ph] project in Norway. And we are working hard to see. And we are very significant to see if we can move that deal next year. As to other projects of course we are monitoring and decided that we also working with our partners and the operators to elevate those projects. Asset pricing, I don’t think we’ve seen any meaningful reflections here, like a benchmark asset prices. I think on asset pricing. And I know we have a number of people from London maybe you can chime in. I think we’re still seeing more assets available at the market in the UK that at certain level for some time and haven’t moved very much. But we’re also seeing a sort of separation in terms of assets between sort of the mature and Brownfields assets being more available under better terms. They usually are, but I think we’re seeing more of a split and separation between Greenfield projects and Brownfield projects, with the latter being available to anybody who wants to take on. And there are pressures on companies to steer clear those for good reason and some models good reason, but — so we’ll be watching that carefully as well. That’s in Norway [Indiscernible] our side. So yes, a big shift. Specifically one asset sales and there are lot of other deal. So when the change that make pricing down for few time. We’ll see a number of deals in them. Haakon, do you have any other thoughts how you see it.

Haakon Sandborg

Yes. Can you hear me? I had a phone. Of course, we mentioned interested in trying to speed up some of the projects now and that would actually in our release and what we can control and work with the partners otherwise to accelerate some of the exciting projects that we have focused on. So absolutely in more interest on that question. But you asked about the allocation of capital between our business units. As early as you say, of course we have a lot of things to work on in both areas; North Sea and Kurdistan and then go through the normal capital allocation process when we do our budgeting for next year, and I can’t give further real clear answer on that. But of course, very positive effects although what you see in Norway is something that we will take into account on the tax side.

Christian Yggeseth

Okay. Thank you very much guys.

Unidentified Analyst

Hi. It’s [Indiscernible]. Good morning.

Haakon Sandborg

Hello.

Unidentified Analyst

Hi. Thank you for the presentation this morning. And just a few questions if I may. And the first is on your North Sea RBL. I think you may have touched on this. But if you could just clarify if you’ve completed the spring redetermination. And if there’s been any changes there? And if you could just comment on what the amortization schedule looks like till 2026, that would be helpful. And it may be more longer term. If you could just comment on how you’re thinking about capital allocation beyond 2020 versus your debt maturity profile, the two bonds in 2023 and 2024 alongside the amortizing RBL? And finally, just to click on maybe on the Hades appraisal well reserve if you could talk about how you and the partner initially thinking about commercial commercialization of virus Hades and if you have any updates to provide that will be very useful? Thanks.

Haakon Sandborg

I get start to begin on first question from the RBL redetermination, Joe, we had a good discussion with our RBL Bank. And that was done effective at the end of May. So, of course there’s was some movements in the all parties given what was going on in the market at the time. So that was used in the forward looking calculations of the borrowing based amounts. But we arrived there finally and move borrowing based amounts in other words to which we can go against over $235 million at the end of May, which we were pleased with was a good outcome we thought a small movement down from the previous level what to be expected.

We’re drawn around the $1409 million on the current utilization. So we have extra headroom, as I said, on the RBL. We say that, of course will be supported by the tax refunds for Norway, so fully funded in my mind on the North Sea for this year, next year into 2022, unless we start to adding a lot of investments. But looking good on the RBL and on the liquidity and cash situation for our North Sea business. The amortization on the RBL, it’s a long term RBL in 2026 in terms of maturity. It’s not amortizing until the end of 2023 and the end of September, 2023, so then sort of steps down gradually from end of September 23, until the maturity date in 2026.

So we will see what we have in terms of borrowing base announced as we approach the amortization schedule and normally that gets pushed out if you have a good development on your asset base. So, I think we’re in very good shape on that. And that we’re able to add more boring base capacity with the plants we have towards the North Sea. I was not quite clear on your bond question. Could you repeat that Joe?

Unidentified Analyst

Yes, sure. I just wondering how you thinking of capital allocation. And I appreciate it quite a while off now given uncertainty at the moment, just if you’re thinking more longer term, strategically how you’re going to meet those liabilities? And whether this can be a capitalization framework for next few years, just in case things go maybe this year, early next commodity crisis?

Haakon Sandborg

Yes. As you know, we have to bond the bond outstanding is another $400 million — over $800 million on materials at mid 2023 in the next 2024.. So, we’ve been an active issue for many years in the bond markets and definitely refinance and especially maturity by refinancing. I think we’ve done 17 different bond placements over the last 18, 19 years. So we are a frequency issue and a well known to the bond investors. We will continue to grow up our business of course and grow the business. So I think we would look to basically be in position to repay or refinance. We’ll see that mid 2023. But in terms of capital allocation, we basically tend to be focused on having a very good cash flow position in our balance sheet, that’s configured you. So when we have unexpected developments likely in Q3 that the pandemic coming in.

And the same thing back in 2014 with the trust we have security events, et cetera. So we always tend to — again, we’re very focused on building up a very strong cash position to maintain a low or very low net interest bearing debt to meet the maturities, like we have in 2023 and 2024, with the good cash and also to have the extra protection for buffer for any unexpected developments. So I think the main answer to your question is to continue to have a strong cash on the balance sheet and the capital cash buffer available for both debt repayments and make sure that people would be willing to refinance and stretch out in new bond placement. So I think our track record speaks for itself on how much we have done, how successful we have been in the bond markets and hope to of course, continue that track record.

Unidentified Analyst

Thank you. Yes. And just the last one was on Hades, if there’s any comment on that, that would be helpful?

Bijan Mossavar-Rahmani

Yes. On the Hades, you know that the recent appraisal was disappointing, and the operator has with these developments. It’s too early to say what it means for future developments. But it needs to be looked at together with several small of several recommendations that can potentially be developed together. So its too early to say, but we are of course working on this.

Unidentified Analyst

Okay. Very helpful. Thank you.

Haakon Sandborg

Good morning. Can you hear me?

Bijan Mossavar-Rahmani

Yes.

Teodor Sveen

This is Teodor Sveen, SpareBank 1 Markets. Three quick questions for me if I may. First, [Indiscernible] which you made earlier this year. And how do you see that being developed and will accelerate that development in life over the insurance and debt, tax change? Second question is on CapEx for next year given your comments now it looks like investments in 2021, it will be substantially higher than 2020. Is that a fair assumption? And third question is just timing are those $215 million that is expect refund this year so that coming Q4?

Haakon Sandborg

Okay. Starting with the price, may you want to talk about that.

Bijan Mossavar-Rahmani

I think, there’s a bit of problem. They only speaking we can’t hear him. We’re trying to fix this problem.

Haakon Sandborg

Yes. what I said is that of course, is a significant discovered by the material through-put and we’re working with the operator to show there to look at the forward schedule. It’s too early to give a clear guidelines, but clearly is something that we would like to bring this forward and see that connections that can be seen.

Bijan Mossavar-Rahmani

Yes. Then Teodor, your question was on the CapEx in Nigeria.

Teodor Sveen

Yet. It just seems like they will build up activity into going next year. So will that — how much — how you should expect that to be compared to this year?

Haakon Sandborg

Yes. It’s bit early to say. We’re working on plans for next year. And this is out of a downturn and some of them be of course still at a loss. So deterrence to give you any real expectations on, but we’re going to step up with loss. It seems to move with that all guys as we have shown in the past. We are able to adapt our spending level. So quite a high flexibility especially in Kurdistan. So, we are quite keen to move forward and come back to a more normal pattern. There’s a high activity in Kurdistan and also in the North Sea. But taking that a bit cautiously, of course, in the view of the oil price developments and the outlook for oil demand, et cetera. So I don’t think I can get a real firm understanding on that just now. More or less, so Bijan, do you want to add to that.

Haakon Sandborg

No. And not much more to add to that. I do want to respond to another question that came in a bit different, asking if I have any recommendations for books to read about either the energy sector or a biography. And let me respond to that. And there is — there’s no biographies of that I’ve seen that are worth reading for anyone in the energy sector that’s published. It’s a sad story and tale and reflection on the fact that we don’t have the giants in the auto industry certainly that we did in decades past where swashbuckler [ph] made a difference. They’ve all disappeared. But having said that, this market does move in cycles. And the last good books that I read on the on the energy development — so in us development was by Professor at Harvard University, Megan O’Sullivan wrote a couple years ago a book called a Windfall, talking about how the US shale oil revolution has changed the global geopolitical picture in the U.S. is ascendance and so on. And it’s a great book.

But the story has changed dramatically now the last couple years. And is just another — well, it’s a very good book. It just a reminder that this market moves in odd ways and in cycles and one has to appreciate that some of the developments we see in the markets and those are the power politics and the demand, the supply and other developments have happened before in other ways, but the market is cyclical. It goes down and it comes back up again and it’s good to be have that perspective. One thing we haven’t talked about which we had indicated in our refer to of course, in our report for the quarter was the roughly $240 million arrears in Kurdistan for the months of November through February, this past winter, and also for our override payments. And we indicated that we are in discussions with the Kurdistan government to find a mutually agreeable timing and arrangement to have those arrears cleared.

Obviously, Kurdistan and other governments have been hard hit by these for a lower price world and their ability to pay has been interrupted for that period. Although that’s resumed for in the last several months. But there is this large areas number that we are distracted discussions to have to have recovered and paid, and by fully expect to reach accommodation, how that we done in the past, but that will strengthen our position in terms of investments and more rapid investment spending in Kurdistan. So as well, as across your portfolio. Bijan, would you want some to add to books for start decision like Kurdistan.

Bijan Mossavar-Rahmani

No. At the moment I have no comments. I’ve just stop, if there are no other questions we have an email questions here.

Unidentified Analyst

Can I jump in. [Indiscernible]. I was going to ask about deferred payment. Is there any sense of when we could get a resolution on that? Are we thinking about Q3 or potential Q4 resolution? And then specifically on the override, again, when do you think that could be reinstated? And in terms of how you’re thinking about it at the moment and the overall specifically, are you treating that as an accruing receivable right now? Or is the most likely solution just that will be an extension to the override for the last month?

Haakon Sandborg

We’re discussing that the override is a smaller piece of a larger puzzle. And I say it’s a puzzle, because so much of this is the arrears building up over a result of the crash in oil prices. And the Kurdistan government made it quite clear early on this, when oil prices recovered to a level in which they have a freer hand and more of our ability to address this they will do so. They understand that the main driver of the foreign exchange earnings are the oil companies and the oil companies have to invest to keep growing and be to maintain production and revenues. And they indicated that Brent hits around $50 a barrel, the companies will sit down with the government’s and they’ll discuss a schedule of payments.

So, that has been the public plan. So I know the government is trying to find other ways to address this, so the companies can have a freer hand in terms of again reinvesting Kurdistan. The companies are left in Kurdistan tend to be smaller ones. Importantly, some of the early players are still there, the majors have come in, some of the left. And for these companies even they know importantly, maybe they’re bit less than others, but Kurdistan is a major engine of our operations and our revenue stream. Without funds coming in the investments can be made. And that’s all well understood. I think everyone means well. That’s our limitations and that have to be address.

So rent, will be — will be there be some announcement of a timing and so on. It’s really driven by oil prices. The fast oil prices recover, the faster we can have these conversations. But there are ongoing discussions between the companies and the government to find other creative ways of addressing this. One way we resolve this issue and we have the big build up several years ago, the ASA [ph] prices is rather than a cash. DNO, so if the government’s 20% interest than the Tawke field that we did the over ride. We just trade and we want to grow. We had no better place at the time to put our money versus time. We found the solution that worked for us. Other companies to cash return stronger and larger positions and the Tawke license which we knew well, I think it turned out well for everybody. So there are other creative ways of dealing with this and everyone means to do the right thing and recognizes the limitations.

So I’ll create the prices as low as it went, and faster recovers, faster we’ll find the solution that’s — that’s sort of — we’re keeping an eye on that money and those funds and the ideas, how we want to spend them when they are available to us. But even those money those are coming larger this year, as we said earlier, our program in Kurdistan is already full funded with the revenue stream that we already have coming in. We can’t spend that fast enough, but we’re trying the ways to do it once we have the confidence in the local pricing and also the current export situation.

Bijan Mossavar-Rahmani

And just to add, your second question on receivables from DNO unless you confident that we book those as recievables. And I think the current outstanding on that is about $28 million on that part. I realize the whole — on in another answer and he was about, do we– when we get the tax refund for this year? And this thing was six installments per year that starts on the 1st of August. So first the payment tenure will be an amount of $23.3 million that we get tomorrow on Saturday I guess. So they get with us, we’ll get it tomorrow. If not we’ll get on Monday. So the rest of the 315 [ph] will be coming in Q4. So quite a lot of refunds coming especially then in Q4 is the answer to your question.

Unidentified Analyst

Yes. Thank you.

Bijan Mossavar-Rahmani

Okay. It’s 11:03, so I think we’ll move to end. But there one email question I was to short address it. The question when expected 10% on shares to be releases? And the answer to that, I’ll start — it has taken long than expected. As we’ve even handed five-year credit slowdown, the capital economic market especially. Now we expect to take here shortly after summer, which is then coming quicker than here in a way. But I think we will say, thank you for everyone participating. For those from media to indicate its interest, our Communication Manager, will reach out to you shortly after this call. Thank you to everyone.

Haakon Sandborg

Okay. Thank you stay safe and healthy.





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