Dno ASA
OSE:DNO

Watchlist Manager
Dno ASA Logo
Dno ASA
OSE:DNO
Watchlist
Price: 9.4 NOK -1.62% Market Closed
Market Cap: 9.2B NOK
Have any thoughts about
Dno ASA?
Write Note

Earnings Call Analysis

Q3-2023 Analysis
Dno ASA

Ramped-Up Production and Financial Recovery

DNO reported a significant turnaround with third-quarter revenues surging by 150% compared to Q2, owing largely to increased local sales in Kurdistan and restored production in the North Sea. The company reached a production level close to 40,000 barrels per day, with the Tawke and Peshkabir fields resuming operations following pipeline closure. Despite local sales fetching prices markedly below international rates, upfront payments covered ongoing costs, and the company is working to optimize these new sales channels. DNO is also focusing on drilling the Baeshiqa 3 well and processing receivables amounting to over $300 million for past exports. Exploration discoveries in the North Sea, including a new play with high-quality reservoir sands, add excitement and potential growth. Financials improved with an operating profit of $40 million and an operating cash flow of $32 million, despite a net loss of $55 million due to high net finance expenses and tax changes. The company is unhedged but considers natural hedges in Kurdistan's production sharing contract and discusses gas hedging in the North Sea. A muted free cash flow in Kurdistan during Q3 is expected to pivot positive moving forward, and the company anticipates stronger net production in the fourth quarter. DNO maintains a solid cash balance of $708 million with a net cash position of $142 million, ensuring balance sheet strength, albeit with reduced equity ratio.

DNO's Strategic Adjustments Lead to Improved Q3 Results

DNO, the oil and gas company, kicked off its third-quarter earnings call for 2023 with a new Managing Director, Chris Spencer, at the helm. The company has shown resilience and adaptability, especially in Kurdistan, by reversing the use of its Fishkhabour tanker loading facility from an unloading to a loading operation for local oil distributions, marking a significant shift in response to regional export pipeline disruptions. These strategic adjustments have resulted in significantly better performance compared to Q2, with Q3 revenues soaring by 150%, marking an operating profit for the quarter. The net quarterly production stood at roughly 40,000 barrels, nearly half of which came from Kurdistan, signaling a recovery from previously low production levels.

Discoveries and Operations: Progress in the North Sea and Kurdistan

DNO reported a discovery in the North Sea, a first for the company in terms of operating a high-pressure high-temperature (HPHT) well. This successful discovery complements their progress on the Brasse project, with an investment decision expected early next year. Additionally, DNO acquired a significant block in the U.K.'s latest licensing round. In Kurdistan, they focused on optimizing local sales and operations, more than covering ongoing costs, and hope to further improve performance. The Tawke and Peshkabir fields have been restarted, with current production running at about double the average rate achieved during Q3. The Baeshiqa 3 drilling is set for next year, as it is part of the final commitment in this development phase.

Financial Resilience Amidst Geographic and Commercial Challenges

DNO has faced challenges such as lack of exports to international markets, but has a history of adapting quickly to changing conditions. They have been effective in establishing efficient local sales strategies to manage these challenges. The company's industry association advocates for certainty in payment for both future sales and outstanding receivables, a position that is understood by various stakeholders. Despite building up receivables in difficult times, their commitment has been demonstrated by the Kurdistan Regional Government (KRG) honoring their financial commitments, as evidenced by a recent symbolic payment action to reduce DNO's debt by $8 million.

Hedging Strategy: Cautious Approach Reflects Market Conditions

DNO discusses hedging closely and has historically hedged some of its North Sea gas production. However, with a current focus on gas, there is no active hedging in place. The production sharing contract in Kurdistan offers a natural hedge, as lower oil prices lead to more cost oil barrels. The management expressed that political conflicts in the region, such as the Israel-Hamas Gaza situation, have not yet impacted operations, but they are monitoring closely for any potential effects on production or the reopening of pipelines.

Financial Outlook: Aiming for Free Cash Flow Neutrality in Kurdistan

DNO reported an EBITDA cash flow of around $8 million in Kurdistan for Q3, and although this is at a lower level compared to pipeline export periods, they anticipate moving toward a free cash flow situation as supplier payables are paid down. This repayment is seen as a working capital movement, signaling a positive shift towards financial stability in the region.

Future Plans and Closing Remarks

Looking into future investments, DNO is keen on balancing production with development and exploration, specifically in the West African region. While acknowledging the tightening of the rig market and the ascending rates, DNO remains capable of finding operational slots for its wells, signaling sound resource management. As they close the quarter and move forward, DNO is optimistic about maintaining reasonable returns for its investors and invites stakeholders to join the full-year results presentation in February 2024.

Earnings Call Transcript

Earnings Call Transcript
2023-Q3

from 0
G
Gudmund Hartveit
executive

Good morning, and welcome to DNO's Third Quarter 2023 Interim Results Earnings Call. My name is Gudmund Hartveit, and I head up Investor Relations here in DNO. With me today, I have DNO's recently appointed Managing Director, Chris Spencer; and our CFO, Haakon Sandborg. Chris and Haakon will give a presentation before we open up for questions in the Q&A session. Please note that the Q&A session is for investors and analysts. Any media requests will be dealt with separately.During the presentation, all of the participants in this call will be in a listen only mode. If you want to ask a question in the Q&A, please click on the yellow virtual hand on top of the screen. When you are selected, you will be notified on your screen that you are allowed to unmute, after which you must remember to unmute yourself.And with that, let's start the presentation, and I hand the word over to Chris.

C
Christopher Spencer
executive

Good morning. It's a great pleasure for me to join this quarterly presentation for the first time in my new position as Managing Director of DNO. We start this morning with a very important photo related to our current operations in Kurdistan, and that is our Fishkhabour tanker loading facility, which is a key for us to maintain local sales at the moment. In the times where the export pipeline is open, this is used for unloading oil coming in for exports into the Iraq-Turkiye pipeline system. Currently now it is reversed, and we are loading our oil here for distribution to local buyers.Thank you. So, in terms of Q3 summary and a couple of important developments post-quarter. Obviously, the results were significantly better than Q2, driven by higher local sales predominantly in Kurdistan, but we also had better production in the North Sea too. The third quarter revenues were up 150% over Q2, and that led to an operating profit in the quarter.As I touched on the net quarterly production for DNO was close to $40,000 with Kurdistan getting back to nearly 20,000 barrels a day, where we've been virtually zero in the second quarter. That reflects a gradual resumption of operations and since the pipeline closure. And first, we brought Tawke field back on stream and subsequently Peshkabir.In the North Sea, the rebound in production is partly seasonal. As most of you understand, Q2 is the season for the major shutdowns of those facilities in the North Sea. But in addition, we've had some encouraging results from one or two of our assets, which we'll come back to.West Africa, total well operation, again, it's really the seasonal impacts we see every year. In the rainy season it's more of hydro-power generated so that results in a slight reduction in production there.One of the highlights of the quarter for us was yet another discovery in the North Sea, particularly pleasing for us since it's been operated well and the DNO's first open in HPHT well. On the development side, we're moving forward with the Brasse project again, very good cooperation with the new operator at Brage, okay, and departments there, and we're hoping for an investment decision early next year.And finally, we picked up a very interesting block in the most recent U.K. licensing round. That was after the end of the quarter, but we're 50% operated there without the BP as partner, and we'll touch on that in a slide or two.So, focusing a bit further into the Kurdistan side of the business. Obviously, as the headline described, the key issue here remains the lack of exports to international markets. And as always, when the environment around us changes in Kurdistan, DNO has very rapidly readjusted to the new realities. The key now is getting these operate -- getting these local sales working efficiently, which is -- requires us not only to go and produce the oil, to work very well with our new buyers in order to maximize production and sales through the local distribution networks. We made a good start in Q2 and Q3 on that, and we're continuing to work very hard on that issue.Of course, the price that one's going to achieve in the local market is significantly below international prices as is set out on the slide. But importantly, we are paid in advance. So, we require payment before we make any delivery and the payment is directly to us. And through these local sales, we have been able to more than cover our ongoing costs. And as we ramp up, we hope to do better than that.That's the other side of the work because although the biggest adjustments made in Q2, we have continued to optimize our cost structure through Q3. And in this new environment, that remains a focus for everyone in the team. I really have to recognize all of our team for the speed in which they reacted to the situation. And of course, it's not an easy process to go through when you [indiscernible] activity and therefore, necessarily cutting jobs from the organization. So that's been a great team effort.As we ramp up now, we happily have restarted our Peshkabir field as well as the Tawke. And that, obviously, our production operations teams like not nothing better than to be running that, everyone in gas field, so we're very pleased to be able to do that, and we're working hard to make sure that's stable through the next quarter. As we've noted, since the end of the quarter, our efforts to build local sales have been rewarded and we are actually running at currently at about double the average rate that we achieved during the third quarter.On the activity side, of course, on the [indiscernible] we've made huge reductions in activities and costs. You see that most clearly in the lack of drilling in Tawke and Peshkabir. There's no drilling activity at all in the quarter and the same at Baeshiqa during that quarter. However, we are now working on drilling Baeshiqa 3 early next year. That is a commitment well at the Baeshiqa license, where we still have exciting opportunities to drill for. It's the final commitment well on this phase of development. So, it's going to be a very important well for us.With respect to the prospects going forward and the -- all of the discussions around the pipeline and reopening and so forth, we note that our industry association, the association of the petroleum industry in Kurdistan, of which we were one of the founding members, they have put forward the position that we need to know how we're going to be paid, not only for the oil that we will sell in the future, but also the oil that we have transferred and not been paid for in the past. Before, we're able to recommence pipeline exports.I think that's an important position. It seems to us that the various governments and stakeholders understand the background to that and recognize the ability to that position. And that's our input into trying to help all the stakeholders come to a resolution that really Iraq and particularly the people of Iraq and Kurdistan badly need.We have to focus on the past sales and the -- what we call the receivables, what we're owed, because if you put the [indiscernible] members together, then we are somewhere in the order of $1 billion for past exports down the bloodline. DNO's share of that is as noted in the quarterly report over $300 million. Of course, DNO has been in this position before, having built up receivables.It has always been the key that Kurdistan Regional Government have always honored their commitments in that regard. I personally, my time with DNO, they've been through 2 rounds of agreements through which Kurdistan Regional Government have made good on their credit.And in that regard, we noted in the press release that a rather small but in my mind, an important symbolic action that even in this difficult time, the KRG have taken action that's allowed us to offset some deals that we would otherwise have owed to reduce this debt. And I think that it was $8 million of DNO's share in October again just after the quarter. So, not a huge amount compared to the $300 million, but in my mind, symbolically important and once again showing KRG's responsibility in regard to that.Thank you. Turning to North Sea. Once again, the focus is on exploration where we have had a very active and forward-leading drilling program this year and last year, and we've really been getting the results of that this year. The latest being real exciting discovery in our operated normal well, which is a new play and has discovered very good quality reservoir sands and deliver the depth.And we see a very big range on the announced resources, which reflects the uncertainties we have going forward that, obviously, play. So, we're eager to get on with the delineation and subsequent appraisal of that discovery. We also have other prospects in that play within our very large acreage position there, which you can see in the blue outline. So, it's sort of very exciting in the discovery. We're looking forward to following up on that.As with our other discoveries, we've been through our APA applications targeting licenses that are near to existing infrastructure and the ability to be at least 2 potential hosts that could take developments once we get to that point.It's also an important milestone for the company as an operator in the North Sea because this was our first operated high-pressure high-temperature well. Something not one takes for granted these days in -- on the NCS that these operations are delivered safely. And I'm really pleased that our team achieved that, and it was drilled very efficiently and came in slightly ahead of time and under budget. So, an excellent performance by drilling team in addition to finding resources.So, this builds on the impressive track record we've had this year on the exploration side. Clearly, we have many interesting wells ahead, but we now also have a very strong focus on the finding the opportunities, discoveries to development. But important part of that is appraisal where we already made discoveries, and that's what's happening at the moment. But both the affiliate discovery in [indiscernible] area and the [indiscernible] discovery up in mid-Norway near to the [indiscernible] tie-back. And both of those wells are down in the interesting parts of the operation at the moment. So, we hope to have announcements on those very soon.I think that concludes the comments that I prepared for this quarter. So, I'll now hand over to Haakon for the financial keys.

H
Haakon Sandborg
executive

Good. Thank you, Chris, and good morning to everyone. For the Q3 financial results, we have an increase in our revenues by up to $141 million. That came from a lower level of $58 million in the previous quarter. And the revenue increase came partly from restart of production for local sales deliveries in Kurdistan from mid-July. These sales provided $32 million in new revenues or revenues for Q3.In addition, the North Sea revenues increased by $53 million to $109 million. That came mainly from the lifting from the Vilje field, but also from higher lifting at the Ula area and the Brage field. Assumption of production at the Alve and Marulk fields also contributed to the revenue increase in Q3 because of the other shutdown in Q2 on these fields that Chris discussed.So, looking at the Q3 operating profit. It increased to $40 million from a loss of $15 million in the previous quarter. So that's good. And this increase was mainly driven by higher revenues, but offset by higher depreciation from increased production volumes and higher production costs from the North Sea overlifting in this quarter.Now under the Q3 financial expenses, we have reduced the book value of the KRG arrears by $45 million. This is based on an accounting adjustment to incorporate the estimated present value of the recovery of these overdue receivables. There were also net realized FX losses of $7 million this time, another finance items in addition. So, as you can see, the net finance expense is high at $60 million for Q3.We have also a significant tax expense at $35 million, and this is primarily due to a change in deferred taxes. So, on this basis, we show a net loss of $55 million for the third quarter as shown on this slide. But just to mention not shown on this slide on a year-to-date basis through Q3 this year, our revenues are down by 55% from the same period last year. And this is, of course, mainly due to the Iraq-Turkiye pipeline closure. But in addition, we also have realized the lower oil and gas prices in the North Sea year-to-date this year. So, our net profit has dropped to the $14 million year-to-date in this year.Shift down to cash flow. We saw an operating cash flow of $32 million in Q3, up from $16 million in Q2. The Q3 cash flow includes $35 million in working capital increase that comes primarily from a reduction of payables in Kurdistan and from an increase in receivables in the North Sea. Shown here under the tax part, we received the expected $27 million in the U.K. tax refund in Q3 as we discussed in our Q2 presentation. I should also mention that we expect to receive $6 million in further tax refunds in Norway in Q4. And with a quick tax depreciation under new NCS tax rules, we currently don't expect significant tax payments in Norway in 2024.Under investments, the main items include CapEx at $26 million, mainly for development at Berlin and Brage in the North Sea. And we also have capitalized exploration at $35 million relating to drilling of the Bergknapp appraisal well and also the Norma exploration well. We have the $5 million in cash inflow from West Africa and also including other items. Net investments were thereby at $64 million in the quarter.Net finance of EUR 30 million and mainly covered a dividend payment of $23 million in Q3 and also net interest expense. And in sum, after net finance, our cash balances were thereby reduced by $34 million in this quarter. But still at a level of $708 million, we maintained a solid cash balances, and we have a net cash of $142 million. So, our balance sheet strength remains very much intact. The slight reduction of our strong equity ratio down to 48% from 50% in this quarter is mainly due to the net loss in Q3.Now, as we look ahead, we see stronger net production to date in the fourth quarter, and that is driven by higher demand from local trading companies in Kurdistan. And we see that they are getting very attractively priced oil prices at the moment, which is way below the international market. So, higher demand, and we think that's going to drive up production in our fields in Kurdistan in Q4.Our North Sea production is expected to exceed the high end of guided levels for this year. We had sales between 12,000 and 13,000 and now we're saying 13,500 average for the year. So, this is being supported by given net production also in Q3, and Q3 had a level of 14,300 BOE per day from our fields in the North Sea.For our West Africa, production is expected to average 3,500 BOE per day for this year. As we go into next year, we look forward to starting production at the DNO operated [Technical Difficulty] field in Q1. And this is expected to build up to the level of 3,000 BOE per day net to DNO. So, with this start-up and combined with good performance from our other North Sea assets, we thereby expect further production growth from this business unit in 2024.Otherwise, we continue to closely manage our spend levels and with support also from FX changes, we further reduced our guided operational spend this year by $40 million to $550 million. And of that amount, $418 million have been incurred already through Q3. Now backed by our exploration success in the North Sea, we will maintain high exploration spend in this region also next year at around the same levels as we have had this year.So, we trust that this program will add further to our reserves and resources in 2024 and also to the long-term values that we are building in the North Sea. We are also engaging in the several North Sea development projects going forward and expect some increase in CapEx for these projects next year.For Kurdistan for the time being at least, we remain focused on covering operational spend by cash flow from the local sales until we see pipeline exports resume. As such, we will have a flexible spin program as we determine the actual expenditure levels for this region through 2024. As we normally do, we will present our investment and spend plans for the next year in detail at the Q4 release in February.And finally, we are pleased to confirm that the Board of DNO has authorized another quarterly dividend payment of NOK 0.25 per share, and this will be payable on the 24th of November. So, thanks for that. I think we all then move over to the Q&A session, Gudmund.

G
Gudmund Hartveit
executive

The first question is from Teodor Sveen-Nilsen.

T
Teodor Nilsen
analyst

Questions around 3 topics. First, on local sales in Kurdistan. I just wonder how do you see the local market going forward? Is it saturated or is it still growing after the expected growth you talked about for Q4? And do you know anything about who you actually are selling to and where the oil ends up? And finally, on the local sales. Are you selling in dollars or local currency?And then one question on North Sea. On the Norma discovery, which definitely is promising, can you discuss potential developments on soil solutions? And should we regard this as a tie-in candidate to either [indiscernible]? And final, on NCS tax. Haakon mentioned that you do not expect any significant NCS tax installments for 2024. I assume that statement is pretty sensitive to your CapEx assumptions. So, I just wonder what kind of CapEx assumptions you bake into that statement.

C
Christopher Spencer
executive

I'll try to deal with the local sales. Som the local sales, what we've experienced in the last 2 or 3 months, I think actually in the last quarter's Q&A, this point was addressed. And what we do see is that the type of prices we are selling at, and Haakon touched on it, that there's a huge margin between that and international prices. In Iraq and Kurdistan region, generally that are a lot of refineries or more simple refineries, topping plants, et cetera, and the ability to turn crude into products of varying qualities in order to take advantage of that price differential is clearly been expanding over the last few months.So, when we think about the market, certainly, the Nordic crude is within the region, but the market products extends beyond the region. And I'd say that is the part of the market that is expanding. To the extent of mechanic spend, I think as long as that differential is there from the prices we're selling to international prices, then there will be plenty of entrepreneurs looking to make this market work for them. There's certainly a very strong incentive to do so.You touched on the destination of our crude oil and so forth. And that is very important to us. Obviously, in this part of the world, there are certain areas where the compliance purposes we are allowed to deal with directly. And so, that is we deal with that in our contracts with the buyers, and we have a duty of following up to ensure that our business is compliant with all the rules and regulations that apply to us. Regionally, nationally and internationally. So that's been an important part of our process.And in terms of the currency we're selling at, yes, we are selling in U.S. dollars. Haakon?

H
Haakon Sandborg
executive

The discussion on the Norma, the tie-in to the surrounding and host platforms.

C
Christopher Spencer
executive

Thank you for the reminder. Yes. I mean, we showed the math in the presentation. Clearly, there are a couple of hosts or affirmatives for Norma. But the main focus initially is going to be on understanding where we are in that resource range. Clearly, that's what the partnership are focused on whether it's 25 million or 30 million barrels makes a huge difference. So next step is going to be appraisal there.But we're working very hard across our portfolio. We've got numerous discoveries. So, we're working hard to mature those and we're hoping in the quarters ahead, we'll be able to provide some positive updates.

H
Haakon Sandborg
executive

Third question from you, Teodor. Thanks. That was on why am I talking about taxes for next year. Well, one reason is that we have very significant tax payments in the first half of this year, 2023 because of the strong results we achieved in the North Sea for 2022. So that was one of the reason we sort of had a reduction in cash, et cetera, in the first half of this year.So, I just wanted to put forward that it looks different now because of the changes in the Norwegian tax rules and also looking at our spend levels that we don't expect the same sort of big tax cash out payments for the first half of next year. So, we think that those will be limited tax payments or maybe no tax payments for the full year 2024 next year. Again, based on the new rules and also looking to our CapEx levels.At the moment, Teodor, it looks like an estimated $90 million or so CapEx for our North Sea business in 2023. And we expect -- well, we will guide you more on our Q4 presentation. But as I said, maybe some increase on that level for next year. We also have an estimated exploration spend around maybe less than $150 million for this year. And as I said in my comments, around the same level for next year, very high activity on appraisal and exploration drilling also next year for our North Sea business.You will need also, of course, in your models to have an assumption on oil prices to make that statement. And we have -- I'm not go into great detail, but it's one of a modest oil price assumption when I say limited tax payments next year. If the taxes come low as regional prices come up from our assumptions, of course, that's fixable change. But I want just to put forward that we don't see the same big tax payments as we have had this year.

G
Gudmund Hartveit
executive

Next question is from Nikolas Stefanou.

N
Nikolas Stefanou
analyst

I have a couple to ask, if I may. The first one is more about, I guess, the negotiations between you and the KRG. So, what I'm trying to understand is, are these basically bilateral negotiations between each company and the KRG or this -- are you or have you kind of like formed -- is it kind of like basically optical who is negotiating with the KRG? That's the first one. Or are you even negotiating? I mean, is it just -- are they just kind of like going to come and tell you that terms which is what happened last time?And then the second one on this topic is the previous mechanism, if I remember correctly, was that you get, I think, $0.50 for every dollar over $50 for every barrel produced or something like that basically. And the last time when we had these receivables and I think for all the [ IOCs ] was about $2 billion. You managed to recoup them within a year, most of the [ out season ] there. And I think with this oil prices, you will have the same mechanism as last time you'd be able to do it like, again, within the next 6 to 12 months. So, is that basically kind of like the starting point of a new formula of how you going to get back your receivables, or are you trying to get something better? I just want to get a bit more color on this kind of like [indiscernible]?And then my final question, I think might be a bit controversial. I just want to kind of like ask you, Haakon, as the CFO. For a few months, free cash flow has not been that strong. This quarter, you have not been able to pay the dividend within free cash flow. Next quarter will probably be better just because you've got more products in the rebates, but you did say that 2024, CapEx will be a bit higher. At which point would you feel a bit uncomfortable having that dividend there? Or taking a consideration whether you should suspend it prior to having exports via the pipeline?

C
Christopher Spencer
executive

Yes. Just let me check. You're talking about -- you were referring to negotiations with respect to the past receivables, I assume, in that question. Is that correct?

N
Nikolas Stefanou
analyst

Well, I mean, for you to send the exports via the pipeline, you want to find a mechanism for the receivables, right? So, yes, that is. Yes.

C
Christopher Spencer
executive

I mean, that's important clarification because it's difficult to isolate any one part of this complex picture. And indeed, we want to understand how will we paid for the oil that put, that we nominally sold to the KRG during the period October 2022 until the pipeline shut. And in addition, we will need to know how we're going to be paid for any future oil we put into that pipeline. So, the 2 elements are intrinsically linked.And when it comes to the second element, it seems clear. It seems clear. Those are the contradiction in terms. Everyone knows how murky these -- murky, but how unclear the situation is. But clearly, Baghdad has a role in payment for future exports. So given the arbitral ruling on ITP that it is only [indiscernible] who has the right to load oil from [indiscernible] that comes through ITP.And secondly, the budget law, which is internally inconsistent in some respects. But clearly, of course, for an understanding between [ AREOL ] and Baghdad with respect to any such exports. So that is a complex picture. I think it's been helpful for APIKUR to be established and be in place and put forward in general terms, what its members need to contribute to what everyone wants to happen, which is exports being restarted.I think also, APIKUR, we have tried to point to the impact of the ITP closure on the like all the normal people of Iraq in a particular Kurdistan region. If you think about the drop in activity level at Tawke PSC, we had 4 or 5 groups drilling last year. When you think of all the ancillary services and jobs and transportation and IT, all of these connected industries to an oil and gas operation.And all of that has disappeared from the local economy around our PSC and the local economies around all the other international operations, which is obviously a very bad news for those local communities. And we -- I think APIKUR has pointed to that repeatedly in our announcements, and we hope that that will resonate with the politicians that they're our daily needs of people that need to be taken into consideration.When it comes to specific negotiations, APIKUR itself is not in a position to negotiate for all specific members because we each have -- each company has its own contracts, the most important of which being the production sharing contract, and that is signed between specific IOC and sort of international oil companies IOC and the Kurdistan Regional Government. And there are conferenciers and provisions in those agreements.And although they -- Kurdistan Regional Government has kept their model PSC as the template for all of them, there are some important differences between. And therefore, it's extremely difficult for any group negotiation. One has to have ultimately agreements with each member company on any of these issues. I hope that helps you with those matters.

N
Nikolas Stefanou
analyst

What I am -- that was helpful. But they would kind of like describe the situation is that this is more of a talk between Baghdad and their appeal rather than a talk between appeal and the IOCs. How to…

C
Christopher Spencer
executive

There's a big difference -- it remains about two-faceted. Clearly, Ankura has said that they are ready for the pipeline to open and yet that hasn't happened. And I'm not sure what the blockage there is between Baghdad and Ankura but the key stakeholders remain the same. It must be Tawke Kurdistan Regional Government and the federal government of Iraq.

H
Haakon Sandborg
executive

And I think was that -- I'm not sure if I got your second question. You talked about $0.50. That's something. Could you verify on that question?

N
Nikolas Stefanou
analyst

So last time you had these receivables, there was a mechanism on how the KRG was going to repay the receivables. And I think it was when oil price was over $50. The [indiscernible] we get $0.50 for each -- yes, I don't remember exact the mechanism, but that mechanism is kind of like [indiscernible]. And I thought that this one would be the basis basically for at least how you would do receivables. Do you have something similar now or something better?

C
Christopher Spencer
executive

Well, I think when one is thinking about to recoup cadets, it's natural to look at the past presidents. And you're right to -- that was the case the last time KRG owed us money. The previous time, the settlement was very different. Going back to 2017, I had a pleasure being involved in the DNO team, but it was obviously led by our Executive Chairman, and negotiated what we call the receivable settlement agreement in 2017. And that was a much bigger debt than the last time.And the mechanisms to settle that were that KRG agreed upon were, first of all, to hand over the 20% government interest in the total PSC to DNO and also to give us a small effectively a royalty, what we call the overriding royalty for 5 years. That turned out to be a very fair mechanism. Neither side knew what was going to happen because it's obviously related to the performance of the asset and the oil price. We were happy to back ourselves as operator of that PSC. And despite -- even despite COVID we're pleased with that outcome. So that's another model. We see that each of those were tuned to the times, if I can put it that way. And so perhaps there will be another mechanism that's better in tune with the times of when ITP re-opens.

H
Haakon Sandborg
executive

I think, Nikolas, your third question was on -- if I understood it right, on the possible repayment time for the arears. Is that right?

N
Nikolas Stefanou
analyst

It was about how you ask the CFO, feel comfortable about maintaining a dividend. [Indiscernible].

H
Haakon Sandborg
executive

We're getting to that point, but you had a third question around [indiscernible]. So, we're done with that.

N
Nikolas Stefanou
analyst

Yes, yes, we're done.

H
Haakon Sandborg
executive

All right. Now, you want to reel me on the dividends, right?

N
Nikolas Stefanou
analyst

Yes, absolutely.

H
Haakon Sandborg
executive

I understand. Well, obviously, we have a very strong balance sheet, and we are building up our cash flow again now with a higher reduction both in the North Sea and expected in Kurdistan. So, we are sort of doing a very careful analysis from each quarter. Are we in a position now? It is good that we can pay out the dividend and this is done by the Board, of course, in our company. So, we also have good protection from the Norwegian tax system that you spend the money on creation and CapEx and you get the tax expense and return to you the losses quite quickly.So, we assess all these various factors and at what time do I get uncomfortable on paying dividends. Well, this is a quarter-by-quarter and running assessment. I think it's important that we try to maintain the quarterly dividend program. It's been very well received by our shareholders, and we do want to continue. But believe me, we are very careful when we decided to do that by quarter-by-quarter, but -- or above that, it will be dependent on how things look at this payment order. So, I don't think that we will be sort of in a position that we will be [Technical Difficulty] unresponsible if you want payment of dividends. We are quite careful in assessing this from each quarter. I think we can move on to the next question.

G
Gudmund Hartveit
executive

Next one line is Tom Kristiansen.

T
Tom Kristiansen
analyst

I have one question on exports. Do you feel the main pressure points is discussions between Iraq and Turkey? Or do you feel it is internally Iraq, so call it the Iraq KRG company issues? And kind of, what are the key to really unlock or resume exports at the moment?

C
Christopher Spencer
executive

Great question. I have exactly the same question. So, I wish I could answer that. It is -- there's so many stakeholders involved. I think it's very easy to discuss Baghdad as a single entity in reality, if you enjoy you understand the politics of Baghdad as well. But as we saw with the process to improve the budget law, the [Technical Difficulty] set up in Baghdad is very factional and a lot of actions have a lot of disagreements between themselves even in Baghdad. So unfortunately, I think it's a much more complex question than Baghdad versus [indiscernible] versus Ankura. There are many factions within the regions and Baghdad, which make it very difficult to think and pinpoint what the critical issue or critical stakeholder is.So, we follow it obviously very closely and probably spent a bit too much time speculating on outcomes that we subsequently find don't materialize. I can't really help with that one. I can certainly help you as I try to this morning on disclosing how we -- as we've often don't tell in the past, adjust to very uncertain times and still try to make a reasonable return for our investors.

G
Gudmund Hartveit
executive

We want to try to finish by the hour. I think we're on track for that. There are 2 more on the list of questions. Next one in line is [ Renaud Sola ].

U
Unknown Analyst

Two questions. Firstly, generally, have you hedged part of your production? Have you sold forward part of your production? And if so, at what price? Secondly, is the current situation between Israel and Gaza and the different point of views of Turkey, et cetera, regarding this war is delaying the process or putting the process of talking Kurdistan even further than before? And if so, are your free cash flow neutral on Kurdistan at the moment?

H
Haakon Sandborg
executive

Let me comment on the first one, Renaud. Hedging is something we discuss and full quite closely in DNO. We did hedge some of our North Sea gas production some time ago as the market started to move ahead of the price limits. We are not currently hedged, but we are focusing on if we do something on hedging, it will most likely be on the gas side in the North Sea. We see that we are a big part of our production now is becoming a lot more gas in combination to the oil, of course. So, we might do more gas hedging and trying to find a good strategy for doing so. But at the moment, we are not hedged on gas.On the oil side, for Kurdistan, we have -- as we talked about in the past, we have a sort of a natural hedge in our production sharing contract that if oil prices go down, we get more cost oil barrels for your costs. So, we have a natural hedge in Kurdistan. We are not focusing so much on hedging for that region. So, it's primarily a discussion of North Sea and at the moment, primarily discussions on gas. But currently, unhedged. Then I leave the big question on political war.

C
Christopher Spencer
executive

Thank you so much. Now, great question on the political situation. I think the -- I think on how and whether the Israel-Hamas Gaza situation will impact on the reopening of the pipeline and so forth. I think it's too early to say whether that's going to have any impact. I think from what I read many actors are trying to avoid that situation becomes a regional and split into have a regional perspective. So, we'll see whether they're successful or not.Clearly, there have been some effects on U.S. bases in Iraq, in the last few days. In fact, as far as I know, no casualties as yet. But I don't think as yet it has changed the dynamics on those [Technical Difficulty].

H
Haakon Sandborg
executive

I understood your third question, Renaud, was on whether we are free cash flow neutral on Kurdistan now. And to comment a bit on that, if you look at our quarterly report, you will see information that could help you on that. We have revenues of $32 million in Kurdistan for Q3. We have $18 million of lifting costs, then we have $62 million of CapEx. So that gives you a net EBITDA cash flow, if you want for Kurdistan for this quarter of around $8. This is, of course, at a very low level compared to where we normally are with the pipeline exports. But the EBITDA if you want is good, and we have also then had a repayment program for our suppliers in Kurdistan.So, for this quarter, we paid down what close to $18 million, $20 million or so of supplier payables. So, after that, of course, we are not showing positive cash flow or free cash flow for this third quarter. But we're thinking about that repayment of supplier payables as a working capital movement, if you want. So, I think, yes, we will be heading into -- as we pay down these outstanding suppliers, we will be going into a free cash flow situation, we expect them in Kurdistan once we're done with the payable situation.

G
Gudmund Hartveit
executive

Okay. As mentioned, we'll deal with Media report separately, but we have one final question then from the [ David Mirsy ].

U
Unknown Analyst

Just last question on capital allocation policy. You've said before -- or I suppose if I look at Norway, you entered into more of a production acquisition, but you've clearly seen better value in exploration appraisal development, and that's been a center of your investment over the last couple of years. You said earlier on this year that you were looking to redeploy capital to grow a third leg of the business in West Africa. Now, clearly having an existing production business in West Africa, do you see the same, I suppose, variation in value between in production assets and appraisal development exploration assets in West Africa? Or would you be more tempted to -- that if you were going to grow a business in West Africa, it would be based on acquiring already producing assets?

C
Christopher Spencer
executive

Just first to the touch on the Norway side of things to get some spectrum because, of course, Norway is unusual, if not unique, in respect of its exploration friendliness with the conditions that Norwegian government have put in place in particular the tax refunds on exploration expenditure. And so, in Norway, one is able to pursue that strategy.It would be nice at our production coverage, but it's not essential. And for that reason, I think in terms of your capital allocation question, we've seen -- we have indeed seen better value in reserves replacement through exploration and acquisition with where Norway has been a hot market. I guess, for several years, it's always been a sellers' market on the production side.If we turn to those new regions, we've been working on the West Africa now for a year or so. And I think there, where you don't have that fact support for pure exploration, our aim is to combine production with development and exploration if we get a new position, so that has a sustainable business. Again, we are trying to keep a capital discipline and not get caraway in these big brands and so forth.And it's interesting that our experience has been that, although there are definitely fewer buyers in the West Africa or the African space more generally. Several of them are compared to be what we think at pre-fall prices. So, we're working hard. We're looking at a lot of opportunities, and I hope we'll strike when the time is right.

U
Unknown Analyst

Just one last one on rig availability. There's been a lot of press kind of comments from the service providers moving out jack up rigs from the North Sea, moving out jack up rigs from West Africa and move them into the Middle East and Southeast Asia. How is this filtered through to the way that you see your investable opportunities and your development costs moving forward?

C
Christopher Spencer
executive

I think, well -- I write those same reports in terms of [indiscernible] same reports. Interestingly, we -- there's no doubt the rig market has tightened, and rates have increased. Since they were at points, everyone knows that we're in a way, unsustainably low for that industry. And therefore, there's been a correction of the rates. We have -- we're not seeing exorbitant rates, and we are still able to find slots for the operating wells that we have. Though as yet, we don't see our prices in that market. But we're watching it closely. And yes, I think that's probably where it impacts us.

G
Gudmund Hartveit
executive

Thank you. So, with that, we're done for today. Thanks to all for listening and don't hesitate to get in touch with us for any further questions you may have. We look forward to reconnecting in February when we will present our full year results for 2023. Goodbye.

C
Christopher Spencer
executive

Thank you.