DNO ASA (DTNOF) Q2 2016 Results - Earnings Call Transcript

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DNO ASA (OTCPK:DTNOF) Q2 2016 Earnings Conference Call August 17, 2016 11:00 PM ET


Bijan Mossavar Rahmani - Executive Chairman of DNO ASA

Bjorn Dale - Managing Director

Haakon Sandborg - Chief Financial Officer


Anders Holte - Danske Bank

Henrik Madsen - Arctic Securities

Thomas Arrestad - Pareto Securities

Kjetil Bakken - Carnegie


Good morning. Welcome to DNO ASAs Second Quarter 2016 Interim Presentation of or results. My name is Bijan Mossavar Rahmani, I’m the Executive Chairman of DNO and I’m joined this morning, by our Managing Director Bjorn Dale, and also Haakon Sandborg our Chief Financial Officer, who will make the presentation of the financial portion of our reports.

In terms of our second quarter performance and results, we have had really a strong quarter both in terms of our operating results and our operating profits. This was the second consecutive quarter in which DNO had operating profits on the back and on the strength of higher revenues and lower cost this year.

We are now launching a fairly aggressive and active drilling program across the portfolio, principally at the Tawke field and Kurdistan, having completed workover campaign in the first half of the year. That’s continued into the current third quarter, but we are now moving into the phase of drilling production wells on the field.

We are drilling the first production wells in the fields since late 2014, and we have planned five production wells at the Tawke field in the second half of the year to boost our production capacity from the current rate of about 120,000 barrels a day by just over 10% to about 135,000 barrels a day by the end of 2016.

Of course the resumption of regular export payments underpin these new investments, we have had payments from Kurdistan on a steady and regular basis over the past eight or nine months. Those payments have slowdown a bit over the course of last month. We are fully confident that there will be a resumption of the payments on an ongoing basis.

There are financial of course pressures and prices and other developments on the ground that you are very familiar with those of you follow developments at DNO and at Kurdistan. But we are fully confident that payments will continue and allow us to conduct and support our active drilling program, but the program is contingent almost payments coming in on an ongoing basis.

In expectation of continuing payments to all of the operators across all the fields in Kurdistan, as you know at the end of July, we also launched a conditional offer to acquire one of the other Kurdistan for this company's Gulf Keystone Petroleum.

We are continuing to take steps to rationalize our portfolio, to continue to high grade in the portfolio, manage our costs and continue to pursue growth opportunities, both inside Kurdistan and outside of Kurdistan.

A little bit more detail on our second quarter operational highlights. Our operator production across the portfolio in the second quarter climbed to about 27% to 123,000 barrels a day of oil equivalent, up from 97,000 barrels a day of oil equivalent in the first quarter of the year.

So strong operating results, of that number Tawke of course is the single largest contributor at 117,000 barrels a day on average during the second quarter. Most of that of course delivered for exports through Turkey.

Those exports continue to be impacted by periodic disruptions and closures and the pipeline system inside Turkey including for short periods of time in June, July and August, so our production figures will reflect those closures, because the bulk of this production is exported.

The average price of these exports from Tawke during the second quarter was $34 a barrel, up from $21 a barrel in the previous quarter, so stronger price as well.

We completed the five workover wells at Tawke in the second quarter. We had already completed three in the first quarter and these are of course to reverse natural field decline and sustain our production rates. Our all month production averaged almost 6000 barrels a day oil equivalent during the second quarter of the year.

I'll just summarize some financial highlights and Haakon will go into much greater detail on these. We have the second quarter 2016 revenues up $61 million of which Kurdistan’s share was $56 million. This was the fifth consecutive quarter in which DNO's revenues totaled $50 million or more, so we are pleased with that run rate.

We expect in 2016 to have a capital investment program of around a $100 million to be fully funded from cash from operations. We exited the quarter with a cash balance of $249 million. So again, we have had a good quarter on the back of a, the first quarter where we saw reversal in some of the trends with respect to profitability, with respect to activity and it feels good to be back and active and growing again.

In Kurdistan and Oman we are stepping up drilling, two rigs are currently active in Kurdistan at the Tawke field. A third rig will be mobilized in September I think that this program I believe the most active international operating company in Kurdistan in terms of number of rigs and number of drillings.

We have [technical difficulty] this morning we were above 1700 meters and we expect to complete the well and have it on production by the end of September. We have dropped our drilling cost in Kurdistan, our drilling cost in Kurdistan were already very low by any standard, including the wells drilled by other companies in Kurdistan and now we have pushed them down to an average cost of just below $10 million a well, for the Cretaceous wells and around $3 million a well for the shallower Jeribe wells. So we are pleased with those numbers.

In terms of our workover wells we were also very cost efficient with those and had an average cost for workover of about $500,000 a well for each of these eight Tawke workovers completed in the first half of the year.

We have as previously announced plans to drill the appraisal of well at the Peshkabir discovery, which also sits on the Tawke license, and that well will start in October. Additionally on Oman, we have plans to re-drill under the restore production at one of the wells and the West Bukha field, the West Bukha-5 and that will take place commencing in December.

This diagram this charts shows the drilling program, we have shown these in the past. Again, in the last couple of years, we haven’t been active in drilling and it’s good to be drilling again. So we have fairly I think active program and hopefully over the coming year or two and beyond we will continue now to be able to active the drill both production wells that over both exploration well, and be back in business as a growth company once more.

Just a few words about the Gulf Keystone approach, I won't go into much detail about this, we have provided in the public domain our rational and our thinking and the determines of the offered that we have made I don’t have very much to add to that. But I do want to point out several things together the Tawke and Shaikan fields represents growth production capacity around the 160,000 barrels a day currently.

This is one third of Kurdistan’s total so the combination is very substantial production units and contributed to the Kurdistan production and export story. The combination with place DNO and Gulf Keystone in terms of the net position of the reserves in the two companies themselves, it will place of two companies at the top of the list of the independent expiration production companies listed in Europe in terms of proven and probable are two key reserves. So this was scaled and sized outside of Kurdistan as well.

One of the reasons that we believe we have an opportunity to create additional value and strengthen the Gulf Keystone operations of the Shaikan field is that for those who follow Gulf Keystones performance and its position. The current monthly revenues that accrue to Gulf Keystone as its share of Shaikan production are not sufficient to maintain and supports, sustain their corporate running cost as well as to support new investments to materially increase the production from Shaikan, which will be capital intensive efforts or north to maintain the current reserves that the company has indicated. Because those reserves are in parts of these in our view premised on significant additional investments.

We believe that DNO has certain operating synergies and experiences that combined with Gulf Keystones operations at Shaikan can bring greater value to the combined entity. And that is an important driver of our motivation to have met this conditional offer through this company.

Our offer we believe is a fair and full offer, it provides a 20% premium to the investors above the current valuation of the company, asset by management, and it allows the current investors in Gulf Keystone not only to retain an exposure to Shaikan and Shaikan’s upside. But an exposure that will be supplemented with DNO's portfolio not just in Kurdistan but beyond to the DNO's higher market capitalization to DNO's more robust cash flow, our stronger balance sheet and again our proven capabilities as an operator in Kurdistan.

The offer is conditional on the completion of Gulf Keystone's financial restructuring, which is been initiated, but not yet completed and also is conditional on a timely and irrevocable undertaking as we have obviously already stated, a undertaking and supports by Gulf Keystone's largest note-holders and bondholders and of course as is normal in these situations by the appropriate and necessary approvals on the Kurdistan regional government. Thank you.

Haakon Sandborg

Okay, good morning everyone. I would like to tell you that we are quite pleased with the increasing revenues and improving operating profits also in the second quarter. And this in our view confronts a solid recovery year-to-date from the challenging conditions that we faced last year.

We see that our improved financial performance is driven by higher production and also by regular monthly export payments in Kurdistan. So on this basis, we are now responding as you have heard today, by increasing drilling activity and investments in the Tawke license and this will take place now in the second half of this year.

Our offer to acquire Gulf Keystone also shows that we are prepared to step up the inventory to strengthen our position and also to add further to our value generation in this region. So clearly, we have a lot going on. And we will come back to that, let's for now, let's focus on the Q2 results and the affiliate numbers, starting with the key figures as they're normal.

Here you will see that our revenues increased by 23% to a level of $61 million in the second quarter and this increase is backed both by high production from the Tawke field and by increasing oil prices in this quarter. And this is both then reflected in the monthly export payments from the KRG.

As you can see here, our netback still remains stable in this quarter and this is mainly due to $12 million in dry well costs from an exploration well in Block 36 in Oman. As we have mentioned we are also pleased to of course see that our quarterly and year-to-date operating profits are improving and this intern is reported by the significantly higher awareness but also by much reduced cost levels this year.

And now moving to our P&L and starting with revenues, I would now like to remind you that our monthly payments on the KRG for Tawke production now from the first quarter this year, consists over one part for contractual entitlement and one part that is paid towards contractors receivables for tight deliveries. So that receivable part is calculated as 5% of monthly and net back revenues.

Now both for the first and second quarter this year we have applied DNO's share with a 5% payment from the KRG to reduce the booked part of our receivables and this means that that part of the KRG payment is not included in our reported monthly revenues. Net to DNO the amounts in question are $3.9 million for the first quarter and $10.2 million for the second quarter. So these are significant amounts that come in addition to our reported revenue numbers.

We aim to continue this procedure going forward and the purpose here is clearly to reduce the longstanding receivables that we have booked in our balance sheet for local sales and thereby to carefully strengthen our balance sheet further. For the cost of goods sold that you see here, we maintain low lifting costs at a level of a $1.70 per barrel in the second quarter for the Tawke production, and this confirms that we lead among the lowest cost of goods in the whole E&P industry with that cost level.

Our DD&A charges are also reduced following the change through depreciation on our 1P proven reserves basis that we have implemented this year. For the other costs, expense declaration is as I mentioned up from RAK-36 dry bulk costs, so we are talking now in the second quarter.

You see here an item called the other income, that's $5.4 million, that's for an accrual for an insurance claim in Oman that we will be paid for shortly. So we have included that in Q2. We also show a reversed impairment that is a positive figure over $6 million and this relates to a transfer of a previously impaired materials and inventory from the hook license to the Tawke license.

Following these items, the Q2 operating profit came in at $16.2 million. I don't think there is any special items for finance and tax in this quarter and we shall hear net profits after tax over $4 million.

If you look at the year-to-date numbers on the right side of this slide, they show an increase in revenue over 37% and a reduction in our cost of goods sold over 51%. Quite significant changes here and this clearly provide much better results this year.

As a look on our investment spending and the exploration well in Block-36 in Oman has been remained nascent so far this year. The cost of this well is initially capitalized in Q1 but thereafter the full cost too is now extends in Q2 after we saw the dry well result.

Other investments year-to-date are mainly included in the $5 million in CapEx and drilling preparation on the Tawke license and combined with the exploration well in Oman, the total spend level is $18.8 million year-to-date. I mentioned that in addition the well workover is at Tawke in a year-to-date amount of $3 million net to DNO have been expensed as OpEx.

The year-to-date spending has thereby been fairly limited, but as we discussed in our Q1 presentation much of the planned investments will now take place in the second half of this year. And this would be the draw the drilling program in the Tawke license where three rigs are running, but also over the investments. So on this basis, we expect capital expenditures of around $80 million in the second half of this year.

Turning now to cash flow. We show on operational cash flow of $7.7 million in the second quarter. Now this cash flow was reduced by significant working capital changes of $27.1 million in the quarter. This includes several items.

The one thing I can mention we have paid down on accrued charges for the KRG protection on the oil police force in the Kurdistan by $12 million and we have paid down other accrued expenses with an amount of over $6 million, again mainly in Kurdistan. And there is also under working capital in the increase in receivables from the Oman insurance payment, those are $5.4 million that will be paid now shortly in Q3.

Working the other way on the other hand there is also $8.5 million reduction in the books part of our Tawke receivables in Q2. And this due to the application of the monthly receivable payments from the KRG, net of some changes in inventory and refinery sales.

As you see here, in additionally we also paid $17.5 million in semiannual interest charges on our bond loan and that was made now in Q2. And together with the working capital changes, this payment then contributed to some used over cash in the quarter in an amount of $12.8 million. Our cash balances remain at a healthy and solid level of the $249 million at end of the quarter.

For our capital structure, there is no other major change in the second quarter and we maintain as before a solid balance sheet, with low leverage through the net interest paying debt over $151 million.

The value of our financial assets also increased further to $25 million in this quarter, supported primarily by share price improvement. We see an increase, although not so big, but slight increase in recent equity ratio to the 44% at the end of the quarter.

So I think to sum up, we obviously have stated today, pleased with the good progress we have made year-to-date, both though the good operational results, but also these solid improvements in our financial performance. We now look forward to the second half of this year and we think it holds a good growth potential for our company.

With that I would like to wind up and we rearrange and we will open up for questions. Thanks.

Question-and-Answer Session

Q - Anders Holte

Two questions for me, this is Anders Holte from Danske Bank. If you could any indications on the timeline for the Gulf Keystone process? And second question is related to the rather substantial debt receivable. You said that last time you were suppose to start a discussion with KRG, if you could elaborate a bit on the progress on those discussions? Thank you.

Bijan Mossavar Rahmani

Andrers what is the first part of your first question, in terms of the Gulf Keystone process. Was it the timetable or are you asking about some other aspect of it?

Anders Holte

No just indicated timeline of process?

Bijan Mossavar Rahmani

We would hope to have a response from the bond holders to note holders in the very first part of the September, we have initiated contact with them, this is a summer holiday so some things were slow, but we would want to have a very good idea of their response by the first part of the September.

This offer obviously is not an open offer that’s indefinite, we have set up very clearly in our initial proposal and I repeat that again now that there is a window. We believe of our opportunity to do a transaction to the benefit of the DNO shareholder, but also of the investors in Gulf Keystone that window will now stay open definitely, because of pauses they are going through and because of the other opportunities we are looking at. And hopefully by the first part of September we will have a clear view us and them as to whether and how we can best proceed with this potential transaction.

With respect to the discussions with the KRG, we had said two things, first that there would be an audit of all of our accounts, but also it’s a mutual audit, an audit of the price of oil obtained in the export of Tawke oil over the past years. So we have made certain assumptions when we translate our receivables as you know about the price based on what is the guideline in the production sharing contracts. We have made assumptions about the price. The actual price may be different.

The price at which the invoicing is down on an interim basis and payment made we have been open about. In public, we stated what that price is we said it was for the previous quarter. We have to sit down and begin understand how the actual price relates to the price as provides us for under sharing contract and the compare our receivable figure with that of the KRG that process is necessary to bringing the figures together.

They are not already close to each other and we have made preparation at the DNO side to collect all material and we are ready to commence the audit, we are waiting for the KRG - they have publically stated that they are doing audits of the entire oil and gas sector in the Kurdistan. And the same process would apply to all the other operators as well, this'd be a process that will take some time to work out. And at the end of that, we will know how close are receivable. This is the unbooked portion of our receivable and what is we haven’t booked it is because it's based on certain assumptions.

We know how much we have produced, but there is importantly a price component, we have made certain assumptions and worked out through the PSC mechanism and formula and we will see what that figure post audit looks like. and then so the second part of that we have said once we have that number agreed with the KRG we will then begin or continue discussions with them as to payment schedule, a payments mechanism and the payments modality and that's important for us to have clarity on that as well.

But again all of this is on the un-booked portion of the receivable as Haakon mentioned on the book portion we are making, I believe progress towards resolution of that and [indiscernible] of our balance sheet. So it's a process that's unfolding and it’s a process that will take some time, but we are patient, and we are being cooperative, and we are being understanding of the circumstances in Kurdistan, which are complicated not just by all that's happened in the oil sector over the past 10 years.

Ahead of systems being put in place that in a more traditional Kurdistan environment would have been the case, but also all that's going on politically within the region and from a security point of view, times are very difficult. we try to be part of the solution and help into the process rather than part of the problem, I believe we have been successful with that.

Anders Holte

[indiscernible] bank, the only question on the potential Gulf Keystone acquisition, you said that their current [indiscernible] seems higher than their revenues, so how much cost potential synergies do you see following that potential acquisition?

Bijan Mossavar Rahmani

I didn't say currently that their share of the revenues exceed our investments, because their investments have been limited. Historically, we don't have the case which got them into so much trouble to begin with that's what I indicated. I tried to be bit careful was that their share of the revenue from Shaikan and you can do the numbers, their production is known, their price can be, if not already public can be quickly calculated from the price they pay to the other producers. And well getting over and ourselves talk out and we obviously report our prices for tuck-back and Tawke,

You know what that number is, you can probably calculate if it’s not directly reported their running costs as a company. And also we have a sense from their audit reports as to what their future investment profile looks like and if you look at their half of the personal report, which reports their proven and probable reserves, that's premised on certain investments to get them to certain production levels and certain recovery factors. And it's clear that their revenues don't support both the running costs and the investments that they have set underpinned their future growth and their reserves percentages, clearly there is a gap, wide gap between those numbers.

The question is well what is that DNO can do that successive management at Gulf Keystone haven't been able to do? I think we have indicated there are certainly some certain savings, any corporation that's listed and has an active corporate structure and it spends considerable monies on that. And I think if you go through kind of the Gulf Keystone reports you can come to some range as to what those costs are and those would be fairly immediate savings and considerable in the scheme of things.

Second is what sort of operational synergies are there, where the two companies have certain synergies while Keystone's production is trucked to Peshkabir and put into the pipeline through the DNO system so we have both an understanding of their operations, but also there are certain synergies operationally and not just with respect to offloading their crude. We are a very active driller, we drill wells cheaply in Kurdistan. It helps that we have a drilling campaign that involves multiple wells on an ongoing basis, while Keystone has not been an active driller.

Their drilling involves perhaps some mob and demob rig costs that we might be able to reduce, because of the part of a program we are engaged and this is one example, but there are other examples of that nature that means operational synergies, more efficiencies, more and more cost savings and we believe that there is scope to do that. And that we believe we are uniquely well placed in Kurdistan to create those synergies and those efficiencies and those savings.

There is a limit to how much we can do of course, there is a certain cost that will be borne by anyone but I think as we are uniquely well placed to integrate that asset into our operation and to better in terms of performance of the assets and has been the historically the case.

The Shaikan field is also of interest to us, because as you know on our Erbil block we also heavy oil that's not dissimilar to Shaikan oil and perhaps from our side there are synergies that would helpful to us from Gulf Keystone's operating groups experience with heavy oil at Shaikan that this is a two way street that there may be lessons learned and operational efficiencies and synergies that would allow us to develop our heavy oil assets more productively and more efficiently. So we also view it from that perspective.

Anders Holte

Okay, and I have one question regarding Kerogee's financial position. We know that to public expensive have declined substantial costs [indiscernible] breakeven, it's like now in terms of oil price.

Bijan Mossavar Rahmani

Kerogee's budgets difficulties, it’s not just the Kerogee it's Baghdad, it's Iran and Saudi Arabia and all the producers. Norway, I mean anyone who’s economy is based on oil prices directly or indirectly has of course been affected. And at Kerogee more so and there is a lot of visibility as to the impact of the lower oil prices and the disputes of Baghdad and all these other issues with respect to their finances. Kerogee has made taken great steps to reduce their spending. Again, much of this is in the press I'm sure you have been following, they have been I think they prioritized payment to the oil companies, because they realized and we have been constantly saying that without revenues we don't have the bandwidth to spend in Kurdistan.

And that by spending we create production, we create value and the bulk of that value goes to Kurdistan, the oil companies and importantly DNO is largest producer of [indiscernible] companies, companies are the biggest generators of revenue in Kurdistan. And for us to be able to generate revenues three quarters or more of which go to Kurdistan we have be able to make the investments and the source our funding for investments is our production stream. They understand that.

So there is a neutrality of interest in paying the companies, but we also understand that with the price of oil especially moving around. Their ability every month, the revenue stream every month changes and the other obligations that they need to meet while they tightened the belts considerably and you will see again in press reports that the payments to the [indiscernible] are limited and sporadic. Payments to teachers payments to ministers, there is some significant budgets cuts.

We have been beneficiary for period of time of ongoing revenues as per our contracts. This has slowed down over the last month or so. We expect to get back on-track and as oil prices move up or stay up and they have been moving up about 20% over the last few weeks that helps the 20% more revenue effectively. I think we will get back on-track, but the reality also is that without our payments we are not in position to continue making investments, we have always been clear when the revenue come in, we will hit the accelerator on investments.

When our results come in we will start on the breaks and we will be watching this carefully and this is an issue not just for DNO, but it is an issue for the other operators including Gulf Keystone. And this is an issue I’m sure that Gulf Keystone investors bear in mind that what happens if no payments come for one, or two, or three months or they are delayed, or they are reduced. There is exposure for all of us. And we believe that we will have a strong balance sheet and with a larger portfolio we will be in a better position as DNO, with or without Gulf Keystone in our portfolio as we have more shock absorbers that a smaller company would have.

Anders Holte

[indiscernible] but is it possible to get - how - because 5%, 10%, 15% oil price breakeven have decline over the past few years or maybe more?

Bijan Mossavar Rahmani

I’m sorry, I didn’t.

Anders Holte

My original question was Kerogee - that should breakeven in terms of oil price when do that see a cash flow, and I don’t understand [indiscernible] specific number whether its $30, $50, $70 oil price depending on lot of factors, but is it possible that to get how much to the decline has been is it 5%, 10%, 20%?

Bijan Mossavar Rahmani

It's hard for me to say, because the budget components aren’t transparent to those of us on the outside. Of course as you know well, it’s a question on just the price but also production and also the cost that getting the oil to markets, so there are a lot of moving parts. But as you look at the as a proxy for the financial strength for and the price of oil or the production levels, if you look at the period in which the Kerogee was paying regularly for the contracts you would assume they are in the comfort zone financially.

And as they moved out of that comfort zone and we have had delays or payments of this bit in any given month as two payments that they were outside of that comfort zone. So you sort of derive for yourself what that number is, I don’t have a fixed number, but I think you get a sense of it from looking at their ability to pay and the timing of the payments.

Anders Holte

Thank you.

Henrik Madsen

Henrik Madsen, Arctic Securities. A couple of operational questions, first of Tawke, as you are guiding for the second half drilling five producers and adding on 15,000 barrels per day of production. When you put that into context of your Q1 commentary of increasing production by 10,000 barrels per day from three workovers, is the current production increase or guidance increase slightly cautious or are there any other circumstance that we need to take into account? And secondly, Oman production is up two quarters in a row now, could you just discuss quickly on Oman sort of expectations going forward in terms of stabilizing production for the increases or back into natural decline?

Bijan Mossavar Rahmani

I think with respect to the workovers as we have said before the fuels of natural decline 5%, 10% at the times of field and part of the effort is to try to reverse that or that decline and to stabilize production, so it depends how you sort of think about this. Are we adding gross production or net production and part of our effort is that was stabilized and so the reverse and naturally of decline and on the stabilize production, which creates a base from which you then grow.

So that's totality to get from 120 at the start the year to 125 at the end of year, you are not just adding 15,000 barrels a day of production, you are adding more as you are trying to offset what was lost previously. I think the guidance we have given is sort of the best information we have, we try to be cautious not to overpromise and under deliver. We think those numbers are reasonable and realistic that could still be lower, that could be higher but we felt that those numbers that we were comfortable with to try to target.

Those of you who follow the company also know there have been in the past wells we have drilled that came at 20,000, 25,000 barrels a day. So one good well could boost the numbers and a couple of more difficult wells could move numbers in the opposite direction.

But there are enough wells we are drilling and enough workovers that we have done that we normalize it and there is numbers that we have given targets early on. We not just targets to markets, we target that we established internally to our team, which well locations you want to drill, give you that combination of risk and rewards that would get us to these numbers.

So it’s an internal target that we set and we reflected as we have gone our subservice team and said drill the best wells you want, so that would create additional reserves with the long shot we would have [Indiscernible] big portfolio of wells. These we have said our producers and the intent was to try to get our production level to 135 by the end of the year. I think that's what the best I can say on that matter, it reflects again our internal discussions and our target.

With Oman, our Oman production is below what it was several years ago. We are trying to get it up a bit higher and that's why indicated that we have a well in mind at the end of the year. This is the well that was on production, we had to shut in the well in production issues and [indiscernible] sidetrack that well and get it back down hopefully producing again. These wells in Oman like other wells will have high flush production and ore time will get back down again.

So it's hard to give a figure but we would hope that by making the investments and drilling the well on Oman production early next year, which is the time it will take to complete this well, will be higher than it has been at this year. With respect to the Oman well also under an arrangement with our partner, we will be undertaking and drilling all the well ourselves, in terms of the cost of drilling the well and the revenue stream and the full 100% of the production will also accrue to us. So we will see a higher impact on DNO's production than we would have normally seen under the arrangement has been historically in place on Block-8.

Let’s keep our fingers crossed and it's a development well, it's a production well so the level of risk is significantly lower and it doesn't ever go away [indiscernible] lower, so I would hope that Oman will be higher, but of course we are looking to have a production in other areas as well. We have made this - we are saying that we are looking at other opportunities and we would hope that the DNO stool will have more than just two legs Kurdistan, Oman that we would reestablish or establish production in other areas and we are very much focused on that.

Henrik Madsen

Okay, thank you. Just finally for me, my understanding is you have been in some discussions with few stakeholders at Gulf Keystone already despite waiting for sort of everyone to get back from vacation as you mentioned, but could you give some general feedback in terms of the response positive, negative, mixed from those stakeholders? And secondly, just a follow-up on synergies, would you expect that you were in sort of G&A cost outside of pure operations would have to increase to accommodate sort of the Shaikan asset and those operations from Gulf Keystone? Thank you.

Bijan Mossavar Rahmani

With respect to discussions, I indicated that we have initiated contacts and discussions, this will be a process that will unfold over the next several weeks and I don't have anything to say about that. I read reports prepared by analysts like yourself and others and we have some market feedback and I think the feedback has been positive from the DNO perspective, I mean many of our investors and the analysts who covered DNO think this was a good move for DNO.

I think the response has been that the offer and the way it's been structured and priced is not unreasonable. I think there has been some indication that this has been opportunistic, well we really want to be opportunistic, but we have been looking at this asset for some time and we had made very clear to everybody that before this asset could change hands, it has to be restructured. This asset couldn't be sustainable under the old debt structure and rate of that to debt.

And we have been very clear that once the restructuring is done that will be a time that we would step up and express our interests and that we have done that and we have been supported by the restructuring. We think that's been necessary, it's unfortunate that shareholders and some of the bond holders have been negatively impacted over the course of time leading up to the restructuring, but we have been supported and once the restructuring was announced we then step up and said based on the restructuring, we are interested to making an offer.

And we made our offer and again that’s about 20% premium to the value of the company as the company's own management had indicated. So we think that this market the 20% premium for an asset is not unreasonable [indiscernible] that range is you know 16% to 30% depending on the asset, the timing of the industry, but in this environment and for an asset, stranded asset in Kurdistan with these payments issues. Another issues that 20% premium is not unreasonable, in fact it's pretty, I think we think it's a pretty strong indication of the seriousness of our interest.

And hopefully the stakeholders on the other side the bond holders and the company's board and management will agree with us. If they don't, if there are alternatives that are more attractive to them we wish them well in pursuing those opportunities and that's it. We remain interested but again the duration of our interest, the nature of our interest, the level of interest is conditional, certain things happening according to a timetable. That timetable is met great, if it isn't met and that there are other opportunities that we are interested in and are pursuing outside of Kurdistan.

Thomas Arrestad

Tom from Pareto Securities. You now say that despite of the Peshkabir will be in October. I think Ginelos said and also your numbers that you are targeting 100 million barrels in the appraisal well, could you say something about - because it's two reservoirs, the biggest potential and which the reservoirs little about the risk. And when can we expect results of the target to reach target depth early next year.

And the second question, you have earlier said that of course the receivable and booked is considerable. You are looking at different options, you have also indicated that you could see asset swaps and your partner Ginelos has now also talked about that. If you succeed with this Gulf Keystone acquisition does that mean you are less interested or would you even be interested in Kerogee parts both in [indiscernible] and Shaikan and other asset, or do you then feel you have enough assets in Kurdistan.

Bijan Mossavar Rahmani

Well we are great believers in Kurdistan, and the Kurdistan story is a very important part of DNO's DNA history and we look always to do more, whether it's our own assets or in assets that have some synergistic interest to us. I didn't finish the question about the G&A savings from a combination. Of course when an asset moves out of a listed corporation with its corporate overheads and its corporate structure and becomes effectively an asset within an existing company and a lot of the overheads and the running costs of a public company go away and those costs are not inconsiderable.

But there are specific costs of running an asset within the company itself and obviously the operating staff all location and the teams that provide the operating backbone of the Shaikan on would be part of, would come into the DNO structure. But there would be considerable saving that would result from a partners [indiscernible] of these companies. But turning back to your question, it’s sort of hypothetical, if Gulf Keystone does happen or doesn’t happen how would this change your thinking about dealing with the receivable, Kerogee has other oil and gas assets and participation in other blocks.

Some of those are I think assets that they will want to keep, this is the decision for the government to make or they want to use those assets in other potential transactions or arrangements. So it’s not that the receivable issue can only be handled through assets transfers that’s a possibility that if made available we would look at, it depends on what assets, at what price, under what circumstances. But that’s really not been something that has been pursued in any detail, our preference would be to receive payments for our receivable or receivable is at dollar amount and we would like to receive dollar value for that.

I don’t think the Kurdistan winning in that position in the next few weeks to pay up all of its debt and this is a debt to us. But overtime that situation could change, all the indications that to be made publicly on their part has been that these debts will be paid back in money terms, but if there is an opportunity that makes sense to us and make sense to them, we certainly we will review it. Yes we do want to deal with this issue sooner rather later but beyond that I don’t have much as other than that they will consider all more dollarize, but our preference is to be paid that cash.

Remember also the number is a large number, but so is the volume of production from Tawke, and the value of Tawke production even at these oil prices is significant. If I were producing 5000 barrels of oil a day at $30 of oil price and somebody owes me $1 billion, the chance of are getting paid back that money would be I would say quite slim, but if we are producing 120,000, and 130,000 barrels a day as the price oil picks up we are stabilizers in this range. Well then we are creating more value every year than the size of the receivable and one can come up with the mechanism to pay that down more and more easily.

So the larger your contributions in terms of value, the greater your chances of in a more timely basis getting the stats addressed. So we are again conservative and that we haven’t booked it, but also we are very much mindful of this and we are very much focused on getting this issue addressed and every indication given to us by the Kerogee and given publicly has been that this is a receivable.

There is a payment [indiscernible] other oil companies that’s recognized on their parts and that they have every indication, they have given every indication, they have every intention of meeting these obligations, which are legal and their obligation and their fiscal obligations and no one has contested that. It’s a question of doing it in a way that is doable. And we will see the less modalities the less we are handling this. But I have every confident that we will be paid.

Peshkabir, I don't have much more to add than what we have already said about Peshkabir, I didn’t say much more, because we have already talked about Peshkabir and what it is we are targeting. We have already talked about the fact that if this appraisal well is successfully located and drilled and we already production, we can tie it back to the infrastructure very quickly, we will have production honestly next year.

There wasn't anything new to add so I haven't said anything new. I guess the only new thing was that we now have a rig that that’s been identified that's being mobilized that will be on location and we have a schedule not to drilling of the well. That's the new news and that’s why we really mentioned that the other information, there is really nothing new to add and as we are drilling proceed we will update the market as appropriate.

Kjetil Bakken

Good morning, Kjetil Bakken from Carnegie. You talk a bit about one thing to establish a third leg on production site, are you still looking into opportunities in Iran and/or are there other opportunities within the current countries where you have had licensed acreage that you are looking at or is it something completely new? And further to that on your opening slide you also mentioned that you have taken further steps to rationalize and high-grade your portfolio. Are there any concrete actions to get out of certain acreage that you currently hold or how should we interpret that?

Bijan Mossavar Rahmani

With respect with the second part of your question, yes, I mean all companies actually look into our portfolios and to see opportunities to high-grade either because the risk profile has changed or the economics of certain prospects of opportunities to change the price of oil. This is routinely done, but I think the oil industry in the last couple of years, because of the crisis in industry has been lot more aggressive and this is in the portfolio. Revisited portfolio and trying to high-grade it.

And this [indiscernible] goes from all the way from the largest integrated oil companies to smallest ones. We have already started this process sometime ago and we are now towards the sort of end of the process of deciding which assets in which countries are no longer fit in the current environment, which also is in environment in which quality assets operated or not operated by other companies are not available at very attractive prices. So it's not just measuring on an absolute sense the components of our portfolio, but comparing them to other options of these that are available either in our footprint or outside of our footprints.

There has been very little asset transactions or merger and acquisition activity in the oil and gas industry, much less than one would have expected with the prices coming out as much as they have. In part because buyers are settled with [indiscernible] so far apart in terms of price expectation, while the sellers still were hopeful that $100 oil or at least $80 was around the corner. And that hasn't happened so I think some of our expectations are now a lot more realistic in a sense of where buyers think prices should be.

So, we are seeing now on the market assets that are quality assets and which are attractive to us. To be able to pursue those assets we have to again as I said high-grade our portfolio, get rid of some assets and bring in assets that we feel are just suited to us or more attractive to us a price basis in terms of being in production or near production. And those assets importantly are outside of our historic footprints, so we are looking at areas outside of DNO's footprint at least in the last four or five years as strictly meet our focused this company.

So we are going to be opportunistic of assets outside, they still have to make sense to us and we can't be spread across five continents and 20 time zones and so on. So we have to be still selective and make sure that everything fits in terms of our capabilities, not just financial and operational, but in terms of just a numbers of people we have and our ability to service and manage these assets.

So yes we are looking outside of our historic footprint and I expect you will see that as these unfold and if we are successful at progressing them, I think there will be an indication that it won't be very far from what might make sense for DNO, but they'll be outside of our recent history. And DNO's MENA focus, we will retain importantly our MENA focus, but we will be stepping out as appropriate assets become available to the extent we can conclude those transactions.

Haakon Sandborg

Okay, I think we will end the presentation. Thank you for all for attending and we will talk to you next time.

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