DNO ASA (DTNOF) Q4 2016 Results - Earnings Call Transcript

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DNO ASA (OTCPK:DTNOF) Q4 2016 Earnings Conference Call February 9, 2017 4:00 AM ET


Bijan Mossavar Rahmani - Executive Chairman

Haakon Sandborg - Chief Financial Officer


Anders Holte - Danske Bank

Trond Omdal - Pareto Securities

Teodor Nilsen - Swedbank First Securities

Karl Fredrik Schjøtt-Pedersen - ABG Sundal Collier

Henrik Madsen - Arctic Securities


Good morning. My name is Bijan Mossavar Rahmani; I’m the Executive Chairman of DNO ASA. I’m joined this morning at our presentation of our Interim 2016 Operating Financial Results and also our Q4 2016 Results by Bjorn Dale, our Managing Director and Haakon Sandborg, our CFO.

Welcome to all of you to this presentation. We’ve had a busy year in 2016, which has brought has back on track to profitability and growth after two difficult years for the oil and gas industry. DNO was one of the first companies as the price of oil collapsed to begin to re-trench and we’re one of the first companies that have come out of this difficult period with by activating a drilling program following a period of cost cutting and the rationalization of assets and the 2016 results begin to show the impact of those activities and strategies.

We started of course the first part of 2016 with more regular payments from Kurdistan for our exports from our flagship Tawke field in that region and as the payments continued and we’ve announced previously the payments are essentially in line with our contractual terms as those payments continued into 2016, we began to ramp up our drilling program. While at the same time keeping of course our overall spend within the cash from our operations. This strategy has led to a year in which we closed the year with operating their profits small, but still important directionally following two years of fairly heavy losses. In the process we of course - strengthened our balance sheet in 2016, all of which prepares us for our stepped up program that we’ve announced this morning for 2017. In preparation for our 2017 program and beyond, we’ve continued to bolster and strengthen our staff and we have continued to shed the non-performing assets from our portfolio.

Let me say a few words about our operational highlights in 2016. Our operator production last year averaged just over 112,000 barrels a day of oil equivalent of which Kurdistan represented just over 107,000 barrels of oil per day and Oman 5,300 barrels of oil a day equivalent, so that combines both the oil and gas production in Oman. Our company working interest production averaged just under 70,000 barrels of oil equivalent per day in 2016. We accelerated the development of the shallow Jeribe producing horizon reservoir in the overlying the main Tawke field last year, that was an important contributor to our production at very low cost and in very rapid time in terms of drilling over those shallow wells and that’s been an important development and we’re going to build on that in 2017. We withdrew from five licenses in 2016, as I said we’ve rationalized our portfolio in terms of overall drilling. We drilled four new production wells, one appraisal well, one exploration well and one water disposal well at Tawke.

Moving onto our financial highlights and Haakon will go into much more detail on the financial side of our results and performance in 2016, but I’ll just summarize by saying that we had annual revenues of $201 million last year up from $187 million in 2015, so we had an uptick. We received 10 monthly payments for Tawke exports last year totaling $292 million gross that of course includes the share of our partners on the Tawke field, but of that about $210 million was net to DNO including $26 million that was attributed and booked receivables for prior local sales in Kurdistan. So we’ve been working down the booked receivables on our balance sheet.

Our operating profit of $6 million compares to an operating loss of $174 million the prior year and $243 million in 2014, so we’re quite a reversal in that metric. In 2016, our operating spend which includes our CapEx and our exploration expenditures and our lifting cost was $125 million down from $161 million the prior year, so clearly 2016 was the year in which we did retrench in terms of our spending particularly in the first part of the year as we looked to greater regularity and for the stability of payments to give us confidence and to give us the financial muscle with which to resume our drilling activity and our spending activity in Kurdistan in particular, but really across the portfolio.

We exited the year with a cash balance of $261 million up from $238 million at the end of 2015 and again that speaks to our strengthening, our balance sheet last year and again having the financial muscle with which to resume our activities and our program in 2017. In the Tawke field our most important activity of course, we completed as I mentioned four production wells. Last year, three of them were targeting this shallow Jeribe formation or reservoir because those wells could be drilled perfectly and cheaply. I think those wells average about $2 million a piece and were drilled in probably couple weeks’ time. So those were easy wells to drill and put on production and we’ve been pleased with the performance of those wells, but we also did on deeper Cretaceous well into the main reservoir at Tawke.

The new wells added around 10,000 barrels a day of new production at a combined cost to DNO of around $10 million, so these are some of the cheapest, quickest, easiest wells certainly that we drilled and I think even by global standards these wells are impressive in terms of cost, time and drilling and production and I think reflect both on the Tawke field and but also on our own drilling and operating teams at DNO.

We are the most active driller in terms of wells drilled in Kurdistan now and at our current production level, just under 115,000 barrels a day our production exceeds that of all of the other international oil companies in Kurdistan combined so we are a very, very substantial player in Kurdistan and Kurdistan is a very, very play of course within the DNO portfolio.

In 2017, we’re stepping up our drilling not just in Kurdistan but across the portfolio across all of the fields in which we have operations and production or our prospective production. We have a planned capital investment program of $100 million that’s up from this year, the number by the standards of the larger companies, the industries are small, but again when you consider the cost of our wells and what we can do with this money and this does behind these numbers is a very substantial drilling program. That would bring our total operational spend to around $185 million again including our operating cost, our lifting cost and also our exploration spend. These numbers again are based on current firm programs.

We’ve in the past have said that given the nature of our export arrangements in Kurdistan and the difficulty in having full predictability about the regularity of payments, we need to be careful to try to match our spend with our earned theirs, but these numbers I think now we’re comfortable with, these are from - behind these numbers is a firm program that we’re committed to and we have lined up the rigs and we will drill these wells and this is major again shift in global oil industry context, but we’d like to do more and as we produce more and sell more and oil prices hold up at the current levels our expectation is, we have other things to do, we’d love to do them but we’ll have a one eye on the opportunity and other eye on the payments as they come in to ensure that we’re prudent in fiscal [ph] sense and in operational sense as we proceed.

The current Tawke program includes four new production wells, which two are again Cretaceous well, deeper wells and two shallow wells but also one more water disposal well. We anticipated that, with all center of fields at some point there will additional water production. We want to be prepared for that, so that additional water production doesn’t impair our ability to produce and maintain the oil production level in the field.

In the Erbil license also in Kurdistan we have plans to drill or spud in Q4 a well at the - on this license for the Benenan field, we call this well the Hawler-1A well, so we’re going back into that block now that we have more predictable revenues come from Kurdistan and to refer to a phrase that block, we have hit the large heavy oil discovery there and hopefully to put it on production.

In Oman, we’re bringing two wells back on production that have not been producing for some time. These are two offshore wells one is sidetrack on the West Bukha field which will be principally an oil well and one the reinstatement of a gas well that’s been out of production after several years on the Bukha offshore field. So we expect to have a roughly doubling our production from these two fields in Oman, so we’re also increasing our activities in Oman.

In Kurdistan, at the Tawke field we also have three additional target wells and Cretaceous to be drilled to increase production in Kurdistan, some of the wells that we’ve been drilling are principally intended to offset the natural field production decline, all fields are obviously go into production decline and we have to drill additional wells to try to maintain production, these wells are intended to in fact increase production beyond current levels, but we will be again having a watchful eye on payments to before we make a final decision with respect to the timing of the drilling of these wells.

Just a quick note on payment, again payments have been more regular. We’ve now received three catch up payments so far this quarter, we’re pleased with that. Part of this reflects the discussions we’ve had in Kurdistan with the government their understanding of the importance of funding the companies - they want companies to invest and increase production and revenue probably is related to high price to oil, which means there is more revenue in Kurdistan and the government is able to meet its own spending requirements, but have additional funds with which to meet its obligations to its contract, is where the oil companies or others, so the rise in oil prices have double impact for DNO, it means more revenue per barrel but it also means greater ability to pay and we’d of course as the prices went down, we saw the reverse. The oil prices hurt us in two ways, most importantly in reducing the ability of the Kurdistan regional government to meet its own requirements for spending which again constraints our ability to pay the companies. So we’re now on the upswing and that gives us even more confidence, that our payments will become more regular, larger and more predictable and we’ve already seen that so far this quarter, we’re quite pleased with that and that helps fund the important part of our Kurdistan budget for 2017, so all that is very positive for us as well.

We’ve previously reported on a Cretaceous oil discovery as Peshkabir which is part of the Tawke license. We had previously drilled a discovery well in Peshkabir, but that had found oil in the deeper Jurassic. This second well that we drilled was targeting not only the Jurassic but also in exploration, possibility in the Cretaceous and that Cretaceous did come in as discovery, we’re very pleased with that, very excited about that and we are now testing the deeper Jurassic to under what the Jurassic horizon looks like in this well, in this location but our focus near term will be on learning more about the Cretaceous and tapping into it with an early production program. That well tested just under 4,000 barrels of oil per day, 28 degree API crude which is roughly the Tawke crude, but slightly lighter than the current Tawke mix from 170-meter interval that was tested from an overall Cretaceous interval likely from just over 300 meters and closer, roughly.

So this is a significant, how significant we don’t know yet, but clearly we’re excited about this and also excited that it’s part of the Tawke license. So from a fiscal point of view that makes it attractive and the spending attractive and we’ll be able to recover our spending pretty quickly, but importantly we’ll be able to put the field on production very quickly as well, so my hope is that by the end of the - or the end of the year we’ll have production at least from one well at Peshkabir that will have a fairly robust drilling program. Some of that is factored in our - the estimate I gave you for our expenditures in 2017, but if we have a reason to accelerate that further we will certainly do some.

The total well cost was within budgets $17.5 million again by Kurdistan standards, where some wells have been drilled, number of wells have been drilled for over $100 million per well. we’re efficient and we’re doing well operation Kurdistan again I’m very pleased, with that as I said we’re considering early production, we can track this oil to the Tawke facility is only 12 kilometers away, but it’s possible that once we come back and drill an additional well and have confidence about the size and scale of the Cretaceous discovery that we would also lay pipeline and to the Tawke facility, extra facilities and have a more permanent solution for production from Peshkabir.

This field again importantly positions DNO for additional production and reserves growth in Kurdistan so we’re quite excited about it. We also released today early compared to prior years our annual statement of reserves that’s been published and most of you I’m sure have seen it very quickly and summarize what that says from a company working interest perspective to year end 2016. DNOs proven and probable reserves the 2P category plus our contingent resources, 2C category stand at about 530 million barrels of oil equivalent. This figure the 2P plus 2C is somewhat higher than the comparable figure at the end of 2015.

We’re very pleased with that but also recognizing that our 2P reserves now at 368 million barrels of oil equivalent are down from the figure at the end of 2015 which was 392 million barrels of oil equivalent with an adjustment for produced volumes during the year, so basically that says we produced down. Our 2P reserves really our proven reserves by the production figure and that brought down the reserve numbers by an equivalent amount and that reflects effectively what happened at Tawke that we did not replace reserves at Tawke and there are number of explanations for that, one of them is, that we had very little activity at Tawke, but we’ve had no need for a reassessment of reserves and a reserve write down, as has been a case with another companies and other fields. We reduced our reserves by the amount we produced, but we did add to our contingent resources category which as we designed in urban [ph] programs and put those reserves in the production those shift will contingent back in or into the 2P category.

The most important addition to our contingent resources was of course at Peshkabir where we added just under 50 million barrels of oil equivalent of gross 2C resources, that number is based on what we’ve seen so far in the well that we drilled. We will drilling an additional well to better understand the Cretaceous and depending on the outcome of that well those numbers obviously could change.

Here we show our well schedule I’ve referred through each of these wells. The red lines represent firm wells that are either currently in drilling or that are scheduled to be drilled during 2017. The shaded ones, the 3Ds are the three Cretaceous wells that I mentioned that we would drill at Tawke on the confidence that regular and predictable payments continue for our sales from the Tawke. There’s been again discussions with the Kurdistan regional government that later in the year the international oil companies would set up arrangements to export their oil directly and I think one or two of the other companies operating at Kurdistan have already mentioned this and I would just like to mention that as well and there are as you, those of follow, company will know there are pluses and minuses and special challenges with respect to exporting oil from a landlocked area, which Kurdistan is and their special again challenges with the Kurdish oil. The government has been able to successfully export the oil for now several years and pay the companies, but we were like to be in a position to export the oil and we have an obligation under the contracts to do sell those companies and that will give us the ability to have a better visibility and transparency, predictability in terms of who the oil is sold to at what price and the revenue would come to us, so directly as it doesn’t all production sharing contracts standard rules around the world and that would again be helpful to us and to the other operators at Kurdistan and further normalize their international oil company operations and activities in Kurdistan. So and that opportunity unfolds and hopefully it will by the end of the year that will be another important development in the history of Kurdish oil, in the history of Kurdistan and its participation in the development of Kurdish oil industry. Thank you.

Haakon Sandborg

Good morning, everyone. As we discussed through our core today presentations, last year we think that 2016 was a year over substantial recovery for DNO following the challenging downturn we faced in 2014 and 2015. As Bijan mentioned, this downturn was driven by decline in oil prices as Brent peaked at around $110 per barrel in mid-2014 and there afterwards followed by a steep decline to around $30 per barrel at year end 2015. That what over price drop hurts of course, as we have all seen throughout the oil industry.

Thereafter the gradual price increase to around $55 per barrel at the yearend 2016 was important for our improved financial performance last year and compared to the previous years, so we’re also seeing that repayment regularity from the KRG strengthened our revenues again last year.

Should go for mention that in addition we have benefited from the early Tawke measures we took from 2014 to counter the downturn that includes cost reductions, CapEx cuts portfolio streamlining and securing a stronger capital base that we did. So on this basis, we’re at least today to represent improved financial results for 2016 including $134 million increase in our operational cash flow compared to the year before.

So here are some key figures that show last year’s recovery from the weak results and the two years before. As you may recall the big drop in revenues in 2015 came from lower cash revenues in Kurdistan. We also had to shut in production in Yemen and we also again saw the much lower oil prices throughout that year. But the revenues increased as mentioned to $201 million last year and this was better oil prices and the improved payment situation in Kurdistan.

In the middle area you see the netback cash flow that we like to show that strengthened significantly last year that was a combination of higher revenues and reduced cost. For the operating profit on the right side you would see that the weak oil prices contributed to major impairments and that there by we had high operating losses in 2014 and 2015. But we’re now certainly pleased to return share operating profit in 2016 even if it is small, but this is backed by lower costs and much lower impairment charges last year.

This slide, I will show you the improved payment regularity in Kurdistan that resulted in gross payments of $292 million to the Tawke partners last year, of which $210 million was net to DNO. This net amount paid to DNO was in turns within $184 million all the entitlement revenue and $26 million in receivable payment. While there were certainly clearly significant payment delays in the second half of this year, we’re of course pleased to see that the KRG now has made three payments so far in Q1, this year in a total amount of $59 million net to DNO. This amount is split in $46 million entitlement revenue and $13 million in receivable payment. So it is thereby good to see a very positive payment development at the start of this year.

I’ve seen some of the Analyst Day comment that we have a quite busy P&L statement for Q4 I have to agree with that. There are several one off items and also some changes from previous quarters. And starting with the Q4 revenues, these are down from Q3. These are due to lower monthly payments for exports in this period and also we took some revenue adjustments in Kurdistan. On the other side, Oman has higher revenues due to higher activity and increased cost of under their PSCs.

You see that cost of goods sold increased in Q4, this was primarily due to increased lifting cost on Tawke that in turn came from one off clean-up of inventories and previous cost estimates. So it’s not like a permanent increase in lifting cost, this was sort of yearend accounting adjustments that we took to adjust the inventory and the cost estimates. I’ve been asked about the other operating income this morning of $11.5 million that we show there that includes $13.4 million in proceeds from an insurance settlement on blockades in Oman shown here at other operating income. There are also impairment charges, so the $33.2 million taken in Q4 and the main item here is $26.7 million impairment on the Erbil license and that comes from a year end adjustment of the discount rate that we use for impairment testing in Kurdistan. So these impairments led to an operating loss of $27.6 million in this quarter.

Net finance expense is down from previous quarter due to realized assumptions for Kurdistan assets and the liabilities and mainly relating to non-cash discounting effects of future cash flows for these items. So on this basis, Q4 shows a net loss of $31.2 million this is clearly not great but it’s again primarily due to the asset impairments taken in the quarter.

Now to the right on this slide you’ll see the full year numbers and here you’ll see the increase in revenues that I have mentioned today. The cost of goods sold for the full year are down by $68.3 million that is 35% reduction, due to both lower lifting cost and to reduced DD&A and that’s on the lower production and also because of the change to 1P depreciation that they made last year as you may recall.

We also see that reduced impairment charges contribute to a much improved operating profit of $5.7 million in 2016 up from an operating loss of $174 million the year before. The lower net finance expense for the year was partly due to reduced impairment of financial assets compared to 2015. So after these items we show a net loss for the full year of $35.3 million.

Bijan mentioned on the investment program and we have seen here that our operational spend consisting of CapEx, exploration and lifting cost dropped from $161 million in 2015 to $125 million last year. This was partly due to lower CapEx in 2016 as we deferred some of the drilling and other projects into this year into 2017 and we also have reduced our drilling cost in Kurdistan overall. The insurance settlement that I mentioned that we reach in Q4 for the Block 8 in Oman is also important it covered around $11 million net DNO of actual cost for well work and drilling preparations in Q4 and thereby reduced our capitalized expenditures for this quarter and for the Oman business unit.

This insurance settlement is important also that it will cover, it is also through the payout we’ll cover some of the CapEx going into Q1 this year. All in that the reduction in total spend was also due to lifting cost being 20% lower than in 2015 as seen in Kurdistan and Oman. It’s somewhat is special but also some is due to lower workover activity and all the changes in variable cost items.

As you’ve heard today we plan to step up our operational spend by 50% in 2017 and that is mainly through the increased CapEx program at $100 million for this year. Just to repeat and stress on the main part of that program that would be new Cretaceous and Jeribe production wells and facilities at Tawke field. And as we have mentioned we are planning a third well and early production facilities at Peshkabir and increased activity at the Erbil license. Oman is important drilling on the site Tawke well is now starting on the West Bukha field just now and the work on the other well on the Bukha field will also start in the middle of the year. And I think this wells will contribute significantly through the production from Oman this year.

So all in, we see this as an exciting program for 2017 activity is clearly picking up and we’re aiming now both to keep up high and stable production and also to thorough replace and develop important new assets this year. I think we’re moving now to maybe the best part from a financial perspective you know the much stronger operational cash flow $98.2 million last year up from negative $35.4 million the year before. I think this is a major financial achievement for us in 2016 and it leads to an increase in our cash balances of $23.5 million and that’s actually cover all the cost and all the investments from our cash flow.

And again the better results from higher revenues, lower costs and that was important for this improvement, but we can also see that the working capital change in strengthened cash flow last year. Among the main items on the working capital, the booked under lift [ph] receivable for local sales from Tawke was reduced by $33 million last year that came primarily from the cash payments from KRG towards the receivables. We are also now done with repayment of previous supplier debt for the Tawke capacity expansion project and another project. So this was less all the negative the working capital item than in 2015.

Now our capital structure remains stable and we maintain a solid financial position with substantial cash balances and low leverage through net debt to $139 million. I’m glad to say that we’re in good shape as before and we’re being fairly strengthened by the recovery we achieved in 2016. So this year well expectations of stable and high production, better oil prices and improved payment regularity in Kurdistan. We do expect that our operational cash flow will improve and strengthen further this year. And supported by these strong balance sheet, our focus will now be on new growth opportunities and on increased investments and activity this year.

So I think with that, we’ll round off the presentation and open up for questions.

Question-and-Answer Session

Q - Anders Holte

Anders Holte, Danske Bank. Just two questions if I may. One on the CapEx budget for this year, if you can provide a split between Oman and Kurdistan? And I guess in relation to that, you’re now saying that you’re being paid as per your contract. So the question becomes - asking now initiate investments again, to what extent do you expect the payment to go off and when should we look for that increase in payments from the KRG?

Bijan Mossavar Rahmani

Let me start with the second question first, better position perhaps to respond to that. When we put the February 2016, payment plan in place as you recall that replaced an earlier payment arrangement whereby the KRG was making payments to the companies on some basis that was not directly tied to the contracts and they allocate a certain sum and they divided that sum between the companies. You know you’re supposed to track the contribution to production, but it really didn’t track anything. It was important for us to get back on our PSC terms that’s critical to any company and our position was, take our payments higher or lower than what we were previously getting it mattered to get back on the PSC, so they paid a certain level of predictability for us.

We also wanted to make sure that there was a payment towards our receivables and in DNO’s case this was our book receivable which was really a figure around $100 million that was related to past local sales as you know our exports payments, our export volumes have not been paid for, we have not booked on our balance sheet. And that payment agreement put that into place effectively. Now we also want to have a plan at that time that wasn’t subject to monthly or regular movements up or down because we’re on the formula that applied to DNO and the other companies that set a fixed percentage of the total sales towards this payment of receivables and entitlements, but recognizing that it would move every month normally these things move as you well know as capital shows up or down as repaid and twice as moved. So we set a figure that was based on what we thought our 2016 spent was going to be, recognizing it some months this figure would over shoot, some months it will under shoot, that’s impact in the case.

So since then the dollar amount we’ve been getting based on this fixed percentage has gone up or down with production and with price and going to 2017, we’re going to have probably the first part of the year the same formula effectively. But it’s possible in our discussions with KRG that we will move away from it. It’s easiest to apply that formula as anticipated by the PSC, if we’re doing the marketing and selling. We sell, we know what the percentage is at month, we make our adjustments and go forward. When a third party, the government is doing this, it’s harder for them monthly to do it, to make these calculations and it wouldn’t be appropriate in this instance because as they make their calculations that will take time to do that and our understanding with them was that, we would send an invoice, the end of the month and within 10 days we will get the payment and for a while that was working then it slowed down, now they’re catching up this quarter.

So it’s also in terms of timeliness best to have a flat percentage and just made it easier for everyone and quicker and that’s worked out well I think for us. We recognized these payments are as the government calls them on accounts, it will have to be an audit and a reconciliation, the price that our oil is sold for, is what the government tells us they sold it for, we will want to go and audit those number and understand them, [indiscernible] production number and understand them so these are sort of page holders for now, on account as they say subject to eventual reconciliation and will be some up and some down.

So you should expect that the same percentage will hold in 2017 for now until we announce differently and that the movement will be based on price of oil and on volumes. To the extent that we expect our volumes to remain basically where they are now, basically we would like to move them higher but basically for planning purposes you’re going expect to be, what they’re now, you didn’t make your own expectation and projection of what you think Brent prices are going to be, but we assume there will be roughly where they are now in this sort of range. We can assume that the net payment to DNO every month will be on the order that it’s been in prior months, where price and volume have been at these levels, that’s the best we can do for internal planning and that’s the best I can propose to you or of course you’ll have your own models, your own expectations of our pricing about payment predictability and about volumes.

We’re more comfortable about payments because of what I said, there is not more money to pay us and they recognize fully well, that if they don’t pay the companies, the company’s production will go down, our drilling is going to go down and that’s going to hurt them because at the end of the day, they get two-thirds of every barrel that we produce and add and we get one-third, it’s in their interest, for this to happen and they understand that fully, fully well. And as long as if you can keep the price of Brent in this range, you can expect that our repayments will be predictable and certain and within this range too.

Haakon Sandborg

I understand the [technical difficulty] again on the question. I’ll start Oman there, the main part will be the rebill on the side track of this well and we’re working on. So the estimate there, it’s a pretty big project offshore and there’s also the reinstatement of the book of one well, the other one, so those are the two main projects for Oman, we’ve mentioned the several wells and that we [indiscernible] facilities at Tawke and also work on the Peshkabir discovery with other well and probably early production facilities, also new well at the Erbil license, so those will be the main investments there.

When we say $100 million, that’s our estimate. The budget will vary on top of that internally in DNO, we have several other projects we would like to do, so sort of given an estimate here so when you ask about the budget that is bit different from the 100, but I would roughly tell you that we’re going to have split between Oman and Kurdistan it would be like 35% Oman and the rest will be for Kurdistan, in that $100 million spend and then by these various projects that we have been going through today.

Anders Holte

Okay, thanks.

Trond Omdal

Trond Omdal, Pareto Securities. You’ve obviously previously said you had prioritized a quick payback - when the drilling wells. The fact that you’re now drilling on the Erbil license and you’re not saying its contingent, could you shed some light on that? Is that - and when do you think we can have a production that within a couple of years or do you think you can get production by 2018 on that?

Bijan Mossavar Rahmani

That’s a very good question, Trond. Your questions always are. On the Erbil license, the delay we plant to do more on that license sooner. The delay was caused impart because of the payments issue and both directly, but also indirectly in the last two years we wanted to really has been to protect our cash as much as possible in the downturn period. So the question is, what do we prioritize and what can we delay. And the priority was the Tawke wells that would have instantaneous contributions in the productions and in terms of revenue. So you push back some projects. I would have love to have done sooner including Peshkabir, the Peshkabir well should have been drilled two years ago. We knew there was very, very significant opportunity potential at Peshkabir, but we have to put it back in terms of priority.

Similarly with the work in Oman. So one was just the general again need to protect our balance sheet. The second was that, the production of heavy oil is challenging in Kurdistan including on our Blocks, the resource base is huge but we haven’t really unlocked the heavy oil. Heavy oil has been unlocked in other parts of the world. And also Latin America and Canada elsewhere, but not in Kurdistan because there was easier oil to deal, including for DNO. But one of the ways to bring the oil to surface and then to move it into market well one way to use life improved as diluents to lighten the heavy oil and bring it up to surface, we have plans to do that when oil prices hit. Now the point priority for the government also was any barrel that can be exported less export and let’s not take some other oil and to trying to use it to bring heavier oil to surface now.

There would be additional incremental volume created as a results, but the quality of that volume would be heavier and they didn’t want to make the mix, the channel mix heavier, so we weren’t in a position to take oil from another Block and use it produce the Erbil license oil, that situation is now changed somewhat. There may be other ways to utilize this oil including the power generation. So there’s been some new thinking on our part as to what to do, how to commercialize and monetize this crude and so more thinking on the part of the government as to with the resources there and DNO thinks they can create value and why not.

And also today the Alpha prepares the orders very different than it was two years ago, when it looked it, there was going to be a lot more production and that production hasn’t materialized in some of the other fields as you know been in important decline. So now I think everyone is more focused on, if there is oil let’s try to reproduce it. So that I think explains the timing perhaps this is a long answer to your question, but now we’re again back in the game and Kurdistan remains a terrific part of our portfolio and there are opportunities and we now have the funds and the higher prices and the higher payment possibility from Kurdistan to allow us to try to capture these opportunities.

I think we can put the well on production pretty quickly, but we’d have to spend sometimes better ahead and trying to understand what have been economics, what have been the impacting on issues, we reckon this oil be used before we wrap up significantly. At Peshkabir we’ll put a well on production and then I think we can wrap up pretty quickly with the heavier oil. So there’s a question, what do you do with this oil? And how much are you going to produce? 5,000, 10,000, 20,000, 30,000. How will we use it? How will we move it? So that’s still it’s a medium-term issue, it’s not a short-term issue. But if we’re able to produce a few thousand barrels a day from one of the first well, we’ll find a place to put it and then decide how best to proceed. The resource opportunity for us is huge, if we can solve the issue how do you get heavy oil, how do you produce it? How do you move it? And to what market? So there’s all these issues.

Trond Omdal

One, and obviously you seem more confident on regular payment at these oil prices. A year ago in Analyst meeting you predicted you said that you thought KRG commerce spending could go down to maybe 450 and it seemed Deputy Prime Minister at the confident long-term said that now they were at 450, 460. So it seems there is a pretty good margin now at current level, maybe 250, 300 maybe to pay, but how confident are you that when oil prices go up, that the oil companies will get a lot of that or that it will not, the bad habit come back or that most of it will be increased government spending in Kurdistan?

Bijan Mossavar Rahmani

We don’t want a lot of that, we just want our contractual share and that will be plenty for us. I’m more confident I was Erbil recently, Bjorn and I traveled there together, we went up to Tawke field, we went at Peshkabir, we had a great time. But we also had very sensitive discussions. There’s never been a doubt in my mind to the Government of Kurdistan has intended and intends to honor its contracts. As I said before, we also understand their problem, I mean we understand there is perfect storm of ISIS and refugees from Syria and elsewhere in Iraq, low oil prices, lower production fields, production dropping. It all came together, we knew what the production was, we knew what the revenues were and we had fairly good idea what their spend was at the time and the fact that they squeezed us hard to pay the companies as they did, it was an important sacrifice. I mean you’re aware that teachers weren’t being paid and civil servants weren’t being paid, that’s continued and so it’s been very difficult for them. But they also understood the need and took the steps necessary to tighten belts there as well, which they’ve done now there’s one of these biometric program to identify civil servants and others, so there’s various duplication in payments, real efforts have been made to reduce wastage and cost and that’s been helped by the price oil moving up.

Kurdistan recognizes the only opportunity for having greater revenues besides higher oil prices is higher production and higher production is double whammy [ph] as prices go up and production goes up and you get the combined effect and the only people able to do that are the companies and among the companies DNO is uniquely well positioned. DNO four, five years ago wasn’t producing more than all the other companies combined. We were into the, we lost our first mover position in Kurdistan, but that we’ve recaptured that for different reasons and there is understanding that DNO needs, DNO needs to incentivized and rewarded and make a capable of investing without funds we can’t invest.

We’ve tapped our equity market, we tapped the bond market and now we have to go back and make sure that working collaboratively with the government, we get paid according to our contractual figures and most of that money we put back in Kurdistan and we get that back and Kurdistan government gets it back very, very quickly. There are many opportunities for companies to go into Kurdistan as we did with the shallow Jeribe production for example. Drill a well and couple of weeks $2 million put on production and produce 3,000 barrels a day and well pays back in a manner of weeks, where else in Kurdistan put its money and because of the nature of production sharing contract what we spend is really Kurdistan’s as we recover it through cost recovery much of it, it’s Kurdistan putting its money through the vehicle of DNO and getting multiples of its investment back quickly.

And it’s common sense that these sharing contract was structured to make, to incentivize governments, the work the companies, to make this happen and we are, we believe the most active, the most committed, the most efficient operating company among the international investors in Kurdistan. This is understood broadly and so it makes sense, it makes sense. That gives me confidence because we’re dealing with rational actors who will take rational decisions and in that context you can expect the right results.

Teodor Nilsen

Teodor Nilsen, Swedbank. Three questions. First on CapEx you’re increasing it pretty much in 2017 compared to 2016, so what should we expect in terms of production increase from the Tawke in next year and second question on M&A, obviously you spent some time on M&A in 2016 but nothing has really happened, for 2017 what kind of assets would you like to look for? And then last question just on the impairment and you said change discount rate, by how much did it change discount rate for your other assets? Thank you.

Haakon Sandborg

Discount rate went from 13.2 to 17.2 really we use sort of standard simple methodology, when we work on this. Trying to estimate our, at any time our weighted average capital cost including in that country risk we’ve been, there is no separate country risking for Kurdistan, so we look at Iraq as a proxy for Kurdistan risk and we look at various forces of that country [indiscernible] that’s a sort of have a benchmarking and see what level is appropriate for us. There are various professors and except for that key this out on an annual basis and we are certain references that we like to use and given that some of these references have increased countries we screen in for Iraq from the year before, when we included that in this back calculation and this basically follow that formula and that’s not sort of reflection of how we see the risk developing ourselves, but it’s using this method than using this external references in our discount rate in Iraq, so that’s basically what we’re doing for this year and we do that every year, we adjust this as we see parts of that formula develop.

In the formula there are also other elements that have changed, but not as large as country we screen in Kurdistan. So it’s basically that we do and I think that’s pretty normal common practice among the oil companies as far as I can tell. On the CapEx side, while we’re drilling wells on Tawke clearly, so we need to keep up and drill more wells, we think now to keep up good production and whether we’re going to increase it with the firm wells that remains to be seen. We think we can have a good chance of doing more wells and increase it if we do, for instance the contingent wells. So I don’t know if you want to comment on that say Bjorn, but I think we basically aim to keep it stable and high.

We were basically discussing with our partner Genel a level of 115,000 barrels per day through average this year and they’re pretty much with, that would be our expectation for 2017. Then you have Peshkabir in the CapEx how much can we deal with that, we’ll have to see. Initial rate was just under 4,000 barrels per day, if we use that and we had another well, maybe we can get significant addition to production from Peshkabir overtime, we need to work on that obviously. And then we Erbil on longer term.

CapEx also goes into Oman as we have mentioned and there you will see, we think very substantial addition to our production there from these two wells, we’re going to work on this year. So I say, you’d see increasing production from Oman and at least stable, at least high and stable production from Tawke, with the firm CapEx.

Teodor Nilsen

[Indiscernible] and Tawke. So to assume, you’ll need more less than strategic production that compared to last year in 2015.

Haakon Sandborg

I think that assumption that we should work on the - fact, there would be need to drill more wells I think that’s fair assumption going forward, that means more CapEx, how much we will have to see. We’re still getting a very significant contribution from the various well and you know I think really depends on the results going forward. And there is more we can do on the parts of Tawke that we’ve also worked on, that would add to production. So overall we’re quite optimistic that we will keep very good production going forward from Tawke.

Bijan Mossavar Rahmani

And just to summarize that in terms of our internal planning based on the wells that we showed as firm wells we expect to keep Tawke production more or less where work is now, but we will add to that additional production Oman towards the end of the year for the two wells and Peshkabir at some point, during the year and how large Peshkabir production will be, we don’t know yet, but based on these tested rates you can sort of make an assumption as to what one well might do Cretaceous 5,000 barrels a day, I think that would be not unreasonable estimate give or take and how much more we do will depend again on what an extra Peshkabir well would indicate. But again as we said repeatedly, I think down at Peshkabir is we can get on production pretty quickly, given its proximity to the main Tawke field. So that’s, internally that’s how we’re thinking about it.

In terms of growth outside of our own portfolio, yes being other companies and always thinking about options or acquisitions one form or another. Yes we did pursue an opportunity 2016 Gulf Keystone and we’ve stated what our thoughts were on pricing and how we would proceed the company chose not to engage or onset other opportunities, it’s still sitting there. For us of course doing more in Kurdistan it makes sense because we also are positioned there as an operator, we know Kurdistan extremely well and Kurdistan knows us, we know what the opportunities are, we’d like to do more in Kurdistan and obviously predictability of payments, continued payments is critically important to what more we do in Kurdistan, but we’re always looking to see what there is we can do that makes sense to us and to the seller and we’ll continue to do that in 2017.

Outside of Kurdistan as we said before, I was looking for other opportunities and I hope will be there in 2017 we can mature one or two of those opportunities in terms of other either new area for the company or a specific asset. So and the fact the prices are coming back, our balance sheet has been strengthened, the payments are coming in, it gives us more confidence to do that and also as you know in the last two years and 2014, 2015 partly 2016 even the price of oil was down, you’d have thought there would be lot of opportunity for M&A there wasn’t because some of those expectations was still higher. I think the current price range more sellers are prepared to let go of assets and then our buyers would prepare to pick these assets - prices, so these that we’re seeing I think more activity and hope we’ll benefit from that, but to us again and making sure we don’t overstretch that we work within our means is important and we have a strong balance sheet now that will support some activity on the M&A side, plus these payments continue to come in from Kurdistan on a regular predictable basis, which again is probably most importantly driven by the price of oil.

These continue, the next period of DNO monthly is around $30 million, that’s $350 million over the course of the year that gives us a lot of currency with which to grow our business in Kurdistan, maybe do more in Kurdistan and think about releasing some of our existing cash on our balance sheet to do other things with its elsewhere as well.

Karl Fredrik Schjøtt-Pedersen

Fredrik Pederson, ABG Sundal Collier. Two questions regarding cost. First of all the lifting cost also said that it was effected by one off clean up - also related to clean up at the yearend, what will be a normalized lifting cost going forward and the second is, DD&A cost which was reduced significantly from third quarter, how should we look at that going forward?

Haakon Sandborg

If you look at the lifting cost overtime we’ve seen fairly stable development in a longer term perspective, but mainly these lifting costs are over than more fixed in nature some are variable but you would have the base cost, which we’re of course working to reduce, but we would have on top of that the workovers and other types of variable items that would vary from year-to-year, so I think what happened now in Q4 was total audit and review of all the estimates and the inventories and we discovered that there was some need to clean up and we took $10 million of extra lifting cost or added to lifting cost for $10 million for this clean up in the Tawke field, that is not something we expect to come back. So we expect that rework through then level just on the $2 per barrel all the lifting cost as what we expect going forward from Tawke.

We had --, we’re so air between 150 and 2 most of last year, so we are over 3.5 this quarter because of fourth quarter because of that extra item. We’re not worried about sort of escalating lifting cost in our main field Tawke, we have a good control, we have been able to take it down somewhat overtime. We have for instance better rig rates and service contracts etc. We’ve been sort of streamlining all we can do to reduce costs, so I think we’re operating in a very efficient manner and continue to do so on especially on the Tawke field.

So we’re running on a per barrel basis among the most efficient lifting cost you would see anywhere, so I wouldn’t be so focused on that is a risk about increasing and we think we have total control on that and it will be stable and low going forward. The question on the depreciation or the DD&A as we refer to, we took review [ph] in Q4 again of the total DD&A estimates for the year and we saw that we were quite high year-to-date, so when we look at through the third quarter, so I think you’re referring to the drop in DD&A in Q4 and that was sort of yearend revision, we were estimating a bit too high in the first three quarters and because of that, we then saw a need to take it down in the fourth quarter to get the right test or the right amount for the full year. So that is not a change or any practice or anything it’s just sort of alignment through the quarters, that were taken in Q4.

Karl Fredrik Schjøtt-Pedersen

And on per barrel basis, for going forward.

Haakon Sandborg

On the DD&A?

Karl Fredrik Schjøtt-Pedersen

In line with the average for 2016.

Haakon Sandborg

I don’t expect a lot of change on that number and on a normalized basis, on a stable basis, I think it will be fairly equal to what we’re seeing, if we normalize the full year now and use that as the expectation I think, that’s going to be what we expect going forward. Of course it depends on how you put in on the actual cash flow and how much you depreciate of future, sorry we don’t do that anymore, but depending on how much you put in on actual cost. So I think it’s going to be pretty stable, I think it’s the main estimate, but there was a variation as you correctly pointed out in Q4.

Henrik Madsen

Henrik Madsen, Arctic Securities. Could you go into bit more detail on Peshkabir and we’re talking about early productions assume mainly from the Cretaceous. But what is the potential on the Jurassic obviously given that you see some success with Peshkabir-2 well, and potentially the Peshkabir-3 well in terms of bringing the Jurassic also to an early production or even a full I guess permanent production system for that field, could you discuss both production levels, potentially but also timeline for a full development. Thank you.

Bijan Mossavar Rahmani

I think it’s premature to discuss that on the Jurassic. We’re testing the Jurassic now as we speak, we will move the rig to Tawke to start drilling the Cretaceous wells, then bring it back to Peshkabir and then drilling another well at Peshkabir directed at the Cretaceous to try to understand the size and scale and productivity of the Cretaceous. I don’t know whether we’re going to be testing the Jurassic in the next 12 [indiscernible]. So next well we will focus on the Cretaceous because the Cretaceous seems to us now to be a more attractive and in the sense easier reservoir to go after at least for now at Peshkabir, so that will be our focus and once we learn from a current testing of the different Jurassic zones that we’re testing will help guide us in terms of what next to do with the Jurassic, but our focus will be on the Cretaceous and Peshkabir, it can be significant, we don’t know yet.

What we’ve discovered is already significant and in terms of what we discussed, we’re very excited about what is we tested so far and we’re excited but about a larger Cretaceous reservoir but expecting this part of our business we’re paid to be excited and take risk and drill. But I think we’ve, in the past we’ve said that Peshkabir was an important part of our portfolio and we’re frustrated that we couldn’t tackle it before for the reasons that I’ve described, we’ve now done so we’re excited about Peshkabir and the Cretaceous for all sorts of reasons including proximity and speed of putting it in production, but please bear with us as we take this thing a step at a time. A quick second, Tom [ph] we want to really move this fast now that we have it, we want to move fast with appraising [indiscernible] and putting it on production, but it is an important part of our portfolio and it can start in 2017 in terms already production which is also exciting for us. And important to Kurdistan that a new field we brought in production.

Thank you very much, good to see everyone.

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