Good morning, and welcome, everybody, to the Statoil analyst call for the Q2 2017. We appreciate that this is an especially busy day for reporting, and we've brought forward our call earlier than previous quarters, mainly to help people's busy scheduling today. We expect this call to run for a max of about an hour, including questions of around 45 minutes. I'm Peter Hutton, Head of Investor Relations at Statoil. With me, as normal, I have Hans Jakob Hegge, CFO, who will run through the results and then take questions. We're also joined by Svein Skeie, Head of Performance Management, and Ørjan Kvelvane, Head of Accounting. With that, we will get straight to business, and I'll ask Hans Jakob Hegge to start the presentation. Thank you.
Thank you, Peter, and welcome to you all. I'm pleased to present another strong quarter from Equinor. Adjusted earnings before tax was $3 billion and the IFRS result was $3.2 billion before tax. With positive results and a cash flow of $9 billion after tax, we have reduced gearing by 8 percentage points year to date. I will revert to the results in a moment. The picture on the front page is of Gina Krog, which started to produce this quarter. We have used the downturn to systematically improve our project portfolio. We are working together with our suppliers to realize several large projects. Johan Sverdrup is on schedule and will be a giant on a global scale. Aasta Hansteen is assembled and readied for field commissioning to start production next year. Njord A is being refurbished to produce for another 20 years.
Very good progress is also being made on the rest of the portfolio. In addition, three plans for development were approved, and we submitted the plan for development of Snøhvit North. We are moving forward with our exploration efforts. Our campaign in the Barents Sea has given us an oil discovery in the Kayak Well. This is close to the Johan Castberg field. We also have a small discovery in the Blåmann prospect. We are currently draining the Gemini North prospect before we drill Korpfjell and Koigen Central. These are interesting prospects that may open new areas in the Barents Sea. On the macro, we still see volatility in the gas and oil prices. The uncertainty is especially linked to the adherence to production curtailments among the OPEC members, as well as production of unconventional resources in the US.
However, our fundamental view remains unchanged as we see drivers for firmer oil prices going forward. Demand for oil continues to grow, and the low investment levels in new projects during the downturn is expected to have an impact on the supply side, leading to a more balanced oil market. The Q2 results have three main characteristics. Firstly, we deliver a strong cash flow and a solid result. We have reduced our net debt ratio to 27.5%, down from 35.6% at the end of 2016. Secondly, we continue to have strong operational performance with high regularity and value-adding production. Thirdly, we have high project activity with solid deliveries, and we continue to see the results of our efficiency work. We have strengthened our financial position. Our dividend policy remains firm.
The board has decided to maintain the dividend at $0.2201 per share and will also this quarter offer a scrip option with a 5% discount. Just to remind you, the scrip option was announced in February 2016 for a two year period ending Q3 this year. On to the results more in detail. We had adjusted earnings before tax of $3 billion compared to $913 million the same period last year. Strong operational performance with high regularity and high production contributed to the solid result, as well as higher prices for oil and gas. The reversal of a provision related to profit oil in Angola contributed positively to the adjusted result by $754 million.
Adjusted earnings after tax was $1.3 billion, compared to a loss of $28 million in the same quarter last year. The tax rate in the quarter was 57.4%. The low tax rate was mainly a result of the reversal of the provision in Angola. This was partly offset by a higher than normal tax rate in MMP due to earnings composition. We realized an oil price of $44.5 per barrel, up from $39.4 the same period last year. Realized gas prices were higher both in Europe and North America by 3% and 65% respectively compared to Q2 last year. We continue to drive down costs with underlying operating SG&A costs down 8% per barrel compared to the same period 2016. Let's go to the segments.
Development and Production Norway delivered adjusted earnings before tax of $1.9 billion, up from $1.2 billion in the same period last year. We continue to see the effect of the continuous improvement work and the production efficiency. The first six months is record high. Underlying improvement in OpEx and SG&A per barrel was 11% measured in NOK year-on-year. Realized liquids prices were 9% higher, and the internal gas transfer price was 36% higher. Liquids production increased by 1%. Gas production increased by 6% year-on-year. The production was the highest Q2 since 2012. Development and Production International delivered a result before tax of $876 million.
This includes the effect of the reversal of the Angolan provision of $754 million compared to a loss of $506 million in the same period last year. The underlying production growth in the international business was 3%. Cash flow from from the international operations amount to around $19 per barrel after tax. This is at the same level as in our Norwegian upstream business. Marketing, midstream, and processing delivered a pre-tax result of $292 million compared to $329 million in the Q2 2016. The main reason for the lower result was weaker contribution from our liquids trading. Good margins and high regularity at our onshore plants contributed positively to the result. Production during the quarter was 1,996,000 barrels per day.
Despite high turnaround activity, we experienced high regularity and a strong underlying production growth of 3% year-on-year. Ramp-up from fields like Ivar Aasen and Goliat on the NCS and Jack, St. Malo, and Corrib in our international business contributed positively to the growth. In addition, we produced higher gas volumes as part of our strategy to move gas to take advantage of periods with higher prices. This was 41,000 barrels per day higher than a year ago. We are in a robust financial position. As a result of the strong cash flow from operations of $10.8 billion for the first half of this year, the net debt ratio is now at 27.5%, down from 35.6% at the end of last year.
We have paid $1.7 billion in taxes, including three NCS tax installments, $0.8 billion in dividends, having paid the cash portion of two dividend payments, and we have received $0.4 billion from sale of assets. Capital investments for the first six months were $4.7 billion. This sums up with a net positive cash flow of $4 billion at the end of the first half of 2017. I would like to remind you that we have three NCS tax installments in the second half of this year, each at roughly NOK 9.5 billion, reflecting the higher commodity prices in 2017. CapEx is expected to be higher in the second half of the year compared to the first half. This is reflecting the higher activity in the third and the Q4.
You may also recall that we have entered an agreement to acquire a further 10% of the BM-S-8 license in Brazil, and we expect to close this transaction during the second half of 2017. I'm rounding off the presentation with our guidance. On the production guidance, we are now saying around 5% organic growth, slightly tighter than the 4% to 5% we gave at our CMU in February. The expected annual production growth from 2016 to 2020 remains unchanged at around 3%. We still expect an additional $1 billion in annual cost improvements in 2017. This is in addition to the $3.2 billion achieved by the end of 2016. Our CapEx guidance remains unchanged at around $11 billion.
We are reducing our exploration spend from $1.5 billion to $1.3 billion due to strict prioritization and efficiency in our drilling operations. With that, I leave it to Peter to take us to the questions.
Thanks, Hans Jakob. Yes, we will indeed now move to the Q and A. On this busy day, I'd like to observe the normal request to keep the questions to one only. With that, I'll ask the operator to open the polling and confirm the instructions. Thank you.
On your telephone keypads. Please ensure your mute function is not activated, since that would prevent us from hearing you. Once again, please press star one to ask a question. We'll now go to John Olaisen calling in from ABG. Please go ahead. Your line is open.
Yeah, I have a question on your reduced exploration guidance. What's the reason for the lower exploration guidance? Is it cost deflation or is it the slipping of wells, et cetera? Could you just kinda highlight if you could talk a little bit more about that, please.
The main reason is efficiency gains. We now drill the wells 69% more meters per day. They have 42% less time on each well and a 35% less cost per well. The efficiency improvements is the main explanation, but also strict prioritization. We started with a guiding on 1.5, taken down to 1.3. We said 30 to 35 wells. We are now more specific on the number of 30 wells. Again, the efficiency gains is the main explanation.
If I may quickly follow up. The five wells that you have excluded, where are those? Which wells have you excluded?
We are not providing any detailed information on that. The reason is that, you know, this is a continuous exercise of optimizing commercially. We go through the plans, we rank them, and we do strict prioritization. It's part of the discipline, and it's part of the natural development.
Thank you.
Thank you very much. We'll now go to Halvor Eggert calling from SEB. Please go ahead. One moment. Just one second, please.
Hello. Organic CapEx was $4.5 billion in the first half of the year, and you said that CapEx would be pretty much back-end loaded with higher activity. Can you elaborate a bit on what drives the activity increase in the second half of the year? Also, the second question, with the improvement now in cash flows and consequently lower gearing levels, do you discuss or consider, you know, moving back to full cash dividend or maybe buying back some of the scrip shares? Thank you.
We maintain the guiding on CapEx at around $11 billion for the year due to the efficiency gains and the strict prioritization. We have lower CapEx in the first half. It is lower facility costs, drilling, marine operations, but also phasing of activities. You know, in the second half we increase the spending due to Aasta Hansteen that starts drilling. We have Agbami drilling, we have Peregrino 2 moving to fabrication. Mariner heavy lift operations, activity going on in the Hywind, Carcará, Terra Nova and also the US onshore part. We expect some ramp up after the somewhat low activity, for instance, in Bakken during winter operations. It is a higher activity level.
On the improved cash flow in the quarter, I mean, NOK 9 billion positive after tax, NOK 4 billion after the investments and dividend in the first half is a strong. It's based on the strong operating momentum. In terms of priorities, we remain firm. It's strict priorities and no changes to that. The financial framework is still the same. It's consistency.
You're not thinking of, you know, a cash dividend or buying back shares that you have issued during the scrip program?
Well, remember when we introduced the scrip program, we said clearly this is a two-year program. It's planned to end Q3 this year, and we have no plans to extend, and we still have a buyback as part of our toolbox, when we have excess cash. No news around the scrip or the framework.
Okay, thank you.
Thank you very much. We're gonna go to Teodor Sveen-Nilsen calling in from SB1 Markets. Please go ahead, your line is open.
Hello, thanks for taking my questions. One question on cash flow and gearing ratio. Really impressive that you have reduced the gearing so much over the past two quarters. I just wonder, given the fact that you actually will invest a little bit more in the second half than in first half of the year, how much should we expect the gearing ratio to decline towards year-end, assuming the same oil price as we had year to date? Second question, just a little follow-up on the US onshore ramp up that you expect. Could you quantify that a little bit more? In which areas do you plan to add rigs and how many?
Okay. On the first one, you asked for a decline in the gearing. I didn't say that though, Teodor, I'm of course pleased with the development that we have seen 8 percentage points year-to-date due to strong results and very solid cash flow. Going forward on the gearing, well, the basis is the good free cash flow and the strong operations and the continued focus on efficiency. As I said, also higher CapEx project activity picking up in the second half. Volatility in prices impact also commercial decisions. Remember, in the past, we had an increase in the gearing due to commercial decisions to have more volumes in transit in our MMP business.
On the second half, we have three NCS tax installments of NOK 9.5 billion each. We have the 10% increase in the Carcará discovery and the closing of that transaction. Most important for me, I mean, we continue to invest in a world-class project portfolio with a break-even of $27 per barrel. On the US onshore ramp-up areas and activity, the starting point is that we continue to look closely at economics before we raise activity. We have five operated rigs and one completion crew in each basin. Bakken added a second completion crew in July, recovery from the winter season, and we expect a slightly increase in Bakken and Utica. The production onshore is reduced year-on-year and still it's a increase quarter-on-quarter.
It's mainly Bakken, and going forward, we will, as I said, look closely at the economics before we raise the activity.
Ladies and gentlemen, I'd just like to interrupt the call to just make people aware of the fact that we appear to have a connection problem. I know that there are a lot of analysts waiting to poll from international calls, and our operators are trying to access those. At the moment, we are on local calls from Norwegian numbers only, which is clearly not what we normally do on this event. We're trying to work this out. We'll continue with the local callers. Can I ask people to again follow the instructions and press star one? We will do our best to get through to everybody.
If we're unable to, for a technical fault, we will follow up from Investor Relations and any direct things that we need to do with Hans Jakob Hegge. Don't fret. We're trying to sort it out, but we will continue to do so after the next question. Thank you.
Just one second, ladies and gentlemen. Once again, please press star one if you wish to register a question. We will now go to Mr. Anders Holte of Danske Bank. Please go ahead. Your line is open.
Morning, guys. Two questions from my side. One of them is related to the CapEx activity or the activity increase for the next six months. Give us sort of the weighting in between what's to be spent in Norway and also what is to go towards the international division. Secondly, it's a bit unrelated, but it's onto the Kayak discovery that you made in the Barents Sea. Although the size was a bit on the low side, does that still give you the confidence that the concept is indeed working? Are you any sort of upside that you see on the back of the Kayak discovery? Thank you.
Let me start with the Kayak discovery. I mean, we have started the year quite good, actually. I mean, we have nine out of 14 wells with discovery, so that's a quite a good start. On Kayak, we have 25 million to 50 million barrels of oil potentially being added to the Castberg development. Remember, we have the investment decision coming up later this year for Castberg. Kayak is still relatively small but could be important for Castberg. On the CapEx activity and the Norwegian versus the international, I mean, I mentioned several examples. The main point is, of course, that we maintain around 11 because we have high quality projects that we invest in. I mentioned a few examples.
Agbami drilling, I mentioned the Peregrino 2, moving into the fabrication, Mariner heavy lift operations, all international examples, Carioca, Terra Nova, and the US onshore as international. In Norway, we have the giant Johan Sverdrup. You know, we are half a way through to maturing that one. The drilling activity at Aasta Hansteen are examples. Quite a lot of activity going on at the moment and even higher in the second half.
Okay. Can we move to the next question, which I understand comes from Oswald Clint?
Just one moment, sir. I'm just going to get that line, physically lined up, please, sir.
I really wanted a bit of an update on the US breakeven reduction strategy that's getting towards $50 per barrel by 2018. I know we're halfway through the year here. Is there any chance we could just see how that part of the strategy is unfolding, please? Then just secondly, on the actual results, I wonder if you could quantify or talk about the recurrence of the trading impacts in the MMP business on the liquids trading plus US gas trading. Seems to be some, you know, sequential negative impacts there. If you could quantify them, please. Thank you.
We are progressing well on the 90 to 50 journey. We have ramped up our valuable GoM barrels, as well as the Bakken that I mentioned, improving cash margins towards the target of $12.50 per barrel in 2018. Cost continued to trend down despite these barrels being more costly than the NGL and gas volumes. On the onshore part, we are investing in wells with competitive break-evens. More than 900 operated wells in our yet to drill portfolio across the three areas have breakeven prices below $50 and about half of those below $40. On the US gas liquids trading, I mean, the MMP result is, it will vary quarter-on-quarter.
After several quarters in the high end, we are having a relatively lower result this time. In the Q1, we had some benefiting from African volumes to Africa to Asia, and we also experienced a sharp drop towards the end mark-to-market, but we are still within the guidance of $250 to $500. Remember, in the DPI result, we also had an increase in the gas prices of 65% contributing to the DPI result.
Very good. Thank you.
Thank you very much, sir. We'll now go to Hamish Clegg calling from Bank of America Merrill Lynch. Please go ahead.
Hi, guys. Thanks for taking my question. Could you confirm precisely how much CapEx is dollar- or Norwegian kroner-related? I know this is something we ask you or every other year or so when there's a big move. Given the big Norwegian krone move recently, it'd be interesting to know how much that would affect your CapEx and OpEx individually. If I'm allowed, could you give me the rough split of projects or regions contributing to the increase in your volume target to the top end of your range? Thanks.
In this all in dollars and, the Norwegian business is a mix, it's variable, so we don't provide the great level of detail on this one. Your second question, could you repeat that?
Just in terms of your volumes, you upgraded to the top end of your volume growth range. I wondered what drove that, increase.
Yeah. This is the highest production since the Q2 2012 for any Q2, despite the bigger turnaround impact, which is bigger than last year. We have really good regularity in operations with a record high production efficiency year to date on the Norwegian Continental Shelf. Contributions from fields like Goliat, Ivar Aasen adds 30,000 barrels year-on-year. Also, the flex gas Troll and Oseberg increased year-on-year about 40,000 barrels versus the Q2 last year. This is due to the higher prices in the summer. All these items more than compensated for the fields ceasing production and decline.
Yeah. Thank you very much.
Thanks, sir. We'll now go to Jon Rigby calling in from UBS. Please go ahead. Your line is open.
Thank you. Yeah. Can I ask, firstly on CapEx, can you just go back and just define what you term as organic CapEx and what it's seeking to achieve? Because obviously alongside that, you're making investments into medium and longer term opportunities as you're doing in Brazil. Are they supplemental to an organic CapEx level that's designed to sustain and grow your business? Or should we be thinking about inorganic or tactical inorganic investments as a regular supplemental investment alongside what you determine as your organic CapEx? And just actually, can I just add another question if that's possible? Rough storage, gas storage in the UK, which now appears to be potentially being closed down. Are there any strategic responses that you can develop to take advantage of that opportunity?
Because it would seem to me that you are the obvious source of swing gas into the UK. Thanks.
First on the organic CapEx in the Q2 is $2.3 billion. This is excluding acquisitions, capital expenses and other investments. The key inorganic investments in the Q2 has been the Cat J rigs on the NCS, exploration signature bonuses. You know, if I got your questions right, investments in 2017 include capitalized exploration, investments to improve oil recovery and major development projects like Sverdrup, Gina Krog that just started to produce, Aasta, Mariner and the US onshore part. On the Rough storage, could we take advantage of it? I mean, it's one of the elements that adds to the assessment of the gas markets. I mean, in the quarter we saw the EU gas prices up 15%.
I see the Rough storage as a part of some, maybe some bullish price signals for the EU gas for the rest of the year. Low storage levels, the outage of Rough and the Groningen cap are examples of these signals. You know, the beauty with our flex gas is really that we can, as we did in the quarter, produce more when the prices are higher.
Just going back on that CapEx question, I probably wasn't clear. What I meant to say was you set out an organic CapEx budget of $11 billion.
Yeah.
Alongside that, you've made an investment into Carcará or two investments into Carcará. What I'm trying to work out is
Mm-hmm.
How should we think of your investment levels in terms of a sustaining level of spend going forward? Should we think of it based off the 11 or should we assume that it's based off the 11+ a continuing level of inorganic spend to sustain the business?
The short answer to that is, you should look at around 11 as a sustainable level.
Right. The rest is optionality.
Yes.
Okay. Thank you.
Thank you, sir. We'll now go to Mr. Christyan Malek calling from JP Morgan. Please go ahead, sir.
Hi. Good morning, and thanks for taking my question. First question, just to be super clear around your capital framework. If oil prices are in the $40 to $50 range in the second half, will you renew the scrip or will you still take it off? I want to understand just to what extent does oil price influence that decision. The second question coming back on CapEx, you mentioned $11 billion being the sort of steady run rate. Is there flex to lower that number again, if oil prices are lower this year?
On the scrip, when we set out the program, we made it clear that it's for two years. No plans to further extend, ending Q3 this year, and no change in the plans on communication related to that. On the CapEx, $11 billion, it is related to a world-class project portfolio of average break even on $27 going forward. I think it's the right thing to continue to invest in these high quality projects. At the same time, we see the clear effect of efficiency gains, and that's why we continue around $11 billion. We think that's a sustained level, going forward.
Brilliant. Thank you very much.
Thank you, sir. We'll now go to Matthew Lofting calling in from Société Générale. Please go ahead.
Hi. Good morning , and thanks for taking my question. I will ask two questions. The first one regarding the tax payment. You've highlighted that tax installment in Norway is going to almost double from H1 to H2. I wanted to know what will be the trend regarding the cash tax payment abroad. Should we expect a material increase as well, or should it remain very low as this has been the case, you know, since beginning 2016? Second question on your exploration budget that you've just lowered. Why don't you want to take advantage from your strong free cash flow generation and the low-cost environment to explore more, much more than your peers and try to fill in the gap between your reserves life and the sector average?
Should we consider that you will prioritize reserves acquisition rather than exploration in the current environment? Thank you.
On the exploration first, I think we are doing more than our peers. One point three billion is a result of significant efficiency gains. It's also a result of strict prioritization. A program of 30 wells this year is quite substantial. It's also an element of replenishment of the portfolio that we actually have used the downturn to acquire cheap seismic and getting access to new potential acreage. We are quite active on the exploration side. It has been and will be in the future an important thing for us. It's a source to create substantial value. In relative terms, I think we are more active than our peers.
When it comes to the tax, as I said, we have pre-NCS tax installments in the second half, NOK 9.5 billion each. Remember that we have paid taxes so far this year based on last year's prices. As we move along, we will start paying taxes based on this year's relatively higher prices, so it will be a bit higher. This quarter we had a relatively low tax rate of 57.4%. That was also linked to the reversion of the provision in Angola that impacted the DPI tax.
Just to come back to that, because, you know, the tax installment is only for the NCS.
Yes.
Should we consider that the tax, that you pay abroad, outside Norway, will increase in a material way as well?
We haven't changed our guidance. You know, for the international, it's 50% to 55% short-term and, you know, more around 50% or in the lower end in a couple of years. In our midstream business, it's the range of 50% to 60%, and in DPN, around 70%. On group level, an average around 70%, and we haven't changed that. Lower prices increase the tax rate, and over time, we should expect a falling tax rate, particularly if prices recover.
Thank you very much.
Thank you, sir. We will now take a question from Biraj Borkhataria, calling from RBC. Please go ahead.
Hi, thanks for taking my question. Apologies to make you repeat yourself, but, I couldn't quite hear the answer. At the group level, you paid $1.7 billion in cash taxes for the first half of the year. What do you expect to pay in the second half of the year, assuming the current environment?
Pre-NCS tax installments of NOK 9.5 billion each is for the second half. That's the level of detail we actually provide today on the taxes for the second half. Then, as I said, the guiding on the international and the MMP.
Thank you very much.
Svein, you want to add something? We have Svein Skeie.
Just add a bit on the NCS. For the first half, we paid NOK 1.4, and as Hans Jakob is saying, then NOK 9.5 in each installment in the second half. In the international, it's more linked to the results that you're obtaining during the quarter, so you don't have the similar deferral there as you have in the Norwegian tax system.
Great. Thanks.
Thank you, sir. We'll now be going to Mr. Rob West, calling in from Redburn. Please go ahead, sir. Your line is open.
Hi. Hi, Hans Jakob. Thanks for taking my question. My first one is on the $11 billion sustainable CapEx number that you mentioned. When you say that's the sustainable number, what kind of growth should I think about getting for that number? Is that the number to run stable with 0% growth, or is your 3% growth rate likely to be continued at that level of investment? That's question one. Question two is around Johan Castberg, which I know is a project that you followed very closely before becoming CFO. The question is, I think that's going through another round of bidding this summer in some of the EPC work.
I was wondering, is there anything you really need to see coming out of that bid round in order to move forward with a sanction in the second half of the year, a bit late in the year? Specifically, some of these bids have been coming in lower and lower from the data I can see. I wonder with the guidance you gave previously, you know, were you assuming some kind of cost reduction would be achieved in some of the big EPC contracts there? Thank you.
Thank you, Rob, for your questions. Around $11 billion sustainable CapEx and what kind of growth. From 2016 to 2020, we guide on an average production growth on an annual basis of 3% based on the project portfolio that we have. That's the short answer to that one. On Castberg, yes, it's up for FID towards the end of this year. In order to have confirmation on numbers, we invited suppliers to give numbers, as you said. We have a breakeven below $35. No update on that figure as of today. You should expect confirmation of cost and breakeven levels when we do the FID that we plan to do later this year.
The only news related to Castberg is it's progressing according to plan, and it's exciting to see the Kayak discovery potentially adding 25 million to 50 million extra barrels.
That's great. If I could have one to follow up, it would be on the 3% growth number. I'm aware of that being the 17 to 20 growth number. To some extent, the CapEx you're funding now is also gonna be contributing to growth after 2020, given the typical lead times of projects. Should I think about that $11 billion as funding a 3% growth rate after 2020 as well, just as my base case assumption, once we get past this next couple of years. I don't know if you can say anything about that.
So 3% to 2020, but also production beyond, not quantified. Remember, we have Johan Sverdrup coming in on stream late 2019. We have Aasta Hansteen next year. We just started with seven hours into the quarter of Gina Krog. That will be more visible in the Q3 and the coming quarters. We have the Ivar Aasen, Goliat, the ramp-ups from GoM. Several elements adding to production growth in near term. You also have the flexibility linked to the US onshore business. Several elements adding to the short and mid-term. Longer term, you're right. I mean, the project portfolio that we presented is still there for sanctioning and adding additional volume. Pretty robust picture that we present and maintain as we did on the Capital Markets Update.
That's very clear. Thank you.
Thank you much, sir. We'll now go to Anish Kapadia calling from Tudor, Pickering, Holt & Co. Please go ahead.
Hi, good morning. I have a couple of questions. The first one was on the cash flow that we've seen so far this year and expectations for the rest of the year. You generated about $10 billion of cash flow from operations in the first half of 2017. At the capital markets day, your guidance implied about $13 billion of cash flow in a $50 oil price environment. Given that very strong cash flow generation in the first half of the year, is that $13 billion of cash flow at $50 still valid? Or is there the potential to significantly exceed that given what you've done year to date?
The second one was, I just wanted to get a little bit of an update on your plans in the Northeast. It seems like there's been more focus in the Northeast on the Utica side of your assets rather than the more conventional Marcellus within the Appalachian region. Just wondering if you could talk about where you're allocating the capital and the relative economics there.
On the cash flow in the quarter, it was $9 billion positive after tax and $4 billion after the investments and the dividend in the first half. Based on the continued strong operating momentum, remember the record high production efficiency on the NCS. In the second half, I mentioned the three NCS tax installments of $9.5 billion each, higher CapEx. It is still valid, the $50 guidance that we gave on the Capital Markets Update. We say we will be cash flow neutral, and positive at $50 in 2017. That is still the case. In the first half, we benefited from lower tax payments on the NCS. If you apply the effective tax rate to the earnings in the period, we have reduced the free cash flow by around $2 billion.
Still, we are free cash flow positive at $50 in the first half. Going forward, it's still valid. Strong focus on efficiency, maintaining the good operating momentum, continuing to invest, and of course then also take into account the closing of Carcará and the upcoming NCS tax installments. On the US activity, we are in what we think is three of the most prolific basins in the US, Eagle Ford, Bakken, and Marcellus. Our number one priority is, of course, safe and profitable operations in the assets that we have. You know, as I said, we will have a slightly higher activity in Utica and Bakken in the second half.
We also want to highlight that we have 900 wells with a break-even of $50 and below, and half of them is $40 or below. We have significant flexibility, and we continue to evaluate the options before we make the decisions. We will come back to the activity level in the Q3.
Does that answer your question, Mr. Kapadia?
Yes. Thank you.
Thank you much, sir. We'll now go to Tristan Langhade , calling in from Kepler Cheuvreux. Please go ahead.
Yes. Hi, good morning. Thank you for taking my question. Just one quick one on Brazil. You announced a further 10% acquisition on BM-S-8 a couple of weeks ago. Could you please give us an update on the pending auction on the open acreage next to BM-S-8, which is scheduled for this year? And also, assuming that it's getting closer, could you please give us some colors on the $1.25 billion contingent payments to Petrobras and the possible timeline for this, please? And also, of course, it applies to the sum $190 million owed to QGEP also. Thank you.
On Brazil, we invested another 10%, as you said. We also are looking closely at the upcoming licensing round. That's for October. We're looking closely at that. You know, the portion of the Carcará fields spans into the open unawarded acreage. This is something we follow closely. As I said, we understand that the unawarded acreage is intended to be part of the bid round later this year, potentially October. We also look at partners to develop this exciting asset, and this is of high priority to us. Specifically on the $1.25, we made half of the payment at the closing of the deal, and the half is contingent later development, so it's not up for this quarter.
What's coming in the quarter is closing of the transaction that we just did, but that's a significantly smaller scale.
No, no, of course. I'm aware of that. I was just wondering what the milestones are for the contingent payments, and if you have a timeline in mind for when that may happen.
The timeline for the Carcará. It's 2019 linked to a balancing in the structure, so that's for later. The recent transaction is in for the Q3. That's the milestone for that one.
Okay. Thank you.
Excellent. Thank you, sir. We'll now go to Lydia Rainforth, colleague from Barclays. Please go ahead, ma'am.
Thanks very much. Apologies if I missed this earlier, but when you were talking about the high reliability for the business, are you able to actually give us what that operational efficiency number is, how it's changed over the last year, and what you expect that to be over the second half of the year and into 2018? Thank you.
Sorry, Lydia, could you please repeat your question?
Yeah. It was just in terms of the record high reliability and operational efficiency that you were talking about, are you able to share with us how that's changed over the last year and what that number actually is at the moment, and how you'd expect it to evolve in the next 12 months?
Yeah. This is of course very rewarding. It's hard work by many people over a long period of time. I remember when we introduced the production coordinator on the field. We started a pilot at Oseberg some years back. These are people that really change this on a daily basis. Good communication and dialogue between the various professional expertise. It's a daily hunting of every profitable barrel. It's all optimization. It's teamwork. It's also linked to better planning and executions of maintenance, further intervals. It is also linked to the way we plan and execute maintenance programs. It is definitely linked to hunting and focus from management on unplanned losses and avoiding that. The precision level also linked to maintenance stops.
Because, for instance, Snøhvit, as an example, we had a big maintenance stop this quarter at Snøhvit. It went according to plan, and we were able to start the facility on time, and that, you know, without any interruptions in the immediate days following. This adds, of course, to a better than past performance on the unplanned losses. This is very systematic work over a long period of time, now paying off. I have no reason to doubt that we will continue to focus on this as it adds very profitable barrels to our production.
Great. Thank you.
Okay. With that.
Thank you very much. As we have no further questions, so I turn the call back over to the organizers for any additional closing remarks. Thank you.
Thanks, operator. Thanks, Hans Jakob Hegge. Apologies for the interruption in our normal service earlier in the call. I'm glad we got it back on track, and I think we got around to everybody's question. If not, apologies, and we'll cover it directly after the call. Thank you for your patience and your participation, and good luck for the rest of the day. Thanks very much.
Ladies and gentlemen, the welcome call is accomplished. Thank you much for your participation. You may now disconnect. Thank you.