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Earnings Call Transcript 2021-Q3

[Jostein Løvås]

Okay, I guess participants are coming in as we speak, but I'll start and introduce this earnings call. Welcome to DNO's Third Quarter Earnings Call.My name is Jostein Løvås. I'm the Communication Manager of DNO, and I will share some practical information with you. [Operator Instructions]We will start with a brief presentation of the third quarter 2021 results by Executive Chairman Bijan Mossavar-Rahmani and CFO Haakon Sandborg, after which we will open up for questions. [Operator Instructions]And with that, I leave the stage to the Executive Chairman.

[Bijan Mossavar-Rahmani]

Good afternoon, everyone. And good morning to those of you who are in the United States or in other part of the world who are still before noon. I'm in the United States. This is yet again a quarterly presentation that's driven by COVID requirements and restrictions. My hope is that, the next one, I'll be in Norway and we can do it in person, certainly with the Norwegian participants, but I've been saying that, I think, in the last 2 quarterly presentations and these pandemic restrictions continue. But thank you for joining us. I think we have maybe close to 100 participants joining us for this meeting. Thank you for your interest. And without further ado, I will make some introductory comments on the quarter, focusing importantly on the operations side, then Haakon will speak to the financial results and performance of the company during the quarter. And then we will, of course, open it up to a discussion among the full group.Jostein, if you please take the next slide. This is a summary slide that we've -- we thought would be -- captures a few messages. First, again, this is DNO's golden anniversary year. It's our 50th year as a company in Norway with much -- a lot of history, a lot of stories, a lot of successes the company has had, but we've been celebrating this year, our 50th, under again COVID conditions; and difficult conditions in the overall global economy, political system, in context of the climate change debate and the issues raised about the oil industry, the fossil fuel industry and its future. But we are proud to be a growth-oriented E&P company and with a focus on the Middle East and the North Sea, and that remains very much a part of who we are and what we believe we are best equipped to do as a company in the interest of our stakeholders. We do stand out in the industry not just because of our age, and we're now one of the older companies around the world that's still standing. And there are older companies, but some of them are changing, as you well know, their focus and their orientation, but now we're one of the old boys or old girls [ in the end ]. And so -- and we're proud of our tradition and we're proud of what we do. We also stand out saying that our lifting costs continue to be industry-beating lows at about $5 per barrel across our operated assets. That's very low by any standard. And we are also a very low-carbon company, again beating the industry averages. Our CO2 intensity is about 10 kilograms per operated barrel of oil produced, and we'll say a few more words about how that stacks up versus the rest of the industry. And the future of the oil and gas industry, with all of that's happening around us, the future will be that of the low-cost, low-carbon companies. We'll be one of the last companies still standing to turn off the lights as fossil fuels exit, whether it's in 30 years, 40 years, 50 years or 100 years.So with that, I will start the review of the slides, starting with third quarter operations.Our gross operated production in the Tawke license, our flagship license in Kurdistan which we share with our partner Genel. Gross operated production averaged around 105,000 barrels a day in Q3. It's down a little bit from Q2. And of that total, close to 79,000 barrels a day was net to DNO's interest, which is a substantial amount of oil for a company of our size, as you know. The North Sea contributed another 13,000 barrels a day of oil equivalent because we also have gas production in the North Sea. That was up importantly as a percentage of North Sea production from Q2, but of course, that additional few thousand barrels is lost in the rounding of our Kurdistan operations but still very important to us because that's one of our important growth areas with respect to exploration. And it's a -- it's been part of our strategy to diversify DNO's activities beyond Kurdistan.Our total net production was about 92,000 barrels of oil equivalent per day for the quarter.Our Tawke license 2021 gross operated production. We've given guidance of about 110,000 barrels a day earlier this year. That guidance is essentially unchanged. We're still looking to come out of the year with the average in that range or approaching that range. It may be off a couple of thousand barrels a day or something, but we'll see how the rest of the quarter goes. But it's essentially that's the average figure for the year that we expect. Our actual exit level could be a little bit higher as a result of some of the wells that we've been drilling and working over coming in, but we'll see. North Sea production guidance for the year remains unchanged, again, at about 13,000 barrels of oil equivalent per day.Next slide, please. On the financial side, our revenues were up significantly in Q3 importantly because of the strengthening commodity prices that have impacted all oil and gas players but also because we've had higher North Sea sales in the course of the quarter. And you'll see on the right that bar diagram that shows split between Kurdistan and North Sea, what has been going on, on the revenue side and we show the splits. Our profit for the year -- for the quarter has been $65 million. That's essentially flat. It's a little bit up from Q2. It hasn't kept up percentage-wise with our revenue growth in the quarter, and -- but Haakon in the financial slides will touch on this a bit more, but it still has been a third consecutive quarter in which we reported operating profits, and that's good.As you know, we have closed on a new $400 million 5-year bond issue with a coupon rate of 7.875% during the quarter. This lowered our average debt interest rate but also extended our maturities and helped strengthen our balance sheet, and we were pleased with the outcome of that bond issue. We received $120 million from Kurdistan in the quarter. That includes, as it does every month, our share of entitlements, our share of the oil that's actually produced and exported, but also an override that we continue to receive every month based on 3% of the Tawke license production. This is related to the -- an agreement that addressed a debt that KRG had to us back in the ISIS period, plus payment towards new arrears that were created when COVID hit wherein Kurdistan withheld some payments from all the oil companies and they've been paying down that debt on a monthly basis. So the total payment was about $120 million. That represented, I believe, 2 months, not 3 months. The third month came in -- has come since, but that was the figure for the -- those [ actual received ] in the quarter. At the end of the quarter, these new arrears, the outstanding amount has dropped to $203 million, and again this is as of the end of Q3. That number has come down further since then with some more recent payments. That's down from close to $260 million at the start, and that excludes any interest. DNO, like the other companies have been affected by this, have been in continuing discussion and dialogue with the Kurdistan government about how to handle interest on these arrears during this period and that -- and how to [ factor ] that into either the payments or into other obligations that companies may have in -- with respect to their assets in Kurdistan.Next slide, please. I've mentioned our gross operations, that -- the split between Peshkabir and Tawke. And the quarter is close to 60,000 barrels a day from Peshkabir and about 45,000 barrels a day from Tawke. At Tawke, we hadn't done any drilling for about 18 months. When the price of oil crashed, there were some delays in getting approvals from the Kurdistan government in terms of spending because they were trying to pause on spending during the difficult price and COVID period, but we were able to reduce some of the natural production decline that occurs in all these fields through pressure support from gas injection, which we'll talk a little bit more about, and also workovers at the smaller things that we could do at the existing wells, shy of drilling new ones. So we were able to slow down the natural decline rates, but now we've resumed drilling at Tawke. And we have a new well design that allows us to drill cheaper wells and more quickly. And we hope that we'll see improvements in the decline rates and maybe steadying production at Tawke moving forward as a result of this now increased level of activity.Both Tawke and Peshkabir will have multiyear development campaigns. At Tawke, a mature field, the next phase is to drill more and more and more wells and to do so cheaply. And that's again the natural progression of fields as they age. It's like being on a treadmill. You run faster in place just to be -- to stand still. And we'll -- and that's anticipated and planned for Tawke, but Peshkabir is a younger field. We have an active drilling program there, but that's less about a lot of drilling in a mature field and still about trying to test the limits of the field and see what it can do and perhaps add some additional production to it.We declared commerciality on our third -- on our second license in Kurdistan. Hopefully, it will become our third field, at the -- at Baeshiqa. That's the asset we acquired from ExxonMobil. The transfer of the interest to us was completed. We have 64% of that license, 80% on a paying basis; and the transfer has been approved. We've submitted an -- we've declared commerciality. We've submitted a development plan, and that's been under discussion with the Kurdistan Ministry of Natural Resources. And there's some fine-tuning that's being done and some final discussions with them as to how the developments will proceed. Once we have all of that in place, we expect to be able to fast track it as we always do in Kurdistan. That's been a key to our success. By fast tracking here, we mean that we have 2 wells that we had -- 2 discovery wells and they were left in a state in which they can be reentered. And production started. We've already produced some test oil from those 2 wells. We'll start with those, and then we will then drill additional wells to bring the -- that license to a higher level of production. And again and hopefully, [ that will be ], by any standard, in record time.The next slide, please. We've talked about our gas capture and injection program in Kurdistan to replace flaring. This is something that we had initiated several years ago and commissioned in mid-2020 before much of the current focus on the [ global climate change ] issues and [ in the ] current context of COP26 and other discussions that are ongoing. That was a $110 million project. The purpose was to reduce flaring at the Peshkabir field, where we had associated gas production which we don't have at Tawke, to move -- to stop flaring and move that gas to Tawke, inject it there or both for safekeeping, to keep it out of the atmosphere and also to help with some enhanced recovery of additional Tawke oil. We're pleased with how that's [ proceeded ]. And we've been able to check all of those boxes and we've been proud to do so. Iraq is one of the largest flarers of gas, associated gas, in the Middle East, perhaps in the world. This is the first project in Northern Iraq and Kurdistan to reduce gas flaring, yes; and inject the gas for -- again, for future recovery but in the meantime for enhanced production if that's possible in the field. And the Iranian government, on the strength of the success we've had, has now mandated that other oil operators should do the same as much as possible and with some -- within some time frame, but this has been -- this project has been held up as a success story and a model for how other companies and other operators should handle the treatment of associated gas.We've now initiated a Phase 2 of this project, of this program. That's going to cost another $25 million. And that's to deal with gas breakthrough. As gas is pumped into the Tawke fuel, some of it will break through. And we will be recapturing it and putting it back in the ground to avoid any flaring at Tawke.I mentioned that our CO2 intensity is very low. It's at the level of 10 kilograms. That's about half of the target for 2025 set by a group of 12 of the world's largest oil and gas companies, so it's a figure we're very proud of, but in addition to CO2, I know there's been some focus shift at COP26 about CO2 and the [indiscernible] CO2 to methane. Methane is an important -- a nasty gas. We have -- we started in 2019 a project to eliminate routine venting of methane, so we were again ahead of a -- ahead of the debate and the discussion on methane. And we've now taken that to a Phase 2 also to launch a leak, methane leak, detection and repair initiative to be able to monitor and to mitigate fugitive methane emissions. These are methane emissions that occur around equipment and so on, tanks, storage tanks; and that might not be visible to the eye but detectable. And that will be part of our effort and contribution to -- on the methane side as well as part of our efforts in the -- in this area. And again we've done these for years and we're -- tend to be quiet about them. We do them because it's the right thing to do, but it's important because we were asked by stakeholders and by shareholders and by analysts, by bondholders what are -- what is DNO doing. And then -- and of course, we have a good story to tell in this area as well.Next slide, please. On the North Sea, I mentioned our production was up a bit from Q2. We had an appraisal well that was drilled on the Bergknapp discovery made in 2020 and in which we have a 30% [indiscernible] interest, which resulted in a 35% resource estimate upgrade in Q3. And we're very pleased with that as we continue to build up our inventory of discovered resources in the North Sea and Norway in particular. We've drilled -- we've been very active as a driller. Our exploration efforts in Norway are an important part of our overall exploration strategy and portfolio.We operated and drilled the Gomez exploration well. It's encountered hydrocarbons, not very substantial volumes, but it could be volumes that -- it could be meaningful. We're and -- with our partner, assessing the commerciality to see if that discovery is in fact commercial or not, and we'll report back obviously as we learn more. Our Brasse field, where we have 50% and operate, is on track for 2022 PDO. And we've made some further progress on that. And DNO recently entered into a strategic framework agreement with TechnipFMC to cover certain subsea deliveries.As part of our effort to constantly review and high-grade our portfolio, we've exited Fogelberg and shelved our Trym South permits but continue to do, again, the active exploration but also development drilling and appraisal development. It's quite been -- it's been an active year for us in that area. And we talk about the first of 4 back-to-back Fenja wells having been spudded in October, first oil planned in the first half of 2023. So we're active and hope to grow our -- the contribution of Norway production to our overall production volumes.Next, please. This slide, I won't try to read everything on the slide for you, but it's available as a -- for your reference. It has our 2021 and 2022 exploration drilling program in some detail in the North Sea.Okay, I think, with that, I will stop and turn to Haakon Sandborg to discuss our -- in more detail our financial performance in the third quarter.Haakon, please?

[Haakon Sandborg, Chief Financial Officer]

Good. Thank you, Bijan. Yes, hello, everyone.We will now move to a discussion on the, Q3 financials. Move the slide, please. So we start with these key figures.And we are again pleased to deliver solid quarterly financial results. We see here we have increasing revenues and we have a strong cash flow generation and also somewhat higher operating profit in Q3. So as Bijan said , our revenues climbed up by 38% from the second quarter to a solid level of $253 million. And this growth was mainly driven by the increased North Sea production and sales and also, of course, by higher oil and gas prices, but just to mention a bit more on the business unit level: The Kurdistan revenues in Q3 of $149 million, they were up by $8 million from the second quarter. That was primarily on the oil prices. And that -- the North Sea revenues of $104 million in this quarter, they were up by $61 million from Q2. So that's quite significant; and that was mostly on higher produced and also higher lifted volumes, supported by the better oil and gas prices.Our netback, which is an after-tax cash flow before working capital change, has benefited now again from higher revenues and from tax refunds. And we can see a good development and reaching a solid level of $194 million for Q3. As I said, some increase in our Q3 operating profit, that comes from the higher revenues again, but that's despite the increased impairments and also higher expensed exploration in this quarter. So again quite pleased, and we see these as good financial results for this quarter.Next one, please. As we normally do, we go to quite a lot of detail on our profit and loss statement in our P&L. We can see the Q3 numbers to the left on the slide, and here we can see the increase in revenues from Q2 that I mentioned.On our costs side, lifting costs and DD&A remained very stable in Q3 from the second quarter, but there is this reduction in North Sea and a lift that leads to an increase in our total cost of goods sold of $19 million in this quarter. So that's the main movement on the costs side and on cost of goods sold, but as you go down on the costs, you can see that the expensed exploration is up by $10 million. And that comes mainly from expensing of a well called the Black Vulture well. We have significantly higher impairments in Q3 at $40 million. It comes from again the revised [ R&D ] submissions from licenses that we participate in. And there has been revised cost schedules and revised production profiles that go into these submissions that we have used in our [ valuations ]. So that is leading to impairment on a couple of licenses, including the Ula area, but in addition to these type of impairments, we have an impairment from U.K. decommissioning costs from this Schooner and Ketch project that we are working on. So a bit higher or higher cost there has been impaired. At the same time, we have had a positive movement on the other decom project that we have in Norway called Oselvar, where we have had a cost reversal. So that's a good development in Q3.This all leads to the operating profit of $65.4 million in Q3, up from $60.9 million in Q2.You see net finance is stable. And we have, of course, the interest expense as the main element, but this quarter, we also have items that include bond refinancing costs and accruals, et cetera [ or accretion ]. But we also this time have a positive revaluation effect on our KRG receivables. Interesting to see on the Q3 a tax expense as it is of $6 million. That compares to a tax income of close to $25 million in the second quarter. And we see that this is now due to reduced tax losses and some change within the deferred taxes.So with the reduced tax income, we saw net income of $30.9 million in Q3, down from $56.7 million in the second quarter.Next, please -- no, sorry, [ the same, this one ]. I have a bit more on this one. I need to talk -- go back again. We have to, sorry, talk about the year-to-date also on the right side of the slide. As I mentioned, last quarter, we see a very strong recovery now from the weak market conditions that we had last year. And we can see revenues. It's now up by $167 million, [ provided ] mainly by higher oil and gas prices, but then again, year-to-date costs of goods sold are also significantly reduced from last year. That is now mainly due to lower DD&A or depreciation mostly. And this comes from reduced DD&A charges per barrel in Kurdistan and from lower North Sea production this year compared to last year. So we also have a reduction in cost of goods sold from the buildup in North Sea underlift due to lower lifted volumes, so far, this year.On the year-to-date this slide also. We have much lower impairments this year. And we saw a much better operating profit year-to-date at $192.7 million compared to the substantial operating loss that we had last year.Now our year-to-date tax income of $23.8 million is also much lower than last year. That's mainly due to the lower impairments, with tax effect, and deferred tax changes, but anyway, after finance and tax, we are pleased to show a year-to-date net income of $139 million. And in my view, obviously with our high production and the current oil and gas prices, we see a good outlook for further strengthening of earnings going forward.Now we're going to go on the next one. We give you some guidance on what we term as the operational spend, the -- some of the CapEx, abex, exploration and OpEx categories. And our operational spend guidance for this year is basically unchanged. We [ expect ] we have a [ $15 million ] increase in projected NSES or North Sea exploration spend compared to our Q2 presentation. And these -- the contributor on that exploration increase is the additional work that we're now doing on the successful Bergknapp appraisal. The projected operational spend is split between $200 million in Kurdistan for this year and $460 million in the North Sea. And that is before North Sea tax refunds, [ importantly ]. As we show in the quarterly spend graph on the right side of this slide, the year-to-date operational spend is at $493 million for the first 3 quarters. And we project and estimate an additional spend of $167 million for the fourth quarter this year. So seeing very close to our guided levels here.Let's go to the next one. So for our cash flow, we again now have delivered a solid operational cash flow in Q3 at $142 million. And that's again on the back of increasing oil and gas prices but also with the higher North Sea volumes. So we see that's reflected in an increase in our pretax profit including -- or adjusted for noncash items, up by $44 million in Q3 from Q2. In the third quarter, we received 2 monthly payments from KRG. And we have since then received other payments after quarter end, but with the 2 monthly payments we received $120 million from the KRG in the third quarter compared to $159 million with [ 3 payments ] in Q2. So we thereby had a negative working capital change of $24 million for this quarter mainly from the increase in KRG receivables that impacted the Q3 operational cash flow, but as shown on this graph to the right, we have received North Sea tax refunds in an amount of $37 million and that again added to our quarterly cash flow. We increased our investments further now to $109 million in the quarter. And as we show on the slide, $81 million is -- has been invested in assets and -- asset developments, and $28 million in decommissioning spend.Now Bijan mentioned that, but we had a successful closing of a new $400 million bond in September. And now in the third quarter, we used $300 million of that, plus [ call premiums ], to buy back and redeem the remaining DNO02 bond. So I'd like to note that, as we've done many times before, through this new bond placement, we had done an early call and early move on our bond maturities to both extend the maturity profile and to enhance our credit profile, but in sum, as we've seen in the recent quarters, cash from operations again funded all investments in the quarter. And if you add the tax refunds and the finance proceeds, we increased cash balances by a substantial $132 million in Q3. And I think we said that before also, but we see a very good outlook now for continued strong cash flow generation going forward.So next one, and here we have our capital structure. You can see that we continued to strengthen our balance sheet also through the third quarter. We have increasing cash balances. And we have a conservative leverage, in my view, as we show with a steadily declining net interest-bearing debt level. So as such, our cash balances have grown by $213 million over the last 12 months since the end of the third quarter last year. And this has mainly been achieved through increasing cash flow from operations, backed by the higher commodity prices and also with support from the accelerated Norwegian tax refunds in this 12-month period. Over the same year, we have cut net interest-bearing debt by 39% to $360 million at the end of Q3 this year, but -- reduction has come mainly through the higher cash balances, but also we have reduced other debt in that during the last 12 months.Shown on the right, with the improved earnings this year, we have also strengthened our equity ratio to the current level of 33%. With this balance sheet and with our strong cash flow generation, we are in a -- obviously in a very solid financial position. And we plan our -- as we plan our investment programs. And we will consider other use of -- uses of capital also going forward. As we normally do and have a plan doing now, we will revert with updated plans and work programs and guidance for next year in our Q4 presentation in February.So that was a brief run-through of the financials for the quarter. That's the end of the presentation, so I think we can now move on to start the Q&A session with questions from our participants, so please, Jostein?

[Jostein Løvås]

Yes. I think we already have gotten a question from one of our old friends, Teodor Sveen-Nilsen. He's an analyst with Sparebank 1 Markets.

[Teodor Sveen-Nilsen]

[ I have ] 3 questions then. First, on general industry trends. We see in certain other industries bottlenecks in the value chain. I just wonder. How is that in Kurdistan? Where do you -- or do you at all experience any bottlenecks? Second question is on KRG payments. You said you got 2 payments in the third quarter. I just wonder whether or not we should expect 4 payments in fourth quarter.And last question is on Bergknapp development. I just wonder. What kind of development concept do you expect for that to discover?

[Bijan Mossavar-Rahmani]

Let me start with some answers. On bottlenecks, yes. I think there -- we feel those in Kurdistan to an extent. It's probably not been as difficult as perhaps in other areas because we have made a -- we purchased stocks in advance of equipment, casing and so on. So we've been prepared to an important extent before disruptions and delays. Plus, the rigs we use are typically dedicated rigs in Kurdistan operations, so we -- yes, we don't have the same issue that perhaps other parts of the world have trouble getting rigs and [ rig crews from on -- ] mobilized to the drilling. So it's that's not been an overwhelming challenge for us. The bottlenecks, they're not really bottlenecks, but there have been disruptions, of course, and challenges from the COVID related, making sure that -- people go in are quarantined, that teams are quarantined, the fields are probably -- or protected, that we ensure the safety and health of our employees. And knock wood, we've been very successful in that respect. There's been a lot of hard work by our colleagues in Kurdistan and those in Dubai who manage the Kurdistan operation, and -- but the challenge has been the human side, making sure that our people are safe. That -- early on, there was a question of [ bottlenecks and who was it getting vaccine from, to get people ] vaccinated. And again -- so it's a different maybe kind of bottlenecks that you have in mind, but -- I remember that, the start of the pandemic, the bottleneck in vaccines was probably more of an issue for people than the bottlenecks in casings, for example, or other wellheads or equipment. So we've come out of that, I think. It's not over yet. Hopefully, it's not -- it's we can see the light at the end of the tunnel, but I think that DNO has managed to -- certainly in our operated activities, to address and manage the challenges posed by COVID.With respect to Kurdistan payments, do we expect another payment? I mean you do know as well as any of us, probably better, that the payments of Kurdistan are sometimes delayed. And sometimes we're surprised with how quickly they come. And suppliers were disappointed that they're slowed down, but they do make it. Whether they're a week late and it's -- becomes -- it slips over to the end of the month or the end of the quarter, I don't know. I can't give you any assurance, but the payments have been coming and coming both for -- with respect to entitlements; royalties, for those of us who have royalties; but also with respect to the payment of arrears. We're not happy that the arrears are still outstanding, but they are being worked down. And so I'm -- we have every confidence that payments will come, but whether they come the day before or the day after or the close of a quarter, I can't really say. But you see them coming. These are large sums of money that the Kurds are paying to the companies. It shows a commitment on their part to do so. They understand that, without these funds, these companies can't spend in Kurdistan to the same extent. And if we don't spend, the revenues are going to go down. And they're pushing us to produce as much as possible, to take advantage of these oil prices. And they understand that, for us to do that, the funds will -- the payments have to be coming in on an ongoing basis. So we have every -- I -- every confidence payments will come, but the timing of them, 1 day or 2 days or 5 days before or after, I can't say. And also, as you know from the announcements of other companies, not all the payments come to all the companies on the same day. Sometimes one company gets payments earlier than others do. And sometimes [ our ] 3 payments are spread over 2 days or 3 days. So -- and some of that, I think, is related to the banking system delays. So I don't know if I've answered your question with respect to timing, exact timing, but we have every confidence the payments will come and continue to come and strong given where oil prices are and the fact that our production is what it is.On Bergknapp, I don't have an answer to your question. Haakon, do you have anything you want to add on Bergknapp? I think it's a little early in the season...

[Haakon Sandborg, Chief Financial Officer]

Maybe [ I'm not the right guy to address that ], but I know from discussions with our technical teams that this is a concept that we are still through early phase. We are looking at possible tie-in to existing infrastructure. And we have a lot of installations in the nearby area around this discovery area, so likely a sort of tie-in to the existing infrastructure in the neighborhood. And we know that we, together with our partners, are working on maturing the options, but that's sort of the level of detail I can go into now at this stage, Teodor.

[Jostein Løvås]

Okay, then I believe the next question comes from Nikolas Stefanou with Renaissance Capital.

[Nikolas Stefanou, Research Analyst]

It's [ Nick ] from Rec. And I have to sort of like give you a congratulation on the 50th anniversary of the company. I've got a couple of questions and then a follow-up. Bijan, I have some -- I'm a bit disappointed not having a dividend announcement today. I think this is what the market was expecting, especially given how healthy cash flow is, how much you have reduced net debt and then also what your peers are giving to their shareholders, so what was the reason you decided not to announce a dividend this quarter? And then -- and any comment on that will be quite helpful. And then my other question is on the Tawke license. It looks like, despite the kind of like drilling hiatus there because of the [indiscernible] approval delays, you're still pretty much on track to deliver your target or at least be quite close to about 110,000 barrels per day. Can you give me an idea, with development now resuming at Tawke, what kind of like exit rate we could see for the end of this year?

[Bijan Mossavar-Rahmani]

Let me answer your second question, first. I think I mentioned that, that our exit rates could be probably a little bit higher than 110,000 barrels a day. And I'm -- that's an estimate but in that range because, as you know, the third quarter, again numbers were a little bit lower. So the fourth quarter will have a little bigger -- higher [ to rush like catch-up ], but I expect our exit rate will be at least 110,000 barrels a day and maybe a little bit higher. We'll see. I mean, every day, the figures are a little bit different. We're -- currently as we have some of these new wells coming into production, there are days in which our production and -- was running higher than 110,000, but where we end up at the end of the year, I don't know. But I think 110,000 is a safe estimate as an exit rate. It may be a little bit high in terms of the average for the year, but by -- I mean, but not by -- if it is, by not very much. And I don't know whether it will be or will hit that average or not. Again it depends on what happens in the next month and the next, I guess, close to 7 weeks or so, but we've done well. This is a -- again we're very pleased and proud with our team in Kurdistan. When they knew and we knew that we weren't going to get new wells down in Tawke, the question was how do we keep Tawke production as high as we could in the face of natural field decline. And they got busy. They rolled up their sleeves and started doing other interventions and were able to do a fantastic job. Of course, those interventions, you always -- you can't keep doing those. You have to drill wells at some point, and now we've started drilling wells. So we've had -- under the circumstances, I think we've done well at Tawke, as you -- as I think you were suggesting, but we will have to drill wells to keep Tawke production decline from being too harsh.On the issue of dividends. As you know, last, I guess, May, at our last Annual Shareholder Meeting, the shareholders approved the start-up of our previous pre-COVID dividend program, which was to dividend out, I think, [ something of the order ] of $20 million equivalent in the second half of each year and then an equivalent amount in the first half of the following year until the following shareholder meeting. So the Board has a discretion and the authority to dividend out up to the equivalent of $20 million before the end of this year. That authority is in place. It cannot be -- the amount cannot be increased. We can't borrow against next year's $20 million to do -- to increase it if we wanted to as a Board. So we're capped at $20 million, and the Board understands that anything less than $20 million is sort of meaningless. So that -- the $20 million figure is the target. The question is does the Board want to proceed with the dividend distribution or not. That decision has not been taken. In fact, we haven't discussed it in our recent Board meetings, where our focus has been on some of these other issue and challenge that we face, but we've agreed as a Board that, as we repair and then now strengthen our balance sheet, that we have assurance that we're successful with that, that the payments from Kurdistan continue on an ongoing basis and predictable basis, that oil prices will support it -- before we took that decision. We didn't want a situation in which another crisis will hit and we start a dividend program and then cut it short again. We were very disappointed as a Board that COVID forced us, we felt, to cut dividends and cut costs. We cut people. We really went in with a carving knife and cut back expenses in ways that are quite painful to staff and never mind to shareholders. I wear, as you know, 2 hats at DNO, 1 is as the Executive Chairman, the other as a very significant shareholder. [ Personally -- and through ] RAK Petroleum. So wearing my shareholder cap, hat, I'd love to see dividends. And then as -- on a predictable, ongoing and -- basis and reflective of the underlying strength of the company financially, but as a -- when I'm wearing my DNO hat, I need to make sure, the rest of the management team and the Board, that we put the company's -- put dividends in the context of the company's larger, again, financial program obligation and opportunities. So we have close to 2 months to go before we have -- we make that decision. We have a Board meeting at the end of November. It's the -- I believe, the last scheduled Board meeting for the year, so there will be an opportunity at that time to make a decision about the dividends but also importantly to put that into the context of a longer-term dividend plan. And there are, I mean, other uses for cash, obviously, as you well know. We have a lot of cash coming in. And some of that cash, we want to return to shareholders as other companies are doing, whether it's in the form of dividends or share buybacks. And we've done both in the past, but we want to put it into context and think about a plan that is sustainable over a longer term because, again, the worst you can do is start something and have to stop it, start and then stop it. And we don't want to be in the business of making a big dividend distribution and then stopping for -- that's not the way to -- at least from our point of view, to do it. So the door is closed. The floor is open because the shareholders have given the authority -- and a lot of the shareholders, including myself in my shareholder capacity, would like to see dividends that meet those targets. So my suggestion will be to have some patience. And we will come back obviously with the Board's decision on dividends certainly before the end of the year because we have that limit that's closing [ down ].

[Jostein Løvås]

I believe the last question will come from Karl Fredrik Schjøtt-Pedersen with ABG Sundal Collier.

[Karl Fredrik Schjøtt-Pedersen]

With reference to [ Slide #13 ], operational spend. There is a substantial increase in the CapEx in Q4 relative to the other periods. Is this an indication of an activity ramp-up which we should extrapolate into 2022? And could you elaborate on the allocation of this capital? And how will that play into production in -- especially Tawke and Tawke license, for 2022?

[Bijan Mossavar-Rahmani]

Haakon, do you want to respond to that...

[Haakon Sandborg, Chief Financial Officer]

Yes. So as you know, there's a lot of activity ongoing in both our business units, Karl Fredrik. We are moving up our drilling schedule in Kurdistan, as Bijan has discussed. We have 2 large rigs now moving and building rigs continuously in Kurdistan. We are looking for a third large rig to even do more drilling. And we have 2 smaller rigs also in operation in that area. So you see that, when you think about our drilling program in Kurdistan, that's one reason why you see an increased CapEx coming into Q4. And then in the North Sea business unit, very high activity also ongoing. So I don't have a full breakdown [ this year ], but I can mention that for Q3 [indiscernible] we had $38 million; of CapEx in Q3. And it's sort of coming up quite sharply in Q4, but for Q3 by itself, we had $22 million spent in Kurdistan. I expect that to come up now with more drilling, more rigs in Kurdistan, from $22 million in Q3. We had $16 million CapEx in Q3 in Norway. That was mainly for Ula, Brage and Fenja. And those three will also continue into much activity into Q4. We had capitalized exploration included in our Q3 numbers, so we will have more exploration ongoing and, hopefully, capitalized and not expensed into Q4. So -- well, that's a separate category, but we're also, as you know, active on decom included in the $167 million.So I think the answer to the question is really basically continuing and stepping up from Q3, especially in Kurdistan on the drilling side on both the Tawke field and the Peshkabir field, as we go into next year. And we will guide you on that in the Q4 presentation in February, but we then of course hope and expect to be quite heavily involved on the Baeshiqa development also into next year. So expect the trend of -- if we can sort of see, a trend [ on a line ] basis here increasing into next year is the expectation. If you look at the annual figures, it dropped down quite a lot with the COVID in 2020, coming up again in 2021. And I expect to be increasing our spending into 2022, but again we will revert on that in February. Do you want to add to that, Bijan, maybe?

[Bijan Mossavar-Rahmani]

No. I think you captured it. Again, we've had a strong quarter. It's been quite a reversal from the damage COVID did to our business, to a lot of businesses. And it's been amazing how quickly this has turned around in our -- again, in our industry and many other industries. We had a strong third quarter. I expect we will have an even stronger fourth quarter. And if the trends continue, we'll have a strong 2022, but I don't want to project into the future. We'll wait and see. Perhaps [indiscernible] 2022, but we're excited about where we are and where we're going. Haakon is a very steady hand and a very steady voice. For those of you participating in this before, you can't -- to want to get too -- show too much excitement. And I've sort of picked up some of his habits. We're really very excited [indiscernible] where we -- where the company is and the opportunities that are opening up. And with the rapid reduction in our net debt, it creates an opportunity for us to look at sort of different paths forward, but what is clear about the DNO story is that we will stay an E&P company. We're not looking at opportunities in windmills and solar and other things. We're good at what we do and we have 50 years history of doing it. I'd expect we'll have a long ride still ahead of us. That's who we are and what we are. And I think we're well positioned, again, as a low-cost, low-carbon company. And for those who are looking for this kind of an opportunity and investment and to join us on the ride, well, this is who and what we are.I was quite struck, when we did our bond road show, which -- with how much -- how supportive the bond side was to the E&P story, not just DNO's but overall. The equity side is still hesitant, it seems, to some extent, but I think we'll see some change in the -- on the equity side, the sentiment, as well as these volumes of cash [ flow into all the ] companies', the E&P companies', coffers and treasuries. So we're excited about that as well, the change in the sentiment and the support we'll get on the equity side...

[Jostein Løvås]

We're about to close the meeting, but Karl Fredrik, if you have a very short follow-up question, you're allowed.

[Karl Fredrik Schjøtt-Pedersen]

Yes, okay. I'll be brief. No dividend this time, a lot of cash on the balance sheet. Are you looking at M&A? And if so, is it -- in which regions?

[Bijan Mossavar-Rahmani]

Nothing that we can clearly obviously report on or discuss. I think a lot of our efforts and time are spent this year on recovering from COVID and strengthening the balance sheet and then -- and focused on our current operations. We're always, of course, looking out to see how we can grow the company in a way that's accretive and meaningful. I don't expect, in terms of M&A, we'll do much more in Kurdistan. We're already the most important player in Kurdistan [ around the ] IOCs. And with Baeshiqa, hopefully, finally getting underway, we'll get -- that's a better opportunity for us to grab. Assets in Kurdistan are changing hands at very significant prices, and we'd rather do it ourselves. And we're able to do it because we have a history in Kurdistan; and again, at Baeshiqa, a very, very good asset base to grow. So it won't be in Kurdistan. North Sea, I mean, we're always looking at opportunities for growth in the North Sea. Sometimes, opportunities come up that make sense for us; and other times, not. Sometimes, it makes sense, and we -- but they're done before we have a chance to move on them. And other times, [indiscernible]. So we're -- obviously we have a -- an office, a full office and team, in Stavanger that are always looking at opportunities. And if the right one comes along at some point, we will do it, as we did with Faroe Petroleum. Outside of Kurdistan and the North Sea, it have -- again there deals are pitched to us, or we're -- we look around. We're not trying to do a global search for opportunities either for exploration or for mergers or acquisitions. It'd have to be something that will be compelling. And it'd have to be somewhere where we DNO have a competitive or comparative advantage before it makes sense for us to proceed.So nothing to announce; same sort of a low-level look at -- all companies sort of have, but our focus has been really on recovery. But as you say, now that we recovered and as the cash pile builds up, growth in -- through mergers or through other [ ground floor ] activity becomes one of the options we'd have to pursue. So -- but I think we're at a crossroads the way many -- much of the rest of the industry is. Do we harvest fruit from the trees that were planted some time ago? Or do we plant new trees? And many shareholders want the oil companies to do the harvesting, produce and distribute the cash to shareholders. Some still look to grow, to see opportunities where the other players are pulling out. And that, I think, is the challenge that we face and other companies face too: Do we harvest, or do we plant new trees? And...

[Jostein Løvås]

And with that, I think we should close the meeting. And thank you all for attending; and see you again soon, hopefully, in person.

[Haakon Sandborg, Chief Financial Officer]

Very good. Thank you.