Good afternoon, ladies and gentlemen, and welcome to DNO's Second Quarter 2024 earnings call on this very pleasant day in August. My name is Jostein Løvås , and I'm the Communication Manager here at DNO. The plan for today's call is to start with a brief presentation, which will be given by DNO's Managing Director, Chris Spencer, and CFO, Håkon Sandborg. After the presentation, we will open up for questions in a Q&A session. Please note that the Q&A session is for investors and analysts, and any media requests will be dealt with separately. During the presentation, all other participants in this call will be in a listen-only mode. If you want to ask a question in the Q&A, please click on the virtual hand on top of your screen.
When you are selected, you will be notified on your screen that you are allowed to unmute, after which you must remember to unmute yourself. It could be nice if you introduce yourself before asking your question. And with that, let's start the presentation. I will hand over to Chris.
Thank you very much, Jostein, and once again, welcome to everyone joining this call this afternoon here in Oslo. Let me just start by explaining the picture that you are looking at. In DNO, we had a wonderful milestone during the quarter. Actually, on the 25th of June in 2004, some 20 years ago, the Tawke PSC, first edition, if I can call it that, was signed in, a nd it is from that that DNO has built the tremendous business that we have down in Kurdistan. It was a wonderful occasion.
I had the privilege of being down in the region and we had some wonderful events, and also together with our partners in the Kurdistan Regional Government and the Ministry of Natural Resources, who we've obviously worked with very closely throughout those 20 years. Thank you. Turning to the quarterly report, as we said in our stock exchange announcements for this morning, another set of solid quarterly results. A doubling of the net profit, which Håkon will go into in a bit more detail later, since we have a couple of accounting effects we've had to deal with this quarter. Underlying all of that was an increase in production, both in Kurdistan and the North Sea, with West Africa pretty stable.
West Africa continues just to be a nice, stable, cash flow to the group. So, I'll come back to Tawke production a bit more on the next slide. The other big event down in Kurdistan is the well that we're drilling on the Shaikan license. And there we reached total depth, TD, during the quarter, and we're just about now to start right at the beginning of that 70-day testing program. Turning to the North Sea, we had another discovery in our Troll area, which we have a slide on in a few minutes' time. A s we've previously announced that, the Arran acquisition completed during Q2, and we signed the Norne area deal in Q2, which should complete in Q3.
Excellent, additions to the portfolio, and giving us a nice outlook in terms of production in the North Sea. Probably the biggest event of the quarter, other than the 20-year celebration in Kurdistan, of course, was the issue of a new 5-year bond. We're very, very pleased with the response we had from the market. On that, we've traditionally been very proactive in refinancing our debt, and this is an example of that. We upsized from the original $300-$400, and we've achieved an excellent coupon rate.
In fact, it's the lowest margin between the sort of prevailing market interest rates and the nominal rate that we've had on a DNO bond, so extremely pleased with that result, and further enhances an already strong balance sheet. And that's reflected with the existing $940 million of cash on the balance sheet and $158 million in net cash, which is actually pretty similar, as Håkon will show, to the end of the previous quarter, the last few quarters, really. Yeah. Now, with all that background, I'm pleased to say that our board has decided to increase the dividend by some 25%. The dividend was reintroduced back in the late, in late 2021.
This is the first increase since then, and as we've said in our announcement, that's because the board, when it makes a move on dividend, it wants it to be a sustainable move. Thank you, Jostein. So, touch briefly on the main messages from Kurdistan. Well, now we've established the, through Q1, we effectively feel we've established the local sales as a consistent method of monetizing our oil, albeit at lower prices than we would wish. O n the back of that, we increased spending, and we should have probably said here, increased quarter- to- quarter, quarter- on- quarter spending. So in Q2, we increased a little bit relative to Q1, and to optimize the production in the Tawke license.
I make that comment because now, as we say, later on the slide, we're actually gonna mobilize a rig to go back and drill the first new well on there since early 2023. Thanks to the excellent performance of our Kurdistan business unit team, who've had a real laser focus on costs this year, all of this new activity we're going to be able to deliver within the budget that we had set for 2024 for the Tawke PSC. So that's why I made the distinction between increased spending that was just quarter-over-quarter, not increased compared to what we thought we were going to spend.
Having said that, there'd be a slight rejigging from OpEx to CapEx, but the total budget for the year remains the same. Whereas the production's gonna come in probably around the $80,000 mark through the whole year. We were a little under in the first half, $78,000, I think, on the operated level, and we hope to be a little over in the second half. Great performance from the teams in the field, in Erbil, and the support teams in Dubai. I touched on this earlier, the export pipeline regrettably remains shut. However, we have now got a pretty much well-oiled machine where we're selling to local traders.
We've got the prices into the upper thirties per barrel, which is obviously low compared to Brent international pricing. However, we get payment in advance to our international bank accounts, so we have removed the payment risk that we used to have from time to time in Kurdistan. And then finally, we're all very excited by the Baeshiqa-3 well. Great performance from our drilling team to get down to TD on this well, and as I mentioned a few minutes ago, we're just starting that testing program these days. I hope to have something to report next time we have one of these calls. Thank you. Turning to the North Sea, we have the 2 wells that we've drilled so far.
Hummer and Heisenberg was on last time around, and last quarter we had the Gjøk, where they—these are smaller, but which was a lovely success. Gas condensate discovery right in the heart of this prolific area and with an operator who's keen to get this developed and tied back. So these should be, although it's smaller than some of our other discoveries, these should be very valuable barrels. Well, they're actually, it's actually gas, so it's barrel equivalent, I should say. We're a little disappointed with the rig schedules that have been against us from Sjark and Horatio, but that's where it goes in the North Sea sometimes. We were really looking forward to those wells, but they've slipped now probably into 2025. Maybe one might start in December.
That has the flip side, of course, of reducing our expected exploration spend this year, but it just moves it into the next calendar year. But importantly, after a bit disappointment in the first half, where we had both a delay to the Trym start-up on the back of the well-publicized delays to the restart of the Danish Harald system, but also a delay to our Andvare development. Now, looking ahead, those give us a nice bump in production as we move from now into 2025. And that is also complemented by the two acquisitions that we've done that I touched on the previous slide, which we'll be adding to our North Sea production as well.
So, although we have the traditional summer shutdowns in one or two of the fields right at the moment, the outlook for North Sea production over the next few quarters is very strong. So those were the comments that I had from more from the operational aspects. I'll hand over to my colleague, Håkon, to take us through the key financials.
Yes. Thanks, Chris, and hello, everyone. Right. So, I'll do a brief financial review for the second quarter. And as usual, let's start with these key figures. As shown here, revenues dropped by $46 million- $137 million in Q2, and this was mainly due to lower sales in the North Sea, coming from lower lifted volumes in the quarter. North Sea revenues thereby dropped by $43 million- $80 million in the quarter. In addition, our Kurdistan revenues declined by $3 million- $57 million, and that was basically on lower net entitlement production, but with an offset for higher oil prices in the period.
The operating loss of $3 million that you see in this quarter is partly driven by the lower North Sea revenue due to the lower liftings. But it should be noted that we thereby are building a underlift position in Q2 that will be lifted and converted into revenue in the following quarters. In addition, to explain that operating loss, following the Arran acquisition, we recognized a deferred tax asset of $62 million from U.K. tax losses, and that in turn led to a $41 million impairment of goodwill. Together, you see that these two entries have a positive impact of $20 million on net income, though they have been recorded in different lines in the profit and loss statement, as required by IFRS accounting rules.
Also, we had an increase in exploration expenses, reflected from higher seismic costs in this quarter. Next one, please. When we move to the cash flow, we see that we had a good increase in operational cash flow this time to $139 million in Q2, up from $100 million in the first quarter. Now, net working capital change admittedly had a positive impact of $62 million in the quarter, explained by an increase in trade and other payables. And key contributors here were prepayments from customers under our sales contracts in the North Sea, as well as a positive working capital contribution from our sales and lifting arrangements from the Tawke license.
Otherwise, we mentioned we had no NCS tax payments or refunds in the first half of this year, and based on the current exploration program and development CapEx, we will only have minor Norway tax payments, if any, in the second half of 2024. We had high investments over $121 million in Q2, mostly well, partly due to the acquisition of license interests in the Arran gas field in the U.K. at $60 million, combined with $61 million in organic development CapEx, mainly for the Berling, Brage and Bestla licenses in the North Sea. As well as we had some capitalized exploration, mostly for the Gjøk discovery. So, this means that we are following up on our clear strategy of building significant new North Sea production, both through extensive organic development, but also through M&A transactions.
Under finance, we had a net inflow of $318 million, driven by the new bond placement in the quarter. I'll discuss that a bit further on the next slide. We also paid a quarterly dividend of $23 million in Q2 under finance items. It should be in order that we have a strong free cash flow in Q2 at $76 million, if you net out the Arran acquisition. So, on this basis, we saw an all-in increase of cash of over $337 million dollars, up to a quite a high level of $943 million at the end of the quarter. Next one.
For our capital structure, Chris touched on that, but we have for many years followed a conservative financial strategy of quite proactive management of debt maturities and maintaining a strong balance sheet. So, in line with this strategy, we completed another successful $400 million bond placement in May. I think maybe you took some of my points, 'cause, it's well received, oversubscribed, and with a very competitive rate compared to some of the other placements in the period. But maybe more importantly, this is again a five-year bond, and that prudently extends the maturity profile of our interest-bearing debt. And concurrent with the new bond, we also bought back $50 million in our existing DNO04 bond. That reduced the outstanding amount of that bond to $350 million.
That was done partly in order to start early on addressing the maturity of that bond that comes in September 2026. Following these bond transactions, combined with the solid cash flow in the second quarter, our increased cash position at $943 million now clearly adds further to our financial flexibility and to our capacity for additional inorganic growth. As you see here, we remain in a stable net cash position at $158 million, while our equity ratio dropped to 42% in Q2, and that was due to the increased size of the balance sheet following the debt placement. I'd say in summary, we have had a very good second quarter, both for operations and finance, and we are now well underway into the second half of this year.
That ends my comments, and I'll hand back to you then, Chris.
Thanks, Håkon. So just summing up, as Håkon says, another solid set of results from DNO this quarter, and extremely strong balance sheet. The outlook is of increasing North Sea production as we move from 2024 into 2025. Steady production in Ivory Coast and of, of course, in Kurdistan, even in a local sales scenario. And this was the background to the board decision. As we said in the announcement, the board of directors aims for a sustainable dividend level. And with these three points I just made, that form the backdrop to the decision to increase the dividend by $0.25. Of course, we all in DNO remain, in terms of our Kurdistan business, we also remain focused on the debt recovery from the sales we made to KRG in 2022 and 2023.
We keep pushing for reopening of ITP, but the board is not counting on those when it decided to increase the dividend. We believe that's a sustainable decision. Those were the last thoughts I had. I'll turn it back to you, Jostein, for the Q&A.
Okay. Thank you, Chris and Håkon, for the presentation. And then we are ready to start the Q&A session. And the first question comes from Eivind Hagen. Eivind, please go ahead. Eivind?
Yes, I was unable to mute myself, but now I believe you can hear me.
Yes.
Excellent. Just one question on you know, the cash position and the inorganic growth opportunities that you're mentioning. Could you talk a little bit more about what kind of opportunities you are seeing, and in what regions you focused most of your efforts?
Certainly, I can. Oh, Håkon?
Yes, the priority number one remains the North Sea. And in that context, Norway. We are keep an opportunistic eye out on the U.K., where, as you know, as you know, we have a couple of very mature assets, but also one or two exploration blocks. So we have a small business in the U.K. and now, and that also enabled us to do that Arran transaction that we were, we're very pleased with. So we are opportunistic as it's the case of the U.K., but the main focus is Norway, where I think we discussed last quarter that we are really pleased with the development portfolio we have, and obviously, to optimize the financing of the company, it'd be lovely to put some more production on top of that business. So that's the priority.
We have also talked about a third leg for the company, and that remains something we would like to do, but it's been a lower priority than building on the North Sea business in recent times.
Excellent. Thank you. And just one quick question on Kurdistan as well. Over the past few months, have you seen any developments towards, say, a solution to the export issue, or is it still a bit of a deadlock?
We have seen efforts. We've made efforts, and we've seen efforts, but it remains deadlocked, I think is a fair comment. Yes, and where exactly the deadlock is is very difficult for us to diagnose. And we spend a lot of time speculating on that as our colleagues in other oil companies do, but really, it's very much up to the governments, the regional government, the federal government in Baghdad, and indeed, the Turkish government obviously has a role to play. In our view, if there was a will, there is a way, but so far, this hasn't happened, and I guess we wish we could put our finger on why.
Okay. Then we'll move on to the next, one, two, and that will be, Teodor Sveen-Nilsen. Teodor, please unmute yourself.
Good afternoon. Can you hear me?
Yes.
Perfect. Congrats on a strong set of the numbers. Three questions from me. I noticed that the realized oil price in Kurdistan increased from $32- $36 per bbl, quarter-over-quarter. Just on what's the driver behind that increase, and what kind of realized oil price have you seen this far in third quarter? Second question is on the Tawke production. I see that you're increasing activity there. What kind of production should we expect from Tawke throughout the year, and maybe an indication on exit rate this year would be useful? The third question is on NCS. You reported underlift, pretty substantially underlift this quarter. Should we expect that underlift to be reversed in third quarter or fourth quarter? Thanks.
Yeah, Chris, the first one was the driver for the increase in the local sales prices in Kurdistan.
Yeah, thanks. So, I think the increase in prices we've achieved from Q1- Q2 is a mixture of things. First of all, the local market obviously has been ramping up since local sales started in earnest last summer. So I think part of it is stabilization of that market and finding routes to market for the refined products and so forth. The other element that, well, it's a bit difficult to break it out is that also traditionally for the crude, such as, you know, the Kurdistan blend, the average Kurdistan crude is on the heavier side. So in the summer months, when the market for asphalt internationally is stronger, there has traditionally been a stronger pricing for these heavier crudes.
So it could be partly that as well. So how we look at those two effects is very difficult to diagnose. We'll find that out as we head back into the winter. But certainly, although there are still the occasional disruptions in the local market, such as we experienced last week with the initiative that the government took against some of the smaller, more polluting topping plants in the region. Our ability to sell has really stabilized significantly over the last six months. We haven't stated specifically what we're selling for at the moment, but I think we touch on high upper $30s, I think we put on the slide, Teodor, so that gives you a good feel for where we're at.
The second question was then?
We're looking at the Tawke production in the second half of the year.
Yeah.
Sort of a full for the year, and then what sort of exit can we indicate to?
Again, I think the slides too are saying, well, we're sticking with our guidance of 80,000 operated production for the year. Because the first half was a couple of thousand barrels a day under, that means the second half has to be a couple of thousand barrels over. So that's what we're sharing on that.
Yeah. The authority had the other was on the underlift that we have seen in the third quarter. Will it be reversed in the second quarter? Will it be reversed in the third and fourth quarter? Well, certainly you see, we can see now that we will have an overlift in the third quarter, but it's gonna even out everything from Q2. Well, it remains to be seen, but we do expect a overlift for the coming or the quarter that we are in now, for the third quarter. It sort of, you know, ebbs and flows, of course, in the business. Okay.
Okay. Thank you. Just one follow-up on the Tawke gross production. So, I interpret your answer that we shouldn't expect any increase from now, despite your investments. Is that correct, or are you just very conservative in the way you replied?
Time will show. Time will show, Teodor.
Okay.
All right.
That's fair. See you everyone.
Thank you.
Thanks, good.
Yeah. Okay, so the next question will come from Nikolas Stefanou. Nicholas, please unmute yourself.
Hi, guys. It's Nick here. Can you hear me?
Yep.
All right, great. Thank you so much for the opportunity to answer my questions, and congrats on the strong set of results. So I have three questions to ask. So the first one, I just want to go back to the Tawke guidance. I think the partner, Genel, when it was like last week, I think their guidance for Tawke was that it would be at similar levels as the first quarter. So, so I use... So what- so is the guidance for the second quarter pretty much similar to the first one? Or because I think, I think you just made the comment that it might be slightly higher than the first sort of like, sorry, first, than the first half of the year.
So if you could just kind of like clarify that question. And then the other one is on the dividend. I was surprised to see an increase on the base dividend before the pipeline opened. So I'm just wondering, can you maybe talk a bit about how you thought of that versus, say, kind of like a special dividend or maybe, you know, some buybacks, which, you know, could arguably be a more kind of like sustainable, like within a free cash flow? And then the final question is from some kind of like remarks that have been on the press by Baghdad. It seems that what Baghdad wants is to change the PSC terms you guys have in Kurdistan.
I think APIKUR said that, you know, that was one of the kind of like, red lines, that the PSC terms need to be satisfied in order to resume exports. I'm just wondering if, from kind of like, from your side of things, is that still a red line? Or maybe would you be willing to kind of like, give up some of the sort of like, you know, some of the fiscal term benefits to get higher realizations? Thank you.
Right. The first one was on the Tawke discussion about the production levels in the second half, Chris?
Yeah, but the Tawke, you're talking about guidance, Nicholas, I assume you're talking about production guidance?
Yeah, correct, yes.
Yeah. So I'm, I'm afraid I'm not as familiar with Genel's numbers as you are. So I'm not sure exactly what they said, but as, as I said to, to Teodor, what we're putting on slides today is, I mean, the result, the result is 78,000 barrels a day gross in the first half, and, we're still sticking with our 80,000 on average for the year guidance.
Okay.
Well, I'm gonna take a stab at the dividend one, and Håkon will, I'm sure, supplement, but as I tried to cover in my closing remarks, we have, we think, as you commented, another quarter of very solid results, with local sales in Kurdistan. And, particularly, the cash flow, we're pleased with. We've got a very strong balance sheet, and the net cash, obviously, we took a lot more debt on, but the net cash has been very stable now for a year or so... and, with the outlook that I described of steady production in Kurdistan and the Ivory Coast, and that's Kurdistan in our local sales scenario, combined with North Sea production that we see increasing nicely, from 2024 through to 2025.
The board is satisfied that they could make a sustainable move in the dividend, and that was the background for that decision. I think when you talk about special dividends or share buybacks, that I think would be more linked with a special event. So if we were to see the $300 million odd of debt repaid to us from the Kurdistan government, that's something we continue to work on. That would, in my mind, be a special event that could trigger a special dividend or the base dividend we want to be a sustainable one. Volker, anything to add?
Yeah, well, you touched on it, I think, Chris, but, of course, we have a very good, strong balance sheet now. We are comfortable where we are with the production in Kurdistan and getting paid on a payment basis. So we think we're in a strong position long term here, and we do wanna use a big part of our cash to invest in new production. And that could give us additional free cash flow and additional growth in production. So you've seen that with the acquisitions of the Arran license interest and the Norne licenses interest in this quarter, in the second quarter.
So I think, if you are successful in some of the things we're working on, we could acquire more production and thereby also increase the dividend capacity going forward as we, as we grow the production. So that's some of the thinking going into both the, the balance sheet that we have now and also the higher dividend level that we have, on the board has decided for, for this quarter. I think the third question was on the production sharing contract terms in
Baghdad.
Baghdad.
Statements pipe back to that. Yes, thank you. That's obviously on everyone's minds. So, APIKUR have clearly set out the position for the IOCs as to what it takes for us to put oil into a reopened ITP. And you touched on one of the points there, obviously, respect for our contracts and the commercial terms as such. That is an important one, as is paying surety of payment for future deliveries and past deliveries. So those are the conditions that we have set. We would love to sit down around the table with the key parties and get involved in a negotiation to unblock this issue.
If ever such an invitation come, then I might start to think about your hypotheticals, but until that happens, this is the position that we have, and we're not gonna start negotiating before we have the right counterpart across the table. So, and that, I think, is my comment on that question.
Very clear. Thank you.
Okay. So, I think we have another question coming from Sander Solheim Nilsen. Sander, just let me unmute you. Please.
Yes, hello. I was just wondering that with a declining entitlement share in Kurdistan, and you have a lot of cash, I was just wondering, going forward, if you plan to ramp up or accelerate investments in Kurdistan, going forward. As I see it now, you have probably some headroom in the cost pool. And then maybe a second question, I was just wondering if maybe it's too early to say, but is it possible to say something on your expectations regarding the Baeshiqa well? Thank you.
Thank you. Yes, we are ramping up carefully in, in Kurdistan. We have wanted to have comfort of a, of a sales system, global sales is working before we started to go back into investment. It seems to be doing so, so we're ramping up, but carefully. And as, as we touched on the slides, we're planning to bring a rig back to the Tawke PSC to start drilling new wells again in the second half. So yes, we are ramping up investment, but we're doing it carefully. Obviously, the macro, you know, the political picture in the whole region is very tense at the moment, and so we think we should be cautious in terms of the amount of shareholder money we put into the region. But we're a long-term partner.
We've been through many ups and downs, and so we... I think, I think, DNO, before my time as well, has ridden the ups and downs very well, and we're using that experience this time around as well. In terms of Baeshiqa, yes, I'm afraid it is simply too early to tell you anything. You'll have to wait until I know something.
Okay. That's fine. Thank you.
Thanks, Sander.
Yeah. So there seems to be only one hand up there, and that's Teodor again. And I think, if nobody else is raising their hand, we'll round it off after Teodor's question. So, and Teodor?
Yeah, thanks, thanks for my question again. On just one question on the balance sheet, and you already discussed that you have a very strong cash position and strong gross cash position. Previously, you have at least, Håkon, you have indicated that you're aiming for a minimum cash position of $300 million. That cash position has now been well above $300 million for many, many quarters, and it's now $900 million. So I just wonder, has that number increased in terms of your desired minimum cash position, or is there anything cooking on the M&A side?
I'll start, and then Chris can help me. Well, Teodor, you're right. We've said that many times, and it's really a reflection of the risks and uncertainties we have seen in Kurdistan, the fluctuations we have been going through, and that we have the capacity to manage those in a good way with a minimum cash position at all times, around $300 million. So, we have not sort of left that idea. I think that's pretty much intact, whether it's exactly that amount or a bit less, that could be discussed. But we are, you know, carefully making sure that we have adequate cash and liquidity to meet any unforeseen situation or risk in our main operations in Kurdistan. Why are we having all this cash sitting here now?
Basically because, as I said, one of the reasons is to be very comfortable on our debt maturities going forward. One other reason is the M&A side, as you alluded to. So we certainly wanna grow our North Sea business and looking actively for new opportunities. That will serve many purposes, increase production, diversify our portfolio, and increase dividend capacity, et cetera. So we have many good uses for the cash that we have on the balance sheet now. So believe me, we are, we're working hard on opportunities. I can't go in and discuss exactly what we are looking at, but it has been mostly in North Sea lately. So anything to add to that, Chris, maybe?
I think it's just. I think those are excellent points. Those are the key, key points. When it comes to M&A, we've also seen in the processes, obviously, you're involved in more processes than you succeed in, and we've we definitely note that most sellers are concerned about completion risk, and therefore, to be in a company that has, you know, the ability to complete deals unconditionally is a great advantage in the market. There's a lot of companies who are not in that position. We can do that now, and that was perhaps just adding on to the M&A part that you touched on, Håkon. So, I think that summarizes our thinking there.
We also add, I mean, it's a sort of, it's what everyone says, but we have run at a higher cash position than we probably would aim for over the last couple of years because we have kept our discipline in the M&A market. So, even though we have a lot of money, we are working very hard to make sure it doesn't burn a hole in our pockets. We want to ensure any investment lays the basis for further value creation for our shareholders.
Okay. Thank you.
Thanks, Theodore.
It seems like we must have given really good and fulfilling answers to your questions 'cause there are no further questions, and we wouldn't want to keep you for longer than necessary, but end the call here. Thanks to all for participating. See you again next quarter.
Thank you.
Thank you.