DNO (DTNOF) Q4 2015 Results - Earnings Call Transcript

| About: DNO ASA (DTNOF)

DNO ASA (OTCPK:DTNOF) Q4 2015 Earnings Conference Call February 11, 2016 4:00 AM ET

Executives

Bijan Mossavar-Rahmani - Executive Chairman

Bjørn Dale - Managing Director

Haakon Sandborg - Chief Financial Officer

Analysts

Teodor Nilsen - Swedbank

Øyvind Hagen - ABG Sundal Collier

Bijan Mossavar-Rahmani

Good morning. My name is Bijan Mossavar-Rahmani. I am the Executive Chairman of DNO ASA. Welcome to our interim presentation of our Fourth Quarter 2015 and Full-Year 2015 Operating and Financial Results. I am joined this morning by two colleagues in the presentation, Bjørn Dale; who is our Managing Director and, Haakon Sandborg, our Chief Financial Officer.

Let me begin with some slides and presentation comments on our corporate overview and also our operational highlights. And when I’ve concluded that section, Haakon will do as he always does with his presentations, a more detailed review of our financial results.

First, I’m pleased to say that DNO now has taken its foot off of the brake and we’ve pressed on the accelerator. We have said always that we have the flexibility as a company to hit the brake or hit the accelerator as circumstances, and in particular our cash flow situation requires. We have great flexibility as a company, quite unusual in our business.

And that our assets, as you know, importantly in Kurdistan are onshore. We have the ability to initiate and stop capital programs fairly quickly. And that when we do hit the brakes, we are able to conserve cash and preserve our balance sheet strength, and when circumstances allow, revenues are coming in. We’re able to fairly quickly resume investments and fairly quickly see results in terms of production from those investments, and I will go into that a little bit.

And we now have the confidence with the resumption of payments to us for our exports of oil from Kurdistan based on our entitlements to resume our investment program there. So, even as the global industry, oil and gas industry continues to retrench, we are now resuming our investment program. And we’re quite pleased about that.

We’ve had those of you follow us know five consecutive monthly payments for our exports on the Tawke Field and the new payment arrangement that was put into place and announced about 10 days ago by the Kurdistan Regional Government is in line with our contractual entitlements moving forward. And there is also a provision to payback, to begin the payback, part of our historic entitlements I’ll go into that in a few minutes as well. But these lay the foundation as I’ve indicated for our renewed investments in Tawke and in Kurdistan.

Our current production at Tawke is running just below 120,000 barrels of oil a day. This has been the result of the fact that we have not made investments. And these fields as you know have natural decline. But we expect with the new investments that we have planned and are announcing this morning to get our Tawke production up to about 135,000 barrels a day by mid-year, that’s over 10% increase in production by mid-year with further production increases to come as we make further investments in the balance of 2016 and into 2017.

DNO was already well ahead of the pack in Kurdistan compared to our peer companies in Kurdistan in terms of our production and our exports and our current contribution to exports from Kurdistan based on the production of the international oil companies is something on the order of 60% of the total, so we are the largest player in Kurdistan currently in terms of a number of metrics including our contribution to exports from Kurdistan through Turkey both important position in terms of the overall contribution but also more than 50% around 60% in terms of the contribution by the international oil companies.

Our production, last year from Tawke totaled to 50 million barrels. That brings our total production from Tawke since the start of our production from the field to something on the order of 150 million barrels. That’s a significant number but it gives you a sense of the size and scale of our operation in Kurdistan and the size and scale of the Tawke Field itself.

For 2016, when we went into our budget cycle last year, we did our budgeting based on $35 a barrel Brent prices so fairly conservative but close on the mark. Based on that and now based on the resumption of payments for exports on our entitlement basis, we’ve initiated capital projects for 2016 on the order of $100 million. This is about doubling of our capital investment program relative to 2015.

And of course the industry cost deflation, the drop in services across the oil and gas industry mean that we and as well as other companies can now do more with less. We are seeing reductions in services, ranging anywhere from 10% all the way up to 50%, probably the average somewhere in the middle of that range. And that of course allows us to get more banks for the dollar, so our $100 million program should take us further than it would have even a year ago.

The size, scale and the attractive economics of our reserves at the Tawke are unrivaled among our peer group. So, as we come out of our retention mode into an investment and growth mode, I think that is something that sets us apart from our peer group in terms of the exploration production companies listed in Europe.

I should note and for those of you, who have been following us, would know this as well that we’ve started our cost cutting program early, earlier than the industry as a group. We’re one of the first to start cutting back capital on operating expenses, overheads, staffing, beginning in the late summer of 2014 and continuing through 2015. So, we are among the first to stop - to hit the brakes and now we’re among the first to hit the accelerator.

Our equity and debt raises in 2015 also strengthened our balance sheet and put us in a strong position, stronger position that we’re in today and allow us to now execute on our new strategy. But as I’ve indicated, we continue to have the flexibility to balance our capital spending with our cash flow. And this importantly sets us apart from many in our peer group as well.

In terms of our operational highlights in 2015, we had record operated production of about 144,200 barrels a day of oil and equivalents. That’s including our gas production as well. This was up 23% from 2014. And I believe 2015 was the sixth consecutive year, sixth year in a row in which our operated production increased. And again, another indication of the - our growth and our ability to increase our production on an annual basis as we make investments and as those investments are supported by revenue stream from production.

The Tawke Field, which is our flagship field in the DNO portfolio, averaged just over 135,000 barrels of oil a day in 2015, of which 114,000 barrels a day were delivered for exports, pipeline exports through Turkey. Another 16,700 barrels a day were sold into the Kurdistan local market and the balance processed in our Tawke refinery.

Our Oman production averaged last year at 8,200 barrels of oil equivalent per day. And of course we had previously announced that our Yemen operations were suspended early in 2015 due to the security situations which you are all familiar.

This graph we show each of our quarterly presentations breaks out our production annually by country in the case of Kurdistan by local sales as well as by exports. And you see this annual growth pattern that I have just referred to.

In terms of our financial highlights, we had revenues of $187 million in 2015 this was down almost 60% from 2014. Again, our production was up, our revenues were down because of the lower world oil prices, again which you are all very familiar.

Our revenue contribution from Kurdistan was $157 million of the total $187 million figure. The DNO revenues included $92 million last year from local sales of crude oil and refined products, and $66 million from exports.

So, even though in the previous slide we showed that the export volumes from Kurdistan were much larger than the local sales from Kurdistan, from a revenue perspective the reverse is true. That’s of course because for about eight months of the year we were not paid for exports. And now that’s been reversed. So I expect in 2016 the bulk of our production will go to exports. And the bulk of our revenues in Kurdistan will come from exports.

It’s also important to note that, with this new arrangement in place, we are now effectively exporting oil from Kurdistan as a company and being paid for it on that basis. And that’s of course very important for us as well.

Our CapEx spending last year was reduced to just over $50 million from almost $300 million in 2014. And again the indication of our having hit the brakes in the face of, lower oil prices and lower payments in Kurdistan.

We had an operating loss of $174 million last year, that’s compared to an operating loss of $243 million in 2014 driven by lower revenues, restructuring and our impairment charges. And again, Haakon will go into them in more detail. But we did end up the year with a higher cash balance of $238 million up from $140 million in 2014. So, our balance sheet remains for us strong to allow us to execute on our strategy in 2016 and moving forward.

A few words about our drilling program which had come to a halt also last year effectively. Our new investments will, at Tawke will involve drilling of both production wells and water handling facilities and water handling wells, injection wells with which we expect to reverse the output decline, the natural field output decline at Tawke and put us back on a growth trajectory there.

We also plan to drill the Peshkabir-2 well that’s now been delayed a year, to appraise the previous Jurassic discovery that we made and also to explore a Cretaceous horizon which is the main producing horizon at Tawke. And if this appraisal program is successful, we can very quickly tie-back the Peshkabir Field to our infrastructure at Fishkabor, which is only about 10 kilometers away.

And again, the indication of our ability to hit the accelerator quickly as the foot comes off the brake and to be able to show results fairly quickly. So we could have Peshkabir production on-stream before the end of the year if we’re successful in the appraisal program. And that will be an important contribution not just to DNO but to the extent production from the Kurdistan region increases, this enables the Kurdistan Regional Government to have more revenues and allows them to remain on track with respect to the payments through the companies and other programs, commitments that they have.

So, it will be a win-win situation for us, and an important indication again of the post-partnership that we have with the government. Our gain is their gain, their gain is our gain. And this is at it should work, where we operate internationally but here in particular. So, we’re pleased to be part of that contributing factor to those gains, which come back to us as well.

In addition, we have an onshore exploration well, planned at our Block 36 in Oman, as previously announced. And we expect to begin drilling to spotting that well this month. And hope to have that down by summer.

Let me say a few words about the new Kurdistan payment arrangement. This is key to our, to the company and to our efforts in Kurdistan and moving forward, again as I’ve indicated, the new payment arrangement calls for payments to the international oil companies operating in Kurdistan of an amount each month, that reflects the entitlements under the production sharing contracts.

This figure is different for each company. We happen to have the most favorable terms, ensuring terms because we’re in early in Kurdistan relative to our partner and our peers. So the number of, the amounts we receive every month will be driven by our particular terms.

The prior payment arrangement were not entitlements, but we recall there were payments to the three operators, the three fields, Tawke, Baghdad and Shekon [ph], each of the two larger fields or larger producers received $30 million payments. The other producers Shekon, the other field received $15 million, these numbers were not specifically tied to the production and the fiscal terms and the entitlements of these fields and of the partners in the fields as of the January payment that was now changed. And the payments are tailored to each field and each partner in each field.

That now means that the Tawke payment will be larger than the other payments reflecting the larger contribution of Tawke to the overall production fund by the international oil companies.

In addition to the ongoing entitlements, the new payment arrangements calls for a 5% payment to each field of the net-back revenue of that month to help, is to begin to pay down the large receivables that currently exist, incur with respect to the three operating fields. 5% is a small percentage relative to the size of the receivable that certainly DNO has, but it’s an important beginning, it’s recognition of the importance of starting to pay down that receivable. So we’re pleased about that.

And of course, as revenues increase, whether because our production has gone up or because prices have gone up or hopefully both, 5% will become 5% of a larger number. And we also have an understanding that as the price of oil goes up and as the overall revenues to Kurdistan go up, that 5% number will be increased. So we can accelerate the repayment of our receivable. And that’s quite important to us as well.

In terms of how the calculation is done of this entitlement figure, again, it’s based on the production sharing terms that each field has or each, in some cases the partners in the same field have different production sharing terms. But the payment calculation is based on the fiscal terms but in addition of course to calculate the revenue, you have both production and price.

The pricing calculation is based on of Brent prices that are then adjusted for each field to the quality of the crude stream. There is a discount for the differential. Tawke oil is heavier than Brent and therefore it trades at a discount two Brent. There are of course tariffs for use of the pipeline transportation system, there are handling charges.

Between them in January, the differential discounts and the transportation costs came to something on the, just over led to an oil price at the well had for Tawke of just over $18 a barrel. That figure will change on a monthly basis depending on what happens to Brent prices and what might happen to the differentials. So we expect some movement in that - obviously in the entitlement number on a monthly basis. But the larger movement will come when the price of oil goes up and also of course when our production starts to pick-up.

The first payment in January was almost $21.5 million to be shared pro rata by ourselves and our partner on the block. And that included almost $18 million towards the current entitlements for January exports and almost $3.5 million towards recovery of the outstanding entitlements. Again a small number but a number we hope will pick up as production and prices pick up.

We continue to have the ability to sell oil into the local market, importantly when the pipeline as Turkey is disrupted this has been the case from time to time over the past months. We’re able to move very quickly to sell oil into the local markets. You will recall that we have considerable capacity to load tankers and move oil into local market.

Our preference would be to sell into the export market where the net-back prices are more favorable, it’s always more expensive to truck oil than it is to pipe it. But we do have the flexibility to move back into the local market if circumstances require it.

And as I indicated, we are now effectively exporting oil, certainly from a fiscal point of view. But I expect that in 2016, we will move closer to the markets and to the buyers of oil and have a more direct involvement and engagement in setting up sales of certainly our part of Tawke production. And that would also be an important next step for us as a company.

So, I now turn over to Haakon, but just a concluding remark that we’re quite pleased with the developments. We’re quite pleased to be back in the game. And hopefully we will have improved results to report on the next quarterly meeting as a consequence.

Haakon Sandborg

All right, good morning everyone. Well, looking back 2015 was clearly not an easy year for the company. We saw a significant drop in our revenues and cash flow. And this in turn came from the lower cash revenues in Kurdistan and the shutdown of production in Yemen. And of course also the much lower oil prices that we saw throughout the year.

So, in response to these challenging market and the revenue conditions, we acted earlier as you have heard today by cutting CapEx and our cost across the business units. And I think it’s important also to look at the important capital market transactions that we completed last year, both by raising new equity and by raising a new bond loan to prepay previous bond debt and to extend the loan maturities.

These actions proved our spending flexibility and also strengthened our balance sheet to better withstand the downturn that we see.

As we now enter into 2016, we are - I just want to join saying that we are very pleased about the increased earnings visibility that we have now. And the normal payments we see in Kurdistan. We expect that this will provide the basis for improving our cash flow again. And it will allow us to build the value through continued investments in this region.

Now, for a review of 2015, let’s start by looking at our key figures. And you will see here that the lower booked revenues at the level of $187 million. It was the main driver both for the lower net-back to cash flow and the operating loss that we show for last year.

But however, if we include the increase in our DNO net export receivable at $274 million last year, total revenues would be on a combined basis at $461 million. And in oil prices in 2015, this significant revenue number shows the real strength and sustainability of our Kurdistan operations with gross 42 million barrels going into pipeline exports from the Tawke Field last year.

As you see here, the operating loss was, last year was also affected by $93 million in impairment charges, mainly due to reduced asset values in Block-8, D-Lamon [ph] and in the Erbil Block in Kurdistan based on lower oil price assumptions.

If we now look at the Q4 and full-year P&L in more detail on this slide, starting with Q4, so, as you’ve heard in terms of revenues, we have seen September received five export payments from the KRG. The first four of these were each for $30 million on a gross basis through the Tawke license and the last one received this week was for $21.4 million.

And keeping with our revenue recognition principles, we record each of the - our share of these payments when we get paid in cash. And on this basis, the first of these payments was recorded in Q3 last year and two were now included in the Q4 numbers that we show here. And the two last ones that we have received so far this year will be booked in Q1 revenues in this year.

Otherwise, local sales revenues in Kurdistan were lower in Q4 due both to lower volumes and lower prices. And the same applies to our Oman revenues in this quarter.

As you will see on Q4 numbers, the drop in cost of goods sold is pretty big. And cost of goods sold, are down because we have reclassified lifting cost in Yemen of $13 million that occurred in the first three quarters of the year, they’re reclassified to other operating expenses due to the shut-in oil production in that country. These reclassified costs now turn up under the increase in other operating expense that you can see on this slide, in the quarter.

And the impairment charges of $79.7 million in Q4, Oman, Block-8 accounts for $42 million and the Erbil license for $25 million. In addition, we have taken write-offs of inventories and other items across our business unit. So, with that, Q4 provided an operating loss of $81.3 million.

You will see here higher net finance costs in this quarter, and that is primarily due to $16 million in impairment of financial assets. And that consists of a further share price decline on our holding of Iraq Petroleum shares, and also a write-down against a receivable in Tunisia.

Tax on the other hand is positive by $25.8 million and that’s due to the reverse log deferred tax liabilities; that comes from the write-down from the assets in Oman. And with that, we have a net loss for the quarter of $83.3 million.

For the full-year, let me show on the right side of this slide. You will see that, in there, 60% drop in booked revenues is as mentioned the main driver for the results last year. And again, the primary reason for this revenue reduction were the lower cash local sales and the higher unpaid export deliveries from the Tawke Field combined with significantly lower revenues from both Oman and Yemen.

The offset is a 38% drop in our costs of goods sold last year that comes, from primarily from lower lifting cost, lower DD&A in Oman and Yemen. But through the cost reduction programs and through the structural changes that we carried out last year, we have cut administrative cost and lifting costs by an estimated $50 million in annualized savings across both our corporate offices and our business units.

And while lifting costs at Tawke Field have been fairly stable, we have also achieved cost reductions here lately. And with higher production volumes, the unit lifting costs on this field have now currently been reduced to a very competitive level of $1.70 per barrel of lifting cost at Tawke. So, I think we have clearly further enhanced our production cost advantage as we go into 2016.

But to wrap up here on the P&L for the year, the impairment charges in 2015 as you can see here were lower compared to 2014. But net finance costs are up on higher interest expenses and on the impairment of financial assets. And on this basis, we show a net loss for the year of $212.3 million.

Moving to our investments. You can see here, we have strong CapEx growth until 2014, mainly going into development work in Kurdistan and that was mostly completed early in 2015. As I mentioned, to counter weak revenues, we thereafter cut cash outlays and CapEx spending significantly last year. And the final CapEx level came in at low level of $50.7 million. That was below our guided levels, and we saw that further products were put on hold in the second half of the year last year.

For 2016, we plan to step-up investments again. And in total this year, as investment program carries capital commitments for DNO of about $100 million. The main part of this program is again targeted for the Tawke Field through new production wells, water handling facilities and the further development work.

In addition, we are certainly looking forward to drilling the exciting Peshkabir-2 well and the exploration well in Oman this year, and other products across our portfolio.

As before and as always, we remain focused on funding our investments from operational cash flow, primarily from the payment stream in Kurdistan and also from the revenues in Oman this year.

And in terms of cash flow, we had a negative cash flow from operations of $74 million last year. That’s after tax and interest on this slide. This was down from a positive operational cash flow of $181 million in 2014. So, other than the much reduced revenues, the 2015 operational cash flow was also impacted by working capital changes, primarily due to a $87 million reduction of our trade and other payables through the year.

This reduction in payables is spread across the business units partly reflecting contractual payment schedules for our investment programs but we also see that generally lower activity and lower cost levels in the licenses, lead to reduced payables.

I have mentioned the lower investments that you see here in the middle of the slide. To comment on the receivables in Kurdistan from our sales there, we have seen a stabilizing amount from the receivable for local sales in Kurdistan. It has increased slightly to a level of $119 million last year and we saw that the local sales levels were insufficient to really reduce this receivable.

But now, we’re planning to apply part of the expected KRG receivable payments to reduce the book part of these receivables in our balance sheet. And as before, we keep our export receivables outside or off the balance sheet at this stage.

I mentioned the equity raise and the bond refinancing last year. And they have been very important for us. We really appreciate the strong investor support in completing these before the capital markets turned really weak last year. And through these transactions we have increased our year-end cash to $237.6 million.

And, with this cash position and net interest bearing debts limited to $162 million, we remain in a solid position with good cash balances, low leverage and longer loan maturities. In my view, this also clearly makes us stand out in a positive way compared to many of our peer companies at this moment.

Our financial assets now consist of the shareholding in Iraq Petroleum with a value of $11 million at the year-end, and treasury shares with the value of $3 million. Our equity ratio has come down somewhat through this downturn, but it’s still at comfortable level of 43%.

As I have noted, our low lifting costs and our low and flexible CapEx provide with a major cost advantage. And this gives us a solid structure to manage the current oil price environment, should the present low oil prices continue longer.

And finally, as we have discussed today, we believe that the new payment arrangement in Kurdistan provides a positive outlook going into 2016. And we are thereby ready to focus on new growth again this year.

So, I think that takes us to the end of our presentation. And thanks for following. And we will now open up for Q&A.

Question-and-Answer Session

Q - Unidentified Analyst

[Indiscernible] Securities. You mentioned, you were right about the realized price around $18 million which is including discount for quality discount and tariffs. Could you say something about the split of that, I mean, mainly it’s around quarterly discount, what are the tariff levels?

Bijan Mossavar-Rahmani

We’ve given enough information that you can do the calculation as to what the splits are. The differential and the transportation discount to Brent were on the order of $12 or so a barrel. As I’ve indicated this number will change month to month depending on market conditions, but that gives you a sense of the order of magnitude.

These numbers are not percentages of the final Brent price as you the differential, certainly the transportation cost of figure is a fixed figure. So as the price of oil moves, offer moves down, that becomes a larger or more important percentage of the total. Differentials change based on market conditions that can move up $1 or $2 or $3 in either direction. But order of magnitude we’ve given enough I think information based on what January looks like.

And with that you can have some sense as Brent moves up or down in coming months as to what the net-back price will look like for Tawke. But at this figure of just over $18 a barrel, our net-back or well-head price for Tawke is much more significant than it would have been at these Brent prices for sales into the local market. So, we’re pleased to have our payments based on this differential and transportation charge versus the previous figures.

So, it does put us in an improved position. But also the payments arrangement that we described and that have been reported puts us in a better position. We believe the number of $22.5 million or so in January were below the previous number of $30 million a month, but the difference is that the $30 million a month number was an arbitrated number to a bit high payments for Kurdistan with the drop in the Brent price during the period in which that was paid.

The amounts were not tied to entitlements nor - therefore did not have the transparency the new numbers have, that allow all of you, all of us to calculate what the numbers will look like, the payment numbers each month. They didn’t have regularity like their indications that the $30 million payment to us and the combined $75 million payment to the three operators was not sustainable because of the financial squeeze in Kurdistan and because of lower Brent prices.

And as we move into the new arrangement while the first month’s figure is lower than the last payment. It’s the quality of the payment is greater, even if the quantity is less because we now know how the payment is calculated. And we know that it will be made on a regular basis.

The payment came very quickly this time. The Kurdistan Regional Government had indicated that they wanted the payments to be paid within 10 days of invoicing. We invoiced on the first day of February and we were paid within just under a week.

And that was the fastest payment against an invoice that we’ve had. In the past these payments took sometimes many weeks. So this regularity, this predictability, this transparency of the payments creates a higher quality of payments to us that offsets in our minds the lower payment in January. And the January payment absent this scheme may in fact have been much, much different, much lower.

So, we’re pleased with it. It’s given us the confidence to proceed. I know we’ve had some questions coming in about how much assurance do we have these payments will continue given the financial squeeze in Kurdistan. It’s not just a result of lower oil prices but also a result as you know of the increased cost of fighting the war that they’re fighting against ISIS and also the cost of the large number of refugees that are now in the Kurdistan region, I think the number is on the order of 2 million, that’s obviously taking its toll as well in a financial sense.

But there is a clear recognition in Kurdistan that the oil production and the oil contribution from the international operators is tied to investments that they make to halt a natural decline of the fields. It’s tied to investments they make to increase production. And that that is usually important to them and absent payments, and absent regular payments, those investments had ground to a halt.

And with this the investments will resume. And at the end of the day, for every barrel we add to production, over two thirds of that goes to the Kurdistan government, something around the third of it goes to companies, to us and that’s a great trade for the Kurdistan government as well. There is this recognition that this is a partnership.

And our gain is their gain and their gain is our gain. So they’ve provided us with this new payment arrangement which is in fact, it’s not a gift, it’s as per our contractual arrangements with the government. The government was not able to order those contractual arrangements for a period of time, that’s commenced with the ISIS attack in Inter-Kurdistan. We all watched that happen.

DNO as a cautionary matter again went into a retrenchment mode that summer and cut back costs and cut back spending and cut back investments. And as the situation is now changed, it’s not completed reversed but it’s changed enough that the government is in a position now to order its contractual obligations. We’re pleased that that’s happened. We never had any doubt that won’t happen, it was question of timing. And the timing is right now.

And I think this change will by incentivizing and rewarding the companies, including importantly DNO allows us to increase production, that’s to everyone’s gain. So that point of view is to everyone’s advantage that this arrangement continues. It’s to everyone’s disadvantage that it’s a stop and those incentives are both clear to the government and they are to us, so that gives us great confidence to make the investments, that’s why we’ve announced those investments.

But again, we can hit the brakes pretty quickly if circumstances change, and circumstances could change for reasons unrelated to the willingness of the government to continue exporting and continue these payments. Those are out of our control, those are out of the government’s control. But absent some great shock, geopolitical shock to the system which can happen, absent that I think we will - we’re back in business, back on track for investments and back on track to increasing our production and increasing our revenue stream from Kurdistan.

Unidentified Analyst

A little follow-up on, taking issue, on operational issue on Peshkabir, if you’re successful, can you link that to Fishkabor, you don’t have to build process facility? And the second question on the shortfall, at current prices and export level of 600,000, it looks like there is a couple - at least $200 million to $250 million shortfall for Kurdistan monthly unless the traders can extend further credit lines.

They’re working on getting the salaries down, energy subsidies down. But there seems to be last week also meeting with Baghdad on securing World Bank funding, is there anything, can you say anything about how KRG is working to get those cost down or how sustainable this can be at current price levels?

Bijan Mossavar-Rahmani

On Peshkabir, I don’t want to get ahead of our operation there. We’re going to drill we’ll see which horizons are commercial. And at that point we’ll make decisions about what kind of facilities would be required at the field. But the important point there is that we’re very, very close to the Fishkabor export system, that’s only about 10 kilometers away. And we have the options of course of trucking as well as putting in a pipeline and what kind of production facilities would be required would be again a function of what the appraisal program throws up.

But I think the important thing is that the development and commencing production is not going be a matter of years, it’s going to be fairly rapid given these infrastructure and ease of development that we’ve already demonstrated in our ultra operations in Kurdistan.

With respect to the financial situation in Kurdistan, yes, it’s extremely difficult as it is everywhere including here in Norway, everyone has been squeezed by this lower prices. But each country’s situation, each region’s situation is a bit different. There is a situation Kurdistan again is made more difficult by the spending, the war spending and also the refugee spending.

The Kurdistan Regional Government has made great strides to try to reduce costs and reduce waste. These are in the news on a regular basis. We know that this is difficult. They have cut salaries and it’s difficult, these decisions are always difficult. But they’ve announced and have probably said that they have every intention of making difficult decisions.

They’ve started that and there has been a reaction, there have been in the part of those whose salaries have been cut, those businesses have been affected. But we have every reason to believe that that process will continue. It will have its own twists and turns as it does in every situation of this sort. But there is a recognition that they have to live within their means, cut waste and have the dollar go further than it has perhaps in the past.

But in addition to that as you indicated, there is the likelihood of outside help whether that comes in the form of private sources or in national organizations or governments, I don’t know. There are discussions along all those lines.

But I think there is also recognition outside of Kurdistan that the Peshmerga, the Kurdish forces are carrying much of the burden of the fight against ISIS at least in that part of the Middle East and they need support, and support already comes in the form of training, already comes in the form of military supplies and arms. And I expect it will also come in the form of financial support for the Peshmerga.

If that happens that would be helpful because in a sense the oil companies through these bill receivables have been funding some of that and that’s really not for us to do. And it’s for others. And I think we will see that kind of support because there has now been a long track record of Peshmerga engagements in the fighting. And this costs money, costs lives, it costs arms and those have to be addressed by the international community. And I expect it will be certainly those discussions are ongoing if you read the press.

Unidentified Analyst

Yes, Andre Schulte [ph] from Danske Bank. Question on the budget for 2016, you quote a total of $100 million I just want to check does that include the commitment well in Oman?

Haakon Sandborg

You’re talking about the exploration well? Yes, the way we do this, we basically, we include the exploration wells, yes, in this $100 million because we see it as initial investment. And then of course whether depending on the outcome, if it’s successful, it will remain as a capitalized exploration item on our balance sheet, if it’s not successful, it will be expensed.

But I can confirm, yes, that the Block 36 well is included in that number. When we point to $100 million that is our investment plan for this year, what we have seen in recent years is that we are able to sometimes when we negotiate with suppliers that we are able to extend the payment structures to last beyond the current year when you make the investment.

So, I’m not going to guarantee you it’s going to be $100 million spent - funded this year, but it could be on the tail-end and that’s somehow it slips into next year. But in the program itself, including exploration wells and all the other normal CapEx is for $100 million on the DNO’s hand.

Unidentified Analyst

And of those, an indication of how much is needed for Tawke to sort of stem the production reduction that we’re seeing?

Haakon Sandborg

I’m not going to go into exactly, I will answer that will vary over this year. But a major - a big part of that will be for Tawke, that’s more than half of that.

Unidentified Analyst

Yes. And last, you mentioned a budget oil price of $36 per barrel. With the current investment plans are you then neutral at $36 per barrel or are you seeing a cash positive position at the end of that?

Haakon Sandborg

This guy used to be a colleague. Can we answer these questions? But when we used $35 that’s a tough question, but yes, we do see a, at least we are covering our investments from our cash flow to put it that way, which we are targeting, so fairly neutral on that.

Unidentified Analyst

Thanks. It’s not my intention to be difficult.

Teodor Nilsen

Teodor Nilsen, Swedbank. We’re positive to see like the new payment arrangements but I think it’s also fair to point out that payments will be lower at the current oil price compared to the previous payment arrangements or is there any chances that the changes from KRG, decide this triggered by the lower oil price? In other way, but that scares you not able to turn it back to the previous payment arrangement if oil prices increases?

Bijan Mossavar-Rahmani

We don’t want to go back to the previous payment arrangement because we were penalized. Tawke and DNO should have gotten a higher percentage of the total payments, $75 million payment figure was not, was arbitrated in some respects. And it did not reflect our contribution as an operator, as a Tawke Field or as equity participant in that.

So, I’m pleased that we’re now getting paid according to our entitlements as are the other companies. And as I indicated while the quantity of the payment in January was lower than in the quantity of the payment in December, the quality of it is better because we know it’s going to continue the $30 million payment previously sometimes would come at the end of the month, come in the following month while there was a commitment on the part of the Kurdistan government to pay something every month.

They also made it clear that the amount of that payment was tied to worldwide prices. And that $30 million to $75 million to the companies, that was above the company’s entitlement, it was not sustainable. And they could have, they saw these prices, the Kurdistan Government could have said well, that’s $75 million total now is $25 million for January maybe it’s $35 million or $15 million in February. We would not have the confidence then to make the kind of investments.

We’re only making these investments now starting up because we have confidence of the payments are worthy entitlements in the contracts, which is what we agreed to do when we went into these contracts. So this is as follows the contracts which means as the price of oil goes down, our revenues go down, as the price of oil goes up, our revenues go up. So, now we face some of this downside of low prices but we also face the upside of higher prices and higher production.

That’s exactly where we want to be, and that’s exactly where we are now. So, I prefer this arrangement to the prior more arbitrary irregular arrangements that was not sustainable. Anyway, plus as production, as price went up $30 million to a target, it would have been too little. So I’d rather be exposed to our contractual terms. And I think this puts us in a better place to do this.

And how sustainable is it, I believe it’s sustainable because there was now an understanding in the market and in Kurdistan that if the payments stop or aren’t regular and aren’t predictable the investment stop and then production goes down and revenues go down. I think this is an important piece of a puzzle as well.

Teodor Nilsen

And then on the 5% recovery, on the big outstanding receivable, you mentioned to transfer that those 5% may increase over time given that the oil prices recovers, by how much should we assume that those 5% could increase?

Bijan Mossavar-Rahmani

5% as much as the oil price increases in the sense that it’s related to that, if you’re asking me will the oil price be $80 at the end of the year or $120 or $40, I don’t know. But clearly the 5% is an important stretch for the Kurdistan government. It’s a symbolic payment. But at least it’s a recognition that these receivables have to be drawn down and paid down.

The Kurdistan Regional Government has always said they recognize this debt to the companies. They appreciate that the companies have been placed in this position and that there has been a hardship. But that there is, a willingness and a requirement to the government pay down this debt. This is the beginning of that process.

We’re pleased at least that process is started. It means now with both getting our ongoing entitlements that are receivable will not grow anymore. And that with this payment our receivables will start to go down, and that’s important to us as a first step. But we fully expect that over time that this will, that our receivable will be in fact paid down and go down to zero.

How that will occur, I don’t know, when it will occur, I don’t know but we fully expect that will happen.

Teodor Nilsen

And just finally from me, those 5%, is that based on negotiations between the oil companies and KRG?

Bijan Mossavar-Rahmani

Yes, it was based on the discussion we had prior to this announcement. And again, we’re very mindful of KRG’s ability to pay and its limitations. And we have to be responsible and reasonable and realistic in how these arrangements are made. We can as to get $1 billion back next month I think it’s not there to give. That doesn’t help anyone.

So, it’s been a lot of discussion and a lot of understanding on the side of the both parties as to what’s necessary, what’s reasonable, what’s doable at this time. And as those conditions change, as what’s doable, changes. Because the revenues have gone up because the prices have gone up, we’ll be back at the table and discussing and agreeing to a payment arrangement that is doable and helps us draw our receivable down further.

Of course the KRG in addition to a cash recovery of all these receivables is in a position to contribute other assets perhaps they have as you know interest in all the fields. It’s possible that there would be a trade or discussion that part of the receivable will be offset by other kinds of assets, that’s a discussion that can be had, that would be appropriate time as well. Although our interest is getting paid down our receivable in cash that allows us to invest more in Kurdistan and invest more elsewhere as well and that’s the business we’re in.

Teodor Nilsen

Okay, thank you.

Øyvind Hagen

Øyvind Hagen from ABG Sundal Collier. First a question regards to receivable. How much has it gone to, what’s the total amount you have on your un-booked receivables? And also how much of that has the KRG recognized when you are being in negotiations recently?

Haakon Sandborg

As you know there are two parts to the receivable, one is the one that we have booked that relates to previous local sales. That in 2015 moved from $112 million to a level of $119 million. So, it was fairly stable from the year before. The other part is the un-booked export receivable which we keep of our balance sheet that went up by $274 million last year. So, it was coming from $663 million in 2014 to a new level of $937 million at the end of 2015.

So, in total, then we have a movement on book, the local sales receivables and the un-booked export receivables from $775 million at the end of 2014 to a level of $1.056 billion at the end of 2015, up $281 million.

So, that’s sort of the numbers, if you got all that down, but we can provide them later if you want. What was the second part of the question?

Øyvind Hagen

The second part related to how much of that has KRG recognized when you’d been in discussions with them?

Bijan Mossavar-Rahmani

The KRG recognizes that there is this receivable, our calculation of the receivable for the period in which the KRG was selling the oil directly we knew how much oil was delivered. We weren’t - we didn’t have the price that was received at Ceyhan from the buyers nor did we have the figures that were used in calculating the net-back value of each of the different crudes.

As you know, the oil when it’s sold as a blend oil from Kirkuk, and from Tawke and from Baghdad and the all the fields. So, we did not have and still have not sat down with them to go over their numbers in terms of pricing. So, our number is based on our best guess as to the pricing. We know the volume, we don’t know the pricing. We have a sense but that number could be off a few dollars a barrel, I expect it probably is off a few dollars a barrel.

So, at the appropriate time, we agree with the KRG, we have to sit down and go over and audit and review their numbers and come up with the final figure. So our number is an estimate. We believe it’s a good estimate. But where that final figure will land is, will be part of a reconciliation process, a review audit reconciliation process. The number may be higher or lower than that I expect, not be much higher.

But hopefully expect to be probably much lower but we’ll see. So, this is our best estimate at this point. But it’s, the number from which we’ve calculated the entitlement amounts. And as we sit down with them and tweak these numbers that too may change. But as a starting point, the KRG has said to us, send us an invoice based on your calculation of your entitlements, and we will make those payments subject to at some point again sitting down and trying to true-up all these numbers which we’ve done before.

Several years ago we had the same process with the KRG we sat down and did our reconciliation at that time, more money moved in their direction. And this is an ongoing process as it is in other countries as well. Although this situation is unique that the government is actually selling the oil, not the companies, the companies should do it. The government takes on regional like I said that in due course, the companies would take-on this responsibility. And I expect we will, and as I’ve said, we’re getting closer now to that point.

Our payments are now based on export values, and I expect we’ll get closer to the trades as well. We are approached by traders asking to purchase Tawke crude. So we’ll be more involved in that process as the year, 2016 unfolds.

We’ve been getting some follow-up questions from the web again as to how this differential works, there is one question as to, is the differential around $14? I’ve said it’s around $12 for January, it will move around. And again, it’s different for each field. The numbers we’re giving here for Tawke, we expect to be some change.

But with this information I think we have and you have now more transparency as to how the number, the net-back figure for Tawke crude will change over the course of the year.

I know we are competing with another presentation. But thanks for coming. So, maybe some last questions or do we round-off?

Bijan Mossavar-Rahmani

Okay. Well, thanks everyone for coming. Thank you.

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