Tethys Oil AB

STO:TETY

Earnings Call Transcript 2020-Q1

[Operator]

Welcome to the Tethys Oil Q1 Earnings Report for 2020. [Operator Instructions] Today, I'm pleased to present Magnus Nordin, the Managing Director; and Petter Hjertstedt, the acting CFO. Please begin your meeting.

[Magnus Nordin, Founder, CEO, MD & Director]

Thank you very much. Ladies and gentlemen, welcome to the third quarter report from Tethys Oil 2020. I can certainly say that when we invited you in February for -- to join us for the first quarter, we did not quite envisage the world to look the way it does, whereas we were quite hoping for a first quarter result in line with what we are actually presenting.So let's turn immediately to the quarter in question and turn to Slide #2. The first quarter 2020 was indeed a very good quarter for us. Excellent production, the third-highest quarterly production we've actually ever seen. Strong cash [ flow in get there ] -- free cash generation, free cash of close to $10 million, leaving the quarter at $78 million of net cash, and certainly a very, very nice amount to have in the bank, given the current circumstances.We spent part of that cash on share repurchases and actually $5.8 million was distributed back to shareholders during the first quarter directly from the cash we generated. And that's also something that we believe strongly, and we do believe that the asset base Tethys can offer is very, very strong and a good investment goal [ set ] for our free cash.While our project and project portfolio continue to develop very nicely. Blocks 3&4 drilled 9 wells successfully, production on it is stable and on its way up towards the end of the quarter; at 49, preparations doing fine, ready to drill an exciting prospect; 56, a newly addition -- a new addition, got government approval and completed a testing program with positive results.So great first quarter, shows the underlying strength of Tethys and Tethys's asset base. But of course, things happened, and we now have to go into an adjustment mode. We are happy to say that operationally, we've been successful in putting measures in place to protect our employees and partners and coworkers and making sure we can work from home, we can still stay operational.The Muscat operator has done very well to keep operations going, limiting contact between shifts and also taking a number of measures to continue working in this environment. And we will, of course, talk more about the future towards the end of this report.But back to the first quarter, and turning to Slide 3, just to remind you, we are Oman-focused. We now have 4 blocks covering a good more than 15% of the surface of Oman and all with interesting, exciting oil exposure. We are -- we were joined with new partners. And for Block 56, we have Medco Arabia, Indonesian resource company Medco as operator. Medco is operating in nearby fields, so small fields within Block 6, close to Block 56, and that's where we've seen some interesting progress on the Block 56 side of that site.But turning to the financial highlights on Slide 4. The numbers are pretty self-explanatory, good revenue, good EBITDA, excellent operating results, good production. In all, a very robust, solid and good quarter. Oil price achieved $63 per barrel. So certainly not affected by the oil price drop in the first quarter. We are going to see a drop in quarter -- in the second quarter. And I always get excited to say that anything could happen in the second quarter and expect 0 and every day that the oil prices have [ got ] 0 in the second quarter is a good day. How long are we going to stay here? Hopefully, we will get out of this lockdown situation and the world oil price will recover, but we are planning for a number of scenarios, also for prolonged shutdowns. And bottom line here, net cash position of $78 million is a very comforting and nice number to have as we are in this situation.Slide 5, just to remind you that we continue distributions to shareholders. We dropped the distribution from SEK 8 to SEK 5 following the oil price situation and the world situation. At the announcement, that was still an 11% yield, so we continue to give back a lot of cash to shareholders. We are -- but we're doing that from a strong position, a very strong position, and in no way affect -- that this distribution affect our ability both to weather a long oil price downturn should we face such a one or to do other things we would want to do to grow the company and be in an even stronger position when we get out of this situation.So if the AGM approves the proposal from the Board of Directors then the record date of May 15, SEK 2 to SEK 3 per share will be cash distributed to the shareholders.On that note, I would like to leave the floor for Petter to comment more detail on the numbers for the first quarter. Petter, please.

[Petter Hjertstedt, Acting Chief Financial Officer]

Thank you, Magnus. Yes, we can go to Slide 6 to have a look at the production numbers for the quarter, we had average daily production of 13,000 barrels per day, down about 3% from Q4, but it's still the third highest quarterly production ever. And that's still in a quarter where we had effect of some temporary system constraints, which was limiting our ability to export some of the production from the field, but maintaining a higher production capacity.And looking forward, we are, as we have publicly announced, subject to production limitations throughout the remainder of 2020, which will be impacting us starting May, as a result of the OPEC+ agreement, but we still are aiming and investing to retain a higher production capacity, much in line with what we've seen in the first quarter of this year.So going to the next slide, we can talk a bit about the achieved selling price, which was, as Magnus mentioned, that is $63 per barrel in the quarter, a very strong number, and that certainly feels very distant to these days when we're looking at the spot prices. But that has its explanation in the way the pricing of the official selling price in Oman works, with that effective 2-month lag.And if we go to the next slide, you can see how that pricing works and how that is expected to impact us going forward. The official selling price is based on the average price of a front month contract, which, of course, has a delivery 2 months ahead. So the current contract, which is being traded during the month of May, is for delivery on July and will, therefore, form the basis of the official selling price in July. So the sales that we make in July are set on that average price in May.So you can see by the graph how the prices from February through to April, in fact, impact our selling prices in the second quarter and the sequential effect that will have versus Q1.I would also like to draw your attention to -- on the line graph. There you can see the Oman blend and Brent oil prices tend to track each other quite closely, but have, especially during the month of April, diverged somewhat, and that's one of the effects of the turbulence and volatility in the oil markets where not only the time spreads in terms of the future market are -- take a extreme shape, but also some of the differentials between different oil crude qualities can spread apart temporarily. So that's worth keeping an eye on going forward. The Oman blend price is set vis-à-vis the Brent.So next slide brings us to the -- to our revenue, which was up about 3% versus the fourth quarter in 2019. And that is the higher oil price quarterly that's impacting and also the somewhat slightly higher entitlement, which was 49% in the first quarter versus 48% in the previous quarter.And looking forward, we are expecting under the current conditions of lower production and lower oil prices having a 52% net entitlement for the full year 2020. And given that we had 49% in the first quarter, that implies that we may have a quarter with higher than 52% to be able to achieve that on a full year basis as the entitlement calculations are done on a full year basis.Moving on to expenses. Q1 operating expenses was up 4% versus the fourth quarter. And that's mainly the operator overheads from the annual bonuses and benefit payments that we always have in the first quarter. And you can see that we had the same effect in the first quarter of last year, albeit it is somewhat lower this year. So it follows a usual pattern of a slightly lower level this year.And that brings us to the OpEx per barrel and netback per barrel. You can see that the OpEx per barrel was $11.6 in the first quarter. And that gives us a netback per barrel of $19.6. And that's the higher entitlement and higher oil prices trickling through versus the fourth quarter of last year. And worth noting that we have suspended our OpEx per barrel guidance, as we are, as Magnus said, in adjustment mode, where we are adjusting expenditure to the production limitations. And we will come back to that later in the year as the situation becomes clearer.Moving on to EBITDA. Not much to say there. It's simply a consequence of the revenue and OpEx and giving us the 3% higher than in the fourth quarter last year.Interestingly, you can see also on cash flow on the next slide, that cash flow, we have operating cash flow of $24.7 million, a very strong cash flow number, albeit somewhat lower than last quarter, showing the very strong profitability in cash conversion in the assets.And then moving on to investments. We invested slightly less this quarter than last, and that's mainly due to the fourth quarter last year being impacted by the farm-in acquisition of the 20% interest in Block 56. Otherwise, the underlying CapEx was more or less in line with the levels we've seen in previous quarters, and that is reflecting the work program that was set at the beginning of the year. And that is now currently being adopted [ with the new ] conditions. And hence, the suspension of the investment guidance that we have provided and updated only a month back. And it's something we will be coming back to during the course of the year, which brings us to the overall cash flow for the period on the next slide. You can see that we had free cash flow, that is cash flow after investment, of $9.2 million in the quarter and over $6 million of that being spent on share buybacks, leaving us with cash at the end of the quarter of $78.2 million. And we would have had cash significantly over $80 million had we not been -- made those repurchases, showing the very strong financial position we're in, which we can see also on the next slide for the balance sheet. We have almost approximately SEK 23 per share in net cash currently.Then I'd just like to conclude with a slide on the wells drilled during the quarter. We've seen the progression in the past few quarters of increasing number of wells being drilled. And during the first quarter, we drilled a total of 8 appraisal and production wells, all [ of ] which we will have the benefit for the remainder of the year and supporting the production levels even as they are reduced and keeping the underlying production capacity higher than the caps that we have imposed upon us.And with that, I hand it back to Magnus.

[Magnus Nordin, Founder, CEO, MD & Director]

Thank you very much, Petter. So let's turn to Slide 18 and a quick summary of the operations for the first quarter. So focus -- main focus, of course, is Blocks 3&4, where operator CCED is doing a very good job of maintaining and steadily increasing production. And now also doing a very good job of adjusting to the new situation we have in the world and in the oil front.49, which we operate, where we have 100% and where we are ready to drill our first well on the block. And 56 that we bought into half a year ago, we have Medco Arabia as operator and where we have had -- just completed a successful testing campaign.Turning quickly to the next slide and looking at 49. A fairly large block. Some data beforehand was just with 9 legacy wells drilled. We focused on the area closest to Saudi Arabia in the Rub'Al Khali Basin, where we, based on what we learned from previous operators, [ book ] in 3D and 2D seismic, and have found a very nice prospect at the Thameen prospect in the middle of the 2D area. We're ready to drill to 4,000 meters, we have been ready to drill since fourth quarter 2019. Rig availability was actually quite limited in Oman in the early part of 2020. A lot of activity, a lot of majors coming back into the country and [ scoping ] up, [ whether they can get ] the free capacity in Oman. We have had difficulty signing rigs, but with the downturn in oil price and the subsequent cuts of CapEx among a number of operators also in Oman, [ has the end of ] rig market free up quite a bit and we're also seeing rig rates come down, as one should expect in this kind of a situation. So we are working, as we speak, talking to a number of potential rig operators to secure the rig for Block 49.3&4 for the quarter remains very much business as usual. Remained as usual, I should say. The adjustments we are seeing now are focused on maintaining the most important part of CapEx spending [ also ] for the remainder of the year. For example, we have luckily just concluded a major seismic campaign, in particular in the Northern parts of the block, where we can now, for the next couple of months, focus on interpreting that seismic and mature further leads into prospects and sign additional deals.We continue to see a substantial exploration potential in the block, both within albeit smaller prospects in the surrounding producing areas of Farha, Shahd and Saiwan, but also a number of play opening riskier plays in the far-field areas. The [ desk quote ] will certainly continue as will investments into maintaining production readiness, should we be allowed to increase production suddenly and rapidly over the next half year to a year, whereas the main focus will be on protecting the value and preserving cash, and learning more about the geology of the field.Block 56, a new addition in the Southeast. And it's quite an interesting block. As you can see from the map, it's on trend with Block 4, and we have an area within Block 56 where that we believe is quite similar to Blocks 3&4, Block 4, I should say, in particular. We have a producing field, the Thameen Field, just to the west of the block within the PDO license area Block 6. And the testing program that we concluded in the first quarter was partly aimed at showing that, that producing play, that trend of the heavier oil prospect continues into Block 56. That was conclusively proven in the first quarter. Evaluation is still ongoing. And obviously, the oil price is important given that it is a slightly heavier crude, 20, 25 degree.And then we have a third play concept to the very far east, so the coastal area of Block 56. Different basin, a tertiary basin, the same basin that's being explored offshore by a number of operators. So far, 56 has been very much what we were hoping for. The Thameen look-alike seems to work. 3&4 play concept seems to be there, but we most likely will need additional seismics to firm up prospects in that area. And the tertiary basin area is under investigation and, of course, we're also following what's happening offshore. Operationally, doing fine on all 3 areas of operations. And of course, we have the cash to continue to pursue the exploration potential. To turn then to the adjustment situation we are currently facing. The COVID-19 pandemic has, of course, affected us all, both directly by forcing us to take steps to protect our people and our assets, and also indirectly through the sharp drop of oil demand and the subsequent price drop. A number of measures have been implemented to ensure that staff is healthy, and safety is maintained, and also by the operator in the block and also by Oman itself, which is experiencing a similar lockdown like the many other countries in the world. So far, we have seen no disruption on the production or listing capability or export capability from Oman. So the oil business is pursuing business, though not as usual, but still maintaining a good scale of production.Oman being a vocal supporter of the OPEC+ agreement and a very active OPEC+ member, has actively lobbied for and been part of the negotiation to reach the OPEC+ agreement and, of course, is following it quite strenuously, which has resulted in us being informed that we have to curtail our production in line with Oman's participation in the OPEC+ agreement. And Petter, do you want to give some detail on what that actually means in practice for the upcoming months?

[Petter Hjertstedt, Acting Chief Financial Officer]

Yes, Magnus, thank you. Yes, we have been advised by the operator of Blocks 3&4 that production starting first of May, that is last week, has been brought down to a level of 29,000 barrels per day gross, which translates to 8,700 barrels per day for net to Tethys. That is for the period of May to June and is in line with the initial cutbacks as communicated by the OPEC+ group. Thereafter, for the remainder of the year, from July through December, the allocated production quota for Blocks 3&4 is 31,000 barrels, which translate to 9,300 barrels per day for Tethys' net share.And effective a few days back, the operator has been shutting wells and choking back wells to reach these levels. That -- and we expect it to be producing on or around those levels as we have been advised until we get any further instructions.And that brings us to the next slide and how we are responding to that. As you all know, we were already in the process of adjusting our works program and expenditures in response to the fall in prices to be able to conserve cash under that environment, and that work is now further extended to adapting to the new production level. And the adjustment -- well, entails reducing, particularly drilling activity and deferring some of the facility and infrastructure investment that were all related to maintaining and looking to increase the production levels from the previous [ level ], and this, of course, in the near term, will not be necessary to be able to maintain the lower production level.At the same time, what we're aiming to do with that work program is to maintain readiness and capacity to raise production levels should those production caps be lifted or altered going forward and giving us the ability to react to that rapidly. And that is one of the -- that is the central part of the thinking behind how the field is being managed at the moment in terms of what wells are being cut back and how that is -- how impacted shut-ins are being managed. So there is -- we intend to -- even though we are operating under reduced production by about 30% versus the Q1 levels, we are still looking to invest appropriately in the asset to ensure that the long-term production capacity levels are intact.And the target of the adjusted expenditure is for the Blocks 3&4 to be cash flow neutral on a full year basis under these current conditions, when it comes to production limitations and oil prices. And that should be viewed as Blocks 3&4 after CapEx for the -- on the full year to be cash flow neutral. And given that we have started with -- had a pretty strong start to the year from Blocks 3&4, that gives us an ability to adapt expenditures as the year progresses to try to reach that neutral level. As not all expenditures can be cut or can be deferred immediately, there is a transition time and, therefore, we will see the full effect of all these towards the end of the year if nothing else happens.Magnus, do you want to talk more about the other blocks?

[Magnus Nordin, Founder, CEO, MD & Director]

Thank you. I can just say that -- so what we plan to do, given the circumstances is, one, preserve cash, but as I said, very happy [ put it ] -- I mean, we will maintain a strong readiness in Blocks 3&4. We are hoping not to -- we're going for cash flow neutrality for the full year, but we're not cutting oil CapEx, and we are continuing to develop the block and to have a strong readiness in the back end production, to increase that if we can.49, we will continue the exploration efforts. We will certainly be able to drill the well and hopefully [ now more cheaply ] than we would have otherwise. If it comes in, well, same with 56, we hope to see some additional exploration continue there. And of course, we are positioned, as we have an exploration site, by going a bit countercyclical here and rather drill for and find oil when prices are low to be able to bring them to market when prices come back up again. And of course our financial strength enables us to do just that. We are in the very good position of being able to go countercyclical here, and we can be contrarian up to a point, while, of course, we maintain sufficient cash reserves to weather also a longer downturn than maybe we will see. As you all know, there are signs that lockdowns are coming to an end, what is being partly unlocked, and we are seeing demand return to the oil back. If we see discipline among the producer, and we see a number of high-cost producers [ drop oil ] with a reasonable expectation of demand, we may actually see prices and the oil market balance reasonably soon. But that is speculation, and we are preparing ourselves well for a longer-term downturn, where we will be in a, should I say, slightly aggressive countercyclical mode by spending cash wisely on growth opportunities while maintaining a readiness to come back quickly should the market respond. And of course, our cash position is the key behind that strategy, that strategy of adjustment. The [ last of ] the distribution is next week, assuming the AGM approves the Board's proposal. We will still have more than $60 million worth of cash to see us through the future. On that note, please, questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Teodor Nilsen of SB1 Markets.

[Teodor Sveen-Nilsen]

I have 3 quick questions. First, on the production cap, I noticed that the OPEC+ deal runs until April 2022. So could you say a few words about how you expect the production deal to impact your 2021 and potentially also 2022 production? Second question is at which oil price do you expect to have a lower entitlement than 52%? I acknowledge that Petter, you said that the current market conditions [ are ] I assume is at the current oil price? And third question is to you, Magnus, on your concluding remarks regarding countercyclical investments in M&A, in which areas were you specifically looking for growth opportunities?

[Magnus Nordin, Founder, CEO, MD & Director]

Thank you, Teodor. Petter, you want to start with the production and related entitlement question?

[Petter Hjertstedt, Acting Chief Financial Officer]

Yes, certainly. Well, when it comes to the OPEC+ agreement, we all have seen the levels that have been proposed under the OPEC+ agreement for 2021 and 2022. And while we could, on the basis of current levels, sort of calculate that, we have not been advised by the ministry as how they would be -- or the operator how they -- how this would be managed beyond 2020. So we can -- on the basis of the OPEC+, we could make assumptions about what our production quota would be under the unchanged assumptions, albeit that's -- which would be a slight increase in production quotas. However, that is not something we've been provided with. And well, I think that is at the discretion of the Ministry of Oil and Gas of Oman to advise what those levels will be at that point.When it comes to the entitlement, I am not really at liberty to give guidance as to where that changes because it's a question of not only oil price. Well, it's a question of realized oil price and expenditure. And we are, as Magnus said, in an adjustment mode of expenditure where we're targeting a lower level, but we have yet to see exactly where those numbers would land. So it's difficult to give you any further guidance on that. But as expenditure becomes clearer, we will update you on how our net entitlement is expected to [ develop ].

[Teodor Sveen-Nilsen]

And just to follow-up on that. Is it -- is there a chance that actually net entitlement will decline if you cut back spending substantially this year?

[Petter Hjertstedt, Acting Chief Financial Officer]

Well, I don't believe so. In fact, we believe that on the estimates we're working at the moment on the main scenario, we will, in fact, be building a cost pool towards the end of the year. So we will have a buildup. So even if -- we will be -- I think it's unlikely we'll be able to cut spending at such a pace that we will have an entitlement under 52%. But I think we will get back to you, if that should be the case.

[Magnus Nordin, Founder, CEO, MD & Director]

And as Petter [ and I were ] saying as I said, Teodor, I mean, there are 2 elements here. There is the cost oil and the profit oil component. And going for cash flow neutrality on a yearly basis, if prices increase, well, then we can increase CapEx, which would increase the cost pool. So the -- obviously, maintaining a 52% entitlement could be advantageous for a period. So expect more guidance when we have it, but don't expect it to be a major [ one so ].And then on to the potential of other [ opportunities ], well, first, of course, we want to continue our exploration-focused strategy within Oman and make sure that we don't lose any unnecessarily pace in evaluating the blocks that we already have. Then naturally, we will continue to look out for also M&A or other opportunities within our main areas of operations, again bearing in mind that the fiscal discipline and the focus on value creation that we have maintained over the last year has served us very well. And of course, without the cash cushion that we now have, we would not be able to be in such a strong position as we are. So we are going to continue to bear that in mind. But of course, if quality assets come to market at an attractive price, we would be in a position to take a very strong look at that. But primarily we are focusing on maintaining the pace at our already [Audio Gap] [ outstanding ] exploration and growth strategy. If that answers your questions [ reasonably ].

[Operator]

Our next question comes from the line of Colin Smith of Panmure Gordon.

[Colin Saville Smith, Oil and Gas Analyst]

Just to come back to the allocation. The actual cuts pro rata for May and June for OPEC+ were 22.8% and for July to December were 18.2%. And the cuts that you have received in Blocks 3&4 are significantly larger than that. And I just wondered if you had any visibility on why that might be. And again, just coming back to the question as to whether that might actually lead to a reduced level of pro rata cuts for 2021 when they come into action? And then my second question was, obviously, you have a no-hedging policy, which I guess is related to the strength of the balance sheet. But I just wondered if in light of what's happened here, whether that may be something you would have under review?

[Petter Hjertstedt, Acting Chief Financial Officer]

Yes, I think I can take that first question. Yes, one of the key elements of -- and I believe also one of the key discussion points of the OPEC+ agreement was in fact what would be the baseline of those cuts? So from what level should it be cut, given that a number of the countries in that OPEC+ group were already operating under certain cuts and some were not. The agreement landed on an October 2018 baseline level for those cuts, which is also how Oman has applied this. And they've been quite transparent in this. And I think there is certainly publicly available information where you can see how the different operators in Oman are being cut back, and it is on the basis of that October '18 level. Now what has, of course, happened in the interim between October '18 to March 2020, production levels in some cases have gone up, other cases have gone down, which has meant that some players, such as ourselves, are getting a higher cut vis-à-vis our run rate than some of the others. And that's -- I think that's just the sort of -- that's life, unfortunately. But we will see how those levels will develop going forward as some players may, of course, be subject to greater declines than others, which may perhaps lead to a slightly -- in practice a slightly altered allocation, but that's speculative. And I wouldn't actually want to go forward into 2021 and preempt any allocations other than what we've been given. I would say that we're working under the assumption of the current allocations. Could they be subject to change? Potentially, but that's not something we can be -- that's not something that we're banking on at this point. So that's at the discretion of the Ministry of Oil and Gas of Oman.

[Colin Saville Smith, Oil and Gas Analyst]

Could I just ask a follow-up on that, because I appreciate the baseline for cuts was the October 2018 number. But Oman liquids-wise wasn't producing very much more than the 880,000 barrels a day reference point for cuts. And on top of that, the treatment of condensate was changed a quarter or 2 back to exclude condensate. So I think I would have expected your number actually to have been lower rather than higher.

[Petter Hjertstedt, Acting Chief Financial Officer]

Yes. No, it's been -- this is on the basis of the numbers that they've presented on production. Those might not exactly tally up with some of the other numbers, but this is on the basis of the ministry's numbers, so -- that we're operating on.

[Colin Saville Smith, Oil and Gas Analyst]

Maybe I can ask it a slightly differently way. Do you know if the cuts across Oman were the same across all blocks? Or was there any differential between what operators have been asked to cut back on?

[Petter Hjertstedt, Acting Chief Financial Officer]

I think you can see in the material put forward that is publicly available, that everyone on the basis of the Ministry's production allocation are having the same cutbacks on the basis of their October numbers -- October operating numbers.

[Colin Saville Smith, Oil and Gas Analyst]

Okay. Understood. And on hedging?

[Petter Hjertstedt, Acting Chief Financial Officer]

On hedging, yes, I mean, it -- with hindsight, it would have been excellent to have hedges protecting us for these prices. I think at this point in time, it's not -- we still believe that, given we have a strong balance sheet, the need for hedges is still rather limited, not least given the hedges that we would perhaps have most use of today would be significantly more expensive than they would have been had they been put in place in a different market environment. So the cost benefit of such hedges today is perhaps not as great as it would have gone had it been put in place far ahead. We will certainly be, as we do on a regular basis, be reviewing our hedging strategy in light of operational and financial risks, but we have nothing new to communicate on that at this point.

[Operator]

Our next question comes from the line of [ Sigrid Fackler ] of [ Fackler Investments ].

[Unknown Analyst]

I have 2 questions, one about the Block 56. You wrote in your report that there are some news that some things about -- from Block 6 go into Block 56. Is this news a big news for you? Or a new news for you? Can you be more color on that from this Block 6 to 56 infiltration?And the other thing is about your cash. Your goal was to drive down the cash to 0 over time. It's good that you didn't do that. But what's your plan? You wrote in your presentation that you will have a cash balance above USD 60 million. Maybe now is the time to drive it more down because you can be anticyclic somehow, so with buybacks and maybe some new investments. Is your plan to drive it down to 0 in the next years? That's my question.

[Magnus Nordin, Founder, CEO, MD & Director]

Okay. Thank you. First, on 56, just to give some, overall more color on 56. The 56 borders Block 6 and it's a [ well-known ] field there, the Thameen Field that's operated by Medco Arabia, the same operator that we have in 56. And there's certainly been expectations that the same -- not necessarily the same field, but that the same play concept would be valid also in 56. And we were hopeful that would be the case. However, the testing program that was concluded in the first quarter was essential to establish that flows were also possible from the same reservoir in 56 that produces from that particular play in Block 6. And that has now been confirmed. So that, of course, upgrades the overall possibility then of Block 56. And we'll, of course, follow -- [ to then ] follow up with that, and we would expect for that to be some sort of planning on how the [ Thameen ] Field look-alike can be matured and potentially commercialized in 56. That's one of the important stepping stones [ that's at ] and one of the reasons why we entered into Block 56. But the other reasons remain equally valid and also [ is likely ] upgraded on the Block 4 look-alikes. I mean, we know that the 10,000 [ metres ] in Block 4 are present in 56 and based on 2D seismics, we have now had an opportunity to view in more detail. There are certain indications that we have patterns looking like what we saw in Block 4 in the early days before we started doing 3D and drilling. So the next step there would be to encourage additional seismic over those areas again [ for sound ]. And then we have the tertiary play, which is again, a completely different basin, where we know less today, but of course, there are some encouraging signs from the offshore which covers that particular area. So we do consider 56 to be quite prospective and also offering quite a number of both different exposures to different basins and also different play concepts, and one of them we have now confirmed that it actually works. So from that point of view, it certainly has strengthened our interest in 56, but we already had a [ reasonable ] interest from day 1.And going back to what we're going to do with the cash? Well, certainly, it's a lot more attractive to spend cash in a low oil price environment and hoping for the price to go up than spending it in a high oil price environment and worrying that the price will fall. So from that point of view, we are certainly well aware, and see every reason to use the cash wisely [ if an expense emerged ]. And as before, we like being countercyclical, and we're happy to be in a position where we can be countercyclical. And for now, I mean, we have certainly not changed our overall scenario. And the idea is not to hold cash just for the sake of holding cash. Certainly, we need some cash in -- to make sure we can continue our ongoing business. But you quite rightly point out that this is an ideal opportunity to increase spending if opportunity is there, given that the oil price environment has come down, and we should also expect then asset prices to come down. And of course, we should position ourselves for higher prices in the future, absolutely.

[Petter Hjertstedt, Acting Chief Financial Officer]

Yes. And I can just chime in there. I think we should see the 0 cash target, as Magnus says, it should be viewed in the light of we're not holding cash for cash's sake. Cash should be put to use in either investments or returned to shareholders. And it's in one of these times is now where we're saying that, well, Blocks 3&4 will probably be cash flow neutral on the full year and yet we can still invest in Blocks 49 and Block 56. And we might, in fact, even when it comes to Blocks 3&4, rather than slashing expenditure dramatically, we are able to cut it back responsibly and still retain some investments to ensure that, that future value is being captured. And that can be done because we have that cash on hand. So I would expect that an amount of the cash we have on hand will be put to use during this year. And then exact allocation, well, that will be in response to how the market develops as well. But we have a readiness to buy back shares if conditions should allow it, but also we are actively looking to invest it. And my understanding, this might be a good environment to put that cash at work.

[Operator]

[Operator Instructions] And there are no further questions at this time. Please go ahead, speakers.

[Magnus Nordin, Founder, CEO, MD & Director]

Well, thank you very much for listening in, and thank you for some good questions. Do continue to follow up, stay with us and hope to see you again in August when we present our results for the second quarter and the full -- half year 2020. Thank you very much.

[Petter Hjertstedt, Acting Chief Financial Officer]

Thank you.

[Operator]

That now concludes our call. Thank you all for attending, you may now disconnect your lines.