Good morning. Welcome to DNO's second quarter 2022 earnings call. My name is Jostein Løvås. I am the communication manager of DNO, and I will share some practical information. All participants in this meeting are muted by the organizer and will not be able to unmute themselves, chat, or share their screens. We will start with a brief results presentation by CFO Haakon Sandborg, after which we will open for questions from shareholders and analysts. Executive Chairman Bijan Mossavar-Rahmani is also present on the call. If you want to pose a question, please raise the tiny virtual hand on top of your screen. When chosen by the organizer, you will be notified on your screen that you are allowed to unmute, after which you will have to remember to unmute yourself too. With that, I leave the stage to the CFO.
Good. Thank you, Jostein. Hello, everyone. I hope you all are enjoying a great summer, and thanks for taking the time to attend this discussion of DNO's Q2 operations and financials. This time we have kept the presentation fairly short and to the point, so I will focus on the main Q2 highlights and on the key financials for the group. As Jostein said, there will also be a Q&A session at the end to cover any questions that you might have. This nice photo that you see on the front page of our presentation is from a truck loading of crude from our Baeshiqa license. You may now know that DNO has been known as fast truckers for our field developments, but now we're also known as fast truckers.
That's good to see. Let's move on to the next, page, slide, Jostein. Okay, to get started, let's begin with the Q2 highlights. We clearly had a strong second quarter with a further cash flow growth and significant strengthening of our balance sheet. We are thereby now in a net cash position for the first time since 2018. Obviously, the high oil and gas prices are powering this positive development, but there is also solid contributions from our high performance operations and regular contractual payments from the KRG. As such, in our operated Tawke license in Kurdistan, we continue to deliver high production from the Tawke and Peshkabir fields, with some growth in net production now to over 80,000 barrels of oil per day.
We are pleased to see that the natural field decline is being arrested and even reversed through our drilling and development programs, including at the Tawke field. As you can see on the slide here for our North Sea operations, the Q2 net production dropped a bit to 11,600 Boe per day from 12,700 barrels per day in Q1. That was primarily due to planned maintenance at the Ula field. For the new license, as I mentioned, we are also certainly pleased to have started up production and trucking from the Baeshiqa license in mid-June. That's initially producing from the Zartik-one discovery well. We will now be drilling additional wells and engage in further field development and appraisal work to build up production from this exciting license.
We further maintain high development activity in several North Sea licenses, including on the Åsgard project. We are now past the DG2 on this project. Work is ongoing on the FEED studies, and we are on track for the planned PDO sanction within year-end this year. We move on the next slide and now moving over to our financial reporting. These are some of the key figures for the Q2. We are again pleased to deliver high quarterly revenues at $361 million, up 6% from the first quarter. Kurdistan accounted for $239 million of the Q2 revenues. That was up from $209 million in Q1, mainly on the oil production and the higher oil prices.
North Sea revenues came in at $121 million in the second quarter, down from $131 million in Q1. The main drivers here included lower achieved gas prices this time, partly offset by higher oil prices and higher crude liftings. Now, on the other hand, unfortunately, we had a big drop in operating profit in Q2, down to $81 million from $236 million in Q1. This is primarily due to impairments of $127 million, mainly on the Ula field, but also from exploration expenses at $48 million, mostly from exploration wells. With these impairments and exploration expenses, our net profit also dropped significantly in the second quarter to a level of $72 million.
This is after some offset from tax income in the quarter. Just to mention that also important that on a year-to-date basis through the first half of this year, it should be noted that we have basically doubled our revenues, operating profit, and net profit from the same period last year. You know, again, strong operations and higher commodity prices. Fine. Let's go on the cash flow. As you may know and as we have mentioned in the past, this has long been one of the key strengths of our company here in DNO on the cash flow side. For Q2, we are pleased to show further increase in operational cash flow very strong at $341 million.
This is up by $65 million from Q1, admittedly, with good support coming from a $54 million positive working capital change. That in turn was partly coming from reduced KRG receivables due to the payments we received in the quarter. We paid two Norwegian or NCS tax installments of total $25 million in Q2. With these, we completed the repayments of tax refund adjustments for 2021. During the second half of this year, we currently expect to pay $5 million in Norway for the first three tax installments of the tax year 2022. In addition, in the second half of this year, we will receive a $19 million tax refund from the U.K.
As discussed, in line with our guidance for this year, we increased investments further in Q2 to $134 million. This was mainly for CapEx at $78 million and for capitalized exploration at $36 million. In addition, the decom work on the Schooner and Ketch fields in the U.K. accounted for $20 million in Q2. The net finance outflows of $230 million were primarily for buying back $203 million of the DNO03 bond in Q2. All in, we thereby continue to finance higher investments and debt reduction through our strong cash flow. This time with the high bond buybacks in this quarter, we had some use of cash at $47 million in Q2.
I'd say we are still in good shape with cash balances of $801 million at the end of the quarter. Our free cash flow increased again to $167 million in Q2. Looking forward, we see a positive outlook for continued strong free cash flow generation also in the second half of this year. Next one. Here we have our capital structure. We continue to strengthen our balance sheet through the increasing cash balances, reducing our debts, and as I mentioned, we turned net cash positive in Q2. We have thereby had a remarkable move from a net interest-bearing debt of $396 million a year ago to a net cash position of $129 million at the end of the second quarter.
As you see on the right here, we also have increased our equity ratio significantly to 42%. With the bond buybacks, we canceled $224 million of the DNO03 bond in Q2, and that left a remaining outstanding balance of $176 million in this bond at the end of the quarter. We have since bought back additional $25 million in DNO03, and that reduced the current outstanding amount to just over $150 million. I think I wrote all of that before, but in addition to the strong balance sheet, this material reduction of debt will obviously also reduce interest expense and free up cash flow for other purposes. Fine. Next slide.
Looking ahead, on the back of current high activity and drilling of new production wells in the Tawke license, we now expect the gross production from Tawke and the Peshkabir fields for this year to come in between 107,000-109,000 barrels of oil per day. That's well above the previously guided level of 105,000 barrels per day. I could note here that we have added another drilling rig in the Tawke license in June, so we currently have four rigs in operation here. For the North Sea, we drilled four exploration wells in the first half of this year, and that added one good discovery. We will follow with three additional exploration wells in the second half of the year.
We have by now shown good value creation through four NCS discoveries over the last two years, so our exploration program is really starting to pay off. With the Kveikje discovery this year, we have now added to our strong position in the attractive Vestfold-Troll area, and we look forward to drilling another exploration well in this area in Q4 this year. Otherwise, we have this projected operational spend for the full year of $800 million, and that's in line with the guidance that we gave earliest in the year. We have, based on the shareholder approval of an increased dividend authorization at the DNO AGM in May. We have now further announced a 0.25 NOK per share quarterly dividend to be paid later this month.
In dollar terms, this equals about $25 million in total for this quarterly dividend. Okay. To sum up, we are growing organically through exploration and development. We are paying dividends, we are buying back the bonds, and we are building cash balances. In addition, we are certainly also looking to grow further by use of our financial strength to invest in new business opportunities. This will be within our core oil and gas competence. For this purpose, we are now active in the business development discussions in the North Sea, and we are also looking at investment opportunities in new areas outside of our existing operations. We will, of course, revert to you when we have progress to report on these new investments. Good. Thanks for your attention.
I think we can now move on to the Q&A session.
Okay. I think at this stage we have a question coming up from Teodor Sveen-Nilsen. He's an analyst with SpareBank 1 Markets. Ted, you might pose your question.
Good morning, Håkon and Sam. Thanks for taking my questions, and thank you for the update. I have three questions. First one on just your balance sheet. Of course, you have very strong balance sheet now, as you alluded to, a net cash position. Should we expect DNO to run with a net cash position going forward, or should we expect increased buybacks or dividends? That's the first question. Second question is on these rulings we're seeing in Kurdistan lately. We saw the Supreme Court ruling in February and the KRG commercial court ruling now recently. Just wonder what's your thoughts around these rulings, and does that impact your strategy or appetite for investments in Kurdistan at all? Third question is on Baeshiqa. Thanks for the update there.
As far as I remember, you mentioned a exit rate of 8,000 barrels per day in your first quarter update. Is that still valid that you expect to be able to produce 8,000 by end this year? Thanks.
Yeah. Good. Thanks, Ted. I'll start on the first one on the balance sheet. Yeah. Well, as I said, we are very pleased and happy with the strong strengthening of the balance sheet that we have achieved over the last couple of years. We're now sort of back to where we were years back when we had a, you know, a strong position. Whether we gonna run with a net cash position or not, that's not really the target. There will always be discussions on capital allocation and new investments and share buyback, bond buyback. I think to me one of the things I look for is the equity ratio. We're now well above 40%.
I think that's something we would like to try to maintain, a strong, balance sheet by having a good equity ratio like that. That sort of also will guide you on where we will be on the debt levels. In general, we're quite interested in more of the bond buyback opportunities. That will depend on the pricing and the market developments that we see. Of course, also, other use of our funds, but in general, interested in the bond buybacks. I know some of the investors have contacted me directly for possible discussions on that, and I'm available.
like I say, "Here's my phone, and give me a call, and I'll be able to discuss with you on the, on the bond buybacks." I think we're very happy with where we are now in general in the balance sheet. I think it might go up and down on the net interest-bearing debt or net cash situation to deal with. In general, we are now in a good place with our capital structure. On the Supreme Court ruling, I'm not sure if you.
Could I just add a follow-up on that also? It's just to be clear, it's the pecking order is that bond buyback is probably higher on the agenda than dividends or buybacks, if I understood you correctly.
No, no, I wouldn't say that. We have announced the quarterly dividend today, and that's important. Also, managing the debt level is important. Again, looking at new investments. As I say, the capital allocation here, the use of our financial strength, we have to weigh these opportunities against these others. I wouldn't say one is more important than the other, like you are saying. This is a total consideration that we go through.
Sure. Understood.
Okay. On the Supreme Court discussion around Kurdistan, any comments from you, Bijan, on that?
I don't have very much to add to this issue that has already been very widely reported. I know those of you who follow the company as shareholders or analysts are well familiar with the issues. I can only say that as long as I've been chairman of DNO, which is coming on about ten years now, and long before I became chairman, these issues in one form or another have been raised. We've continued to do what we do best, operate, and increased production and be part of the Kurdistan economy and oil sector, and that all continues. Our operations continue as before. Our investments continue as before. We are firmly committed to Kurdistan.
This time the challenges are a bit different than the prior challenges. There have been court hearings in which we have not participated. We have not been represented as far as we are concerned. Our contracts were signed with the Kurdistan Regional Government. They are governed by English law. We are not part of the political process that has led to some of these challenges and issues. With the full support of the Kurdistan Regional Government, we continue in terms of our operations and our commitment to our investments on a business as usual basis.
I believe that is the position of all the other companies that are active, international oil companies that are active in Kurdistan. We will watch developments as they occur. But for us, it's business as usual. We believe the production sharing contract regime is a positive one that we're under, and it's been part of the reason Kurdistan has been so successful in creating a very active and successful oil and gas industry. Production sharing contracts weren't invented in Kurdistan. They've been around, you know, 70-80 years.
There must be 70- 80 countries around the world that have production sharing contracts as the legal structure of their international oil and gas structure with respect to international company participation. It works. It's worked well for them. There's a reason production sharing contracts are the contracts of choice. They create the right incentives for companies to invest and to be rewarded on the success. We believe we are within that international legal and operational structure, and it's worked well for all parties. We would hope and expect that would continue.
Good. Thank you, Bijan Mossavar-Rahmani. The third question was on Baeshiqa and what to expect on the production ramp-up. We are currently producing fairly low volumes from the first discovery well, as we mentioned. We'll be drilling three more wells, so expect to have those mostly done by the end of this year. There's been a bit of a delay here at the other end on getting everything in place, so we're ramping up. I'll be a bit careful about giving you a precise estimate on the exit rate, on the production rate at the end of the year. It sort of depends on how fast and how successful we are in drilling these three wells and the results that we will see from these wells, of course.
There is a learning curve with any new asset like this to understand and appraise, so what do we have here? We think we have, you know, a good idea, but there's more work to be done and to understand this better. As we become more familiar with this, we'll be able to come back to the investors and discuss a bit more on how we see production coming up going forward. We're happy to be in, you know, in development phase now and in production and trucking has started, and it's working well so far. As you know, we truck it up to our Fish Khabur export terminal and ship it out with the pipelines from there.
All in all, things are moving forward, but I'll be a bit reluctant to give you an exit date at this stage.
Okay, thank you, Baeshiqa, and you know, those operations, is that because of our operational style and culture, and because these are onshore fields, we even as we learn more about the field through the development drilling, we produce and learn at the same time. Unlike, of course, as you all well know, an offshore project where you can drill multiple wells and have a huge amount of confidence and a sense of what's the band is of your production before you order the platforms and spend much larger sums and time putting the development project in place. We've put a discovery well on the production.
As we drill additional wells, we'll put them on production. We have a, as Haakon Sandborg mentioned, a trucking system in place to move it immediately to market. As soon as we were given the go-ahead, it didn't take very long for us to start production and start exporting and start earning revenues on the sales of the oil. It's under the same regime as the pricing formula regime as the Tawke and the Peshkabir fields in the Tawke license. Expect that whatever we do, we're gonna add production as we continue to drill. We're still very much excited about the opportunities at the Baeshiqa.
Hopefully, at some point further along, we will arrange to go down the pass to organize the analysts and shareholder trips to Baeshiqa. It's a wonderful, historic part of Kurdistan and Northern Iraq, and it's always, to me, personally, a pleasure to go there. There's so much history. We're surrounded by history and the nature. I would hope in the not too distant future, we'll have an opportunity to invite those of you who want to go see for yourself and what we're doing at Baeshiqa and catch up on what we've done further at Tawke and the Tawke license at Peshkabir.
It's a pretty impressive operation and one which we're very proud of and continue to expand.
Okay. I believe the next question.
Yeah, Jostein Løvås, just earn yourself an invitation on the next trip. Let's go to the next question.
Yeah. I believe the next question comes from Tom Erik Kristiansen at Pareto. You have to unmute yourself, I think.
Thank you, and thanks for the chance to ask a question. With the growing cash pile you have now, you clearly have a lot of capacity to do M&A, and you can do big transactions compared also to the size of the existing business that is substantial of course. Can you say something about what you're seeing out there, where you are looking? I think, you know, a lot of people have expected, you know, Norway to be a direction you are looking of course, but can it also be offshore West Africa or other places where you can use your long history in emerging markets as well?
Could be. I think, because of the strength of our balance sheet, because of the cash flow stream, for us looking at opportunities now is not just a question of our going out into the market looking for things. The market's coming to us. Other companies look at our balance sheet, and they know that we're in a position to move and have and want to move fast on other opportunities. Both a push and a pull, and there are opportunities that we are looking at and some on a preliminary basis, others on a more advanced basis.
As Haakon Sandborg mentioned, when we have something to report, those of you who follow us closely will be the first to know. We are actively looking both coming from us and from the market and other peer group companies.
Of course, from my point of view, that it's important that we then find engaging good transactions that will really add new value and looking to grow our production. Norway is high on the priority list, but as we mentioned, also looking at elsewhere now. Also it's good to see, like Vidar is mentioning, that we are getting incoming interest coming our way. We have a lot to look at and work on. Hopefully come back to you quite soon on if we have success and are making good progress. I think do we have other questions, Jostein Løvås?
We don't. Unless Tom Erik has a follow-up question.
Thank you.
Sorry?
Yes. Yes, please. One follow-up question here, a bit for all the team here, is back to kind of the debt level. Is there an absolute debt level that you feel is appropriate for existing business? Kind of, you know, how much debt would you like to repay? Put it another way with kind of how the cash flows are coming out of Kurdistan now and the cash pile is growing, is there kind of a limit? If you cross $1 billion, for instance, of a cash balance, will that trigger automatically, call it, bond buybacks of shares or a one-off dividend, something like that? Is there any kind of triggers we should look at there going forward?
No, it's a good question, Tom Erik, but I don't think I'll give a precise answer on exact debt level. You've seen that we've been very active in the bond buybacks. You know, with the major redemption we had in Q2, we have made, you know, strong progress in strengthening the balance sheet. It would be kind of natural to look at the shorter-dated DNO03 2024 maturity. You know, we would also look at the 2026 maturity, DNO04, potentially. It's sort of a price question and what the better return would be. As I said already to another question, looking at the balance sheet, looking at our equity ratio, there's no absolute level.
If we have a major transaction, we might move up again on the debt level for temporary levels. We would expect to come down again with a good cash flow. I think we are in a good place where we are now. We could strengthen it further short term, but we do want to grow, and we do want to use our investments, our capital into new investments. This will sort of fluctuate over time, as you have seen with our balance sheet in the past. It certainly it's good to be where we are now and, you know, strengthening further quarter by quarter. We have a lot of financial flexibility now.
Yeah. Thank you. Well done. That was all from me. Thanks.
Okay. With that, I think we'll just wrap it up. Thanks to you all for participating, and we look forward to see you again on a later occasion.
Thank you. Bye.
Thank you. Bye-bye.