Good afternoon and welcome to DNO's Third Quarter 2024 earnings call. My name is Jostein Løvås, and I'm the Communication Manager here at DNO. Today, we will start with a short results presentation, which will be given to you by DNO's Managing Director, Chris Spencer, and CFO, Haakon 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. Media requests will be dealt with separately. During the presentation, the microphones of participants will be muted. 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.
With that, let's start the presentation. I'll hand over to Chris.
Thank you, Jostein. And good afternoon, everybody. Welcome to DNO's Q3 2024 interim results presentation being broadcast from our head office in Oslo, Norway. First slide, please. So Q3 was a solid, or another solid quarter for the company, I should say. Increased revenues on the back of strong production in Kurdistan. North Sea production was somewhat down, but liftings were up. And the North Sea production was reduced due to planned maintenance, so nothing unforecasted there. Also in Kurdistan, we did the continued local sales. During Q3, we were able to tweak the prices up a little more. And that also contributed to the revenue increase during the quarter. On the appraisal and exploration side, the one event during Q3 itself was the Heisenberg appraisal well, which is the second appraisal well we've drawn at Heisenberg this year.
As with the first, we're pleased that that has confirmed the resources that we have in that discovery. Clearly, with that performance, we've ended the quarter still with a very strong net cash position. Particularly with the reduced activity levels in Kurdistan, we are going to be spending less this year than we thought at the outset. Therefore, we're cutting our guidance to the market on projected total operational spend this year by just under 10%. I'm pleased to say that we are maintaining the dividend, which is at the annualized rate of NOK 1.25 per share per year. This 0.3125 is a rather complicated quarterly version of that. As we mentioned in the last quarter, we increased that by 25% with a view to that being a new sustainable level for the dividend. So we're pleased that this quarter we maintain that level.
Next slide, please. Focusing a bit more into the North Sea. As we touched on in the last couple of presentations, we've been working hard to add production to the attractive portfolio of discoveries and developments that we have in the North Sea, and in the first half of the year, we were able to pick up a couple of bolt-on acquisitions. That is giving us a nice short-term trajectory on our projected production, which is illustrated on the chart here. Those acquisitions are combining with development of the portfolio we had prior to them, with Trym, which should be coming on as soon as the beginning of 2025, and that is connected into the Danish infrastructure of Total, which has suffered some delays. And now we understand that the ramp-up is well on its way, and Trym will follow as part of that.
In addition, we're expecting the Andvare field, which is adjacent to Alve up in the Norwegian Sea, to come on stream during next year. And Verdande, which was part of the transaction we did in the announced during the summer, or completed during the summer, where we bought some assets from Vår Energi. And that should be coming on late 2025, maybe early 2026, I believe. And again, you see the nice ramp-up we're expecting over these three to four years. Then in 2027, our Bestla project, which is the tieback to Brage, actually is planned to come on stream. The little teaser with the gray is just to flag that, of course, we have, as regular viewers, if I can call you that, no. We have lots and lots of reserves in our contingent resource category.
There's a huge amount of effort going into trying to mature those as quickly as possible. Trym Sør is a small one, which we may be able to get on by 2027, but we hope that is a prelude to much more. The final point we wanted to highlight to the market is adding, building further on the competencies in our North Sea organization in Stavanger, with a second production phase operatorship. Again, that's a result of this transaction we did with Vår Energi. We have taken over operatorship of the Marulk field up. That's one of the tiebacks to the Norne FPSO. We've got some ideas there, in particular for drilling, which we're now working on with a partnership. That is then being brought into the organization alongside the Trym operatorship.
And that's realized some nice synergies for us in our organization in Stavanger and given the team more interesting tasks to deal with.
Thank you, Jostein. Over to Kurdistan, I believe. Yes. So as I touched on in the first slide, we're very pleased with production levels we reached during Q3 at the Tawke license. We mentioned in the last quarterly report that we had these three wells that we had drilled but not completed. And we suspended them when ITP, when the Iraq-Turkey pipeline was shut. We suspended operations on these wells in Q2 with the stabilization of the local security situation where we were making positive cash flow from that arrangement. We decided to invest in completing those specific wells. And during Q3, all three wells were on for the entire quarter.
And as you see, they made quite a significant difference to production rates from the license. So some 7,800 barrels of oil equivalent on average across that quarter. We also continue to run workovers, various other types of well interventions that are what you might call barrel chasing, continuous work that goes on in most oil fields. And our team have done a great job there. And that contribution from that represented some 3,400 barrels a day on average through the whole quarter. So again, with those, that's just to illustrate with those two bullet points the difference it makes with the activities and the funding that we're still dedicating to that PSC. And that is how we got to that production increase of 6% quarter on quarter. In addition, I should also mention that our production operations team did a fantastic job in terms of uptime.
I think there must be record uptimes that we achieved during August and September, so my thanks to them and all of our well intervention team and drilling team for these contributions to the quarter. Over at Baeshiqa in our other PSC in Kurdistan, we have completed testing on the Baeshiqa 3 well. We're going back to Baeshiqa 2, well we drilled a couple of years ago to do some further testing. The Baeshiqa 3 development well has not come in as we were hoping for, and so as we say here, we are now having to consider next steps. We are also considering those next steps in the light of, of course, that we're having to justify investments based on local sales currently.
Then having pointed to the investments that we've been making in the region, whether it's in Baeshiqa or in Tawke, we also just remind our shareholders and other stakeholders that, of course, it's an uncertain world that we live in down there. If for some reason there's disruptions on the revenue side of our business, DNO has always been ready to cut back on costs and activities further. And indeed, we are ready should we need to do that again, which we hope, of course, we won't have to. Equally, if positive developments come along, we have a foot hovering over the accelerator as well and would be more than happy to get back to drilling and so forth in Tawke if the environment allowed for that.
Part of that environmental piece, the discussions we have ongoing with our hosts, the Kurdistan Regional Government, related to the money they owe us from oil that they didn't pay for during the period 2022 and 2023. Still a significant amount of money for DNO and our partner, Genel, some $300 million or so. I'm sure the exact number is in our report, and obviously, an important focus for the company, our board, and I'm sure our shareholders and bondholders. Thank you. I will then hand over to Haakon to take you through the financials.
Good. Thank you, Chris, and hello again, everyone. I'll do a brief review also of the financial results for the third quarter, and I'll start with these key figures that you see on the screen.
To the left of this slide, you'll see that our Q3 revenues are up by $33 million from the second quarter. That comes as our North Sea revenues increased by $31 million to $111 million. That was mainly on higher sales volumes in the third quarter. And in addition, we had higher gas prices in the North Sea that also contributed to the increase in our third quarter revenues. With the higher lifted volumes, the North Sea underlift position that we reported for the second quarter this year has thereby changed to a minor net overlift in Q3. We also had some increase in our Kurdistan revenues up to a level of $59 million in Q3 on higher net entitlement volumes and also higher realized oil prices. If you look at the cost side, our cost of goods sold are up in the third quarter.
That's mainly due to the higher North Sea sales volumes and overlift. But we also have on the other side, exploration expense was up because we had exploration costs relating to the two exploration wells, the names are shown on this screen. But we had no impairments, no material impairments this time. So the operating profit thereby increased up to $31 million from a loss of $3 million in the second quarter. As we go further on the P&L statement, the net finance expense was low in this quarter, supported by FX gains and also a small positive revision in the book value of the KRG arrears. For tax expense, we had significant tax income in Q2 from the Arran acquisition, as you may recall. But this quarter, we have a tax expense of $8 million.
This explains much of the reduction, this change in the tax expense line. It explains much of the reduction in net income from $35 million to $20 million in the third quarter. Not shown on this slide, but on a year-to-date basis through Q3 this year, revenues are stable or a bit up at $490 million from the same period last year. The net income has strengthened significantly to $71 million, mainly on lower net finance and lower tax expense. The next one, Jostein Løvås. We're moving here to quarterly cash flow. Again, we have a very solid operational cash flow at $112 million for Q3. However, it was a bit down from $139 million in Q2. That was basically due to lower working capital adjustments this time in the third quarter. We had no NCS tax payments or tax refunds in Q3.
We will only have minor Norway tax payments, if any, in the fourth quarter of this year. I should mention, however, that if you look ahead and given the substantial activity that we have in exploration and development, we do expect significant tax refunds for Norway in the fourth quarter of next year. Q3 investments, we had $75 million of organic exploration and development investments, mostly spent on the North Sea assets. And in addition, we spent net $24 million on license acquisitions in the Norne area. Our Q3 finance outflow of $37 million was mostly for the dividend payment of $29 million that we made in August, and also for net interest expense. On this basis, the net cash reduction was limited at $25 million. And the cash balances thereby remained largely unchanged at $919 million at the end of the quarter.
A key point to be made here is that we, again, are mostly cash flow funded on both significant investments and also on the dividend in the third quarter. Next. So again, with these high cash balances, our capital structure remains very strong. We have net cash at $134 million. And we have a solid equity ratio at 40%. If you ask about the year-to-date reduction in our equity ratio, this reflects several transactions with effect on the balance sheet. I could mention the new long-term bond debt of $219 million on a net basis. We have made two North Sea acquisitions. And we have quarterly dividend payments and others with effect on equity levels.
And I know it's been mentioned already, but for our dividend program, we are pleased to announce the quarterly dividend payment now at 0.3125 kroner per share, which is equal to around $28 million to be paid later this month. So in sum, we are pleased to deliver another quarter with, we think, very good operational and financial results for DNO. And as we have also highlighted today, we are clearly also building long-term values and financial strength through our successful North Sea exploration and development program. So we have come to the end of our short presentation today. And I'm happy now to enter into a Q&A session. Jostein.
Yes. Let's see. I think we have a couple of questions already. Just here on the people. I think the first one that wanted to pose a question was Steen Smit. Steen Smit, I think you can go ahead and pose a question. Do you remember to unmute yourself? Okay. Maybe there was a mishap here. Okay. We'll go over to Eivind Hagen. Please go ahead.
Can you hear me?
Yeah.
Yeah.
There we go.
Excellent. So I just wanted to ask about the wording that you have on the Kurdistan slide, where it seems as you are, call it, stepping up the wording when it comes to reducing activity levels. I'm just curious, what's driving the more harsh wording this time around? And is it in any way connected to the news that we saw a few days ago with the potential for budget amendments on the federal level in Iraq?
Thanks for the question, Eivind. I'll have a go at that, Haakon. I guess you'll let me say that one. So it's multifaceted, I think. There has been some disruption to local sales, both before and after the regional election in Kurdistan. And if you follow the sector, you will have read about that in the media. The same media suggests that those disruptions are very much related to internal Kurdistan politics. And for us, it's a great shame having worked with many other stakeholders over the past 18 months to establish a reliable mechanism for local sales that had given us comfort to bring on the new wells that I mentioned and so forth. It was disappointing for us that, I mean, for political reasons, that those sales became disrupted. Now, just in the last couple of days, we've seen signs of that market getting back to normality.
So we're hoping for the best on that. And I guess that would be the main driver behind the comment there on the slides. What becomes from the announcement from Baghdad in the last couple of days, we will wait to see. But I think it was the development in the local sales market that led us to put that point in the presentation.
Excellent. And if I could just follow up quickly, how big has the impact been on the local sales disruption so far in Q4 for you guys?
It's very up and down. It's not been that dramatic, but we felt the need to adjust our guidance for the year. So as you see, we haven't changed the guidance this quarter, which means that we're standing by the guidance of 80,000 gross for the year for Tawke PSC.
All right. So I guess the next question goes to Nikolas Stefanou. We'll be allowed to ask the next question.
Gentlemen, hi, it's Nikolas Stefanou here. Can you hear me well?
Yeah.
So I've got a couple to ask. Both of them are on this announcement by Baghdad the other day. So the first one is, I just want to understand how enforceable is it for SOMO to just take over production? Because at the end of the day, you are guests in Kurdistan, and the relationship so far the KRG has worked well. But can SOMO actually enforce taking over the production there? That's the first question. The second one is on the $16 compensation. Is that something that satisfies you and Africa in general? We haven't seen a statement from Africa. So just wondering what you think about that. And then just a clarification. Will this $16 be $16 per working interest barrel plus OpEx and CapEx? Or is it just $16 flat regardless of the cost-based per working interest barrel? Thank you.
Thank you. But I will take those as well. Well, let me start by saying that a number of the questions you have are questions that we have. So I mean, we think that that announcement by Baghdad a couple of days ago has indeed for us raised as many questions as it's provided answers. Now, clearly, they've announced a proposal to amend the Iraqi budget law. And our position is that that's clearly a matter for government. That's not a matter for us. And whatever views we might or might not have on it, it's just not our business.
Both DNO and APIKUR have been clear for the 18 months or so that, in spite of it being shut, in order for us to entertain putting oil back into the Iraq-Turkey pipeline for export, we need to have surety of payment for the past debt that I touched on in the presentation, as well as future sales. We require that our internationally recognized contract is honored. Now, whether this proposed amendment to the budget law gives the governments enough room to fulfill those conditions, we are yet to hear, so we're looking forward to hear from our host governments how that bridge, how that will be bridged. As yet, we haven't heard on that, so I can't really provide any more answers. Similarly, you asked a specific question about SOMO. Again, I don't really feel that that's a point for DNO to answer.
You'll have to ask SOMO or the Ministry of Oil where they have that power. Again, we have a clear binding contract which sets out the rights and obligations for DNO. And we were also very pleased that repeatedly through this and previous crises, the Kurdish authorities, including the Prime Minister, have stated very clearly that they will stand by the contracts that they have with international companies such as DNO. So I hope that's of some help too, Stefano?
Yes. I appreciate these difficult questions that, I mean, so yeah, I didn't really expect you to be able to kind of provide some of the answers. I wanted to just add to ask them anyway. Then another kind of follow-up question. I just want to get a sense of the future free cash flow generation based on the production outlook you have offered for the North Sea and CapEx there. Because for the past couple of quarters, free cash flow generation has been just enough to cover the dividend. So just wondering in the next quarter, especially as production from North Sea ramps up, how can we get a sense of how cash flow trajectory could move forward. Thank you.
Yeah. Maybe I should comment on that briefly. Yeah. Well, we're seeing that Nicholas said our North Sea production is coming up. We've seen some the price, of course, are very important. We've seen some improving gas prices now. So that's helped us. We do have fairly good operational cash flow coming out of our North Sea business even now with the current production levels. And they will be coming up. But of course, we also have then our exploration and development spending. Remember that we are covering these on a sort of a 12-18 months basis before you get a lot of the expenditures back as tax refunds. So as I mentioned when I was talking this afternoon, we will get a significant tax refund at the end of next year. So I think we're in good shape to carry the initial investments.
And then you get reimbursed, say, roughly 78% of the major North Sea Norwegian spending. So we feel that we have a good control of this on a cash flow basis together with the cash balances and the very strong balance sheet that we have in DNO. We also have support from our RBL banks. So that's taken care of, I think, for the Norwegian and the North Sea expenditures, also on the UK side. And you will see that over time, Kurdistan has provided very strong cash flow to the group. We maintain our low lifting costs. And we have made strong margins, strong cash flow, even with half of the Brent prices that we have been getting in the local market.
So I think all in, we have a good grip on this situation and lots of extra headroom from these factors that I have mentioned in terms of how we will handle our future spend and our growth trajectory going forward.
Can you offer maybe some guidance on 25%-25% cash flow, or is it too early to ask?
That's too early, Nicholas. We will come back, so thanks for the question, but we'll revert to you.
Okay. Thank you so much.
The next analyst to ask a question will be Teodor Sveen-Nilsen, Spencer. Please remember to unmute yourself. All right.
Can you hear me?
Yeah. Here we go.
Looks like I was muted by on your side. But yeah, this is Teodor Sveen-Nilsen, SpareBank 1 Markets. I have three questions from my side. You mentioned that the Tawke production was higher in Q3 compared to Q2, but probably it will decline slightly in Q4 because of just limitations on local sales. Could you comment on what's the Tawke production right now? Next question that is on dividends. I appreciate that you repeated your dividend guidance for this quarter. But looking into 2025, how should we think around dividends? Should we assume that will be paid as a percentage of earnings or based on a certain percentage growth from 2024? And last question that is on working capital. It was also in this quarter some release of working capital. Could you just comment on what that's related to and when you expect that to be reversed? Thank you.
I can try the first two, Haakon and Handover. On the production side, Teo, obviously, it's very important numbers for us. And clearly, if you just figure out the average year to end Q3 and then that we are not increasing our production guidance, that suggests that indeed people were expecting to be a little lower than Q3. And that's the guidance that we're giving on production. But when it comes to the dividend, as you know, the board takes account of a number of factors when deciding to set the dividend. We have the intention for it to be sustainable, which particularly with the uncertainties around our Kurdistan business make that difficult to sum up in a neat dividend policy, as some other companies express. For example, of course, we hope that exports will come back. That will have a huge impact on our positive cash flow.
Secondly, we fully expect that the $300 million of debt that I touched on will be repaid by Kurdistan Regional Government. They have always settled debts in the past. And again, if that were to happen next year, another huge impact on the corporate cash flow. So to sum up, dividend policy in DNO in a sort of one sentence or something is, I don't think, realistic. And hence, the board takes account of all these factors, also our investment profiles in the North Sea when landing the dividend. But as we've said, quite consistently the last year or so, we have pivoted towards our shareholders whilst respecting our bondholders. And we're hoping that all investors are now getting a decent return for their investment in the company. Hakakon, you might wish to add something on the dividend? And then we want to leave other questions.
I think the dividend has been covered in a good way. I think Teo already asked about the working capital, and you call it release, or I call it sort of a positive adjustment or a change to cash flow from working capital movements. There have been several things happening over this year. We have had the North Sea situation with the different licenses and the working capital adjustments within the partnerships. We're talking about repayments during underlift that we have with our contracts that will move our payables up and down, and we also have different situations in our sales and lifting arrangements in Kurdistan that we are currently doing with the local sales, so we will see movements, especially on the trade payable side relating to the sales arrangements in Kurdistan that have been adding to net positive working capital change over the last quarters.
You ask when will that be reversed that you said. Well, we are looking at that, and we don't have a clear exact answer on when this will be reversed. But we have a position that we wish to discuss with the KRG on the working capital side. So that's one thing that we are sort of also working on. So it's a combination of things that, as always, move our working capital up and down quite significantly, both the North Sea and Kurdistan. So I don't think I'll be more specific than that, but that gives an idea of what we are looking at. Okay?
Okay. Thank you.
So Tom Erik Kristiansen, the floor is yours. Please unmute.
Thank you for taking my questions. Tom Erik from Pareto here. I have three questions. Firstly, you decided now to be more vocal on what you need to see or not see in order to sanction new investments in Kurdistan and you move drilling out in time. Is that due to the company seeing progress on the negotiations and something that could happen there and therefore feel that this is the right time to be more public on your demands? Because I guess this is thoughts you have had for a while. So that's the first question is why this is coming now. Secondly, if you do not drill new wells at the Tawke Block, what kind of decline rate should we be thinking of going into 2025 on production there? How long can you maintain current levels? And then the last question on Norway.
You commented on the progress towards the development concept on the Troll area. Is there a big challenge with different blocks and different incentives given ownership structure? And if so, is that something DNO can take part in resolving? How do you look at that situation? Thank you.
Yes. I'm not sure I got all the questions, but I can start with the first point on I think Tom Erik you were saying that you didn't feel we'd been as vocal on setting out our requirements for restarting exports. Was that the first point?
No, specifically, as you were today, is all new investments in Kurdistan, including drilling of wells, should restriction be applied to pricing, revenue split, advance payments, those kind of things? It's a bit more outspoken in public, but probably something you told KRG before as well. So why is this kind of a bit of a new communication now? Is that because you see some progress on the exports negotiations? Is something actually happening now, do you think? Or is it just talk as we've seen in the past?
Yeah. What I think I touched on this in an answer earlier that I think the main motivation for that comment related to the disruptions in the local market that we've seen recently, which reportedly have been due to political squabbling in the region, which we think is a poor reason to disrupt the oil industry in a difficult time. So that I think is one of the prime motivations. But of course, it's just a reminder. It's probably a timely reminder with that announcement from Baghdad. Are we going into a period of more uncertainty? We hope not. We have navigated such periods before. But of course, we always, as we like to say, have one foot on the brake and one foot on the accelerator.
If the investment climate is put into a good place and past debts are dealt with, we will be drilling as we always have done. We're a long-term partner with the region. Once the environment is right, as you've seen time and time again with DNO, we'll be back drilling. At the same time, we have the other foot poised over the brake such that if things get more difficult, we will cut back costs and mitigate the exposure for our shareholders. I think that's the simplest one. The decline. I think that's a very interesting question for us all at the moment because I have been very surprised how our team has been able to maintain production at the Tawke PSC this year without drilling.
Now, in terms of decline, we've put out the numbers that are in Q3 that were associated with the new wells. So you can calculate the decline of the prior wells. The variable is the well intervention and workover activity, which I also highlighted, through which the team is doing a tremendous job at maintaining minimizing decline rates. Petroleum area. So I think the petroleum area, indeed, all of our developments in the North Sea, there are multiple factors at play. Sure, different owners is part of that. Is that the decisive issue? I doubt it. It's a contributor. If that were the decisive issue and there were solutions available, DNO will most definitely be playing a role. We are trying to play as constructive a role as we can to move these things forward. And we are impatient.
We feel that in the Norwegian sector of the North Sea, that there's very thorough work done at looking at all of the options available for all developments. But we feel that perhaps more respect should be paid to the time value of money rather than trying to optimize a physical concept. One should also have an eye on the clock and bear in mind that all the companies have already sunk quite considerable investment into those blocks in terms of exploration and appraisal. And that's the impatience that DNO has. And we work hard to bring that voice into all of the license groups in a constructive manner. We do a lot of technical work in-house to help move discussions forward. And we're working very closely with all our partners as well as the I can't remember the new name for NPD. Havtil, is it?
No. Norwegian Petroleum Directorate.
Sorry, the new title escapes me for a moment.
NOD.
Norwegian Offshore Directorate. Thank you, Jostein. Apologies to anyone who works there for my forgetfulness. We're determined to move these things forward, and we will keep working in that manner. Indeed, if interest realignments are part of that, we will be at the table and working to make that happen.
Thank you very much.
Yeah. It looks as if Steen Schmidt wanted to ask his questions. I'll give you one more chance if that works. Please unmute yourself. If that still doesn't work, then we'll take the last question, and that will come from Eivind Hagen again, and we'll wrap it up after that, I think, so please go ahead.
Excellent. Just one quick one on Baeshiqa. How should we think about that going forward? It seems like there was quite a bit of a disappointment with the well.
Yeah. I think it's fair to say that the well was not what we hoped for. And so we need to look at how to take that development forward. The results are still pretty fresh. And so we haven't landed our conclusions yet. I think I mentioned previously, it's also a factor of local sales, whereas, of course, when we went into the FTP, we were assuming exports to international markets. So we've got some technical work to do. And both the technical work and the development of the business environment will feed into our thoughts as we prepare for our 2025 work program and budget on that block.
Okay. With that, I think it's about time to end this earnings call. And thank you all for taking part and for the good questions. And we all look forward to seeing you again next quarter. That will be next year. Okay.
Thank you.
Thank you.