Tethys Oil AB

STO:TETY

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Tethys Q1 Earnings Report 2024 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Magnus Nordin.

[Magnus Nordin, executive]

Thank you very much. Good morning, ladies and gentlemen, and thank you for joining us today at Tethys earnings call for Q1 2024. It's quite an important call today. So let's go straight into the presentation. So what's going on at and with Tethys? Well, actually, quite a lot. Focus and activity levels on our operated Blocks are gearing up for a major transformative events. While our non-operated Blocks 3&4, the source of our production and cash flow for more than 10 years after a continual drop in production starting to show signs of stabilization, and we are starting to see the effects of the increased investments every year. So we are actually hopeful that we are seeing a more stable [indiscernible] from 3&4. And of course, we are not changing any guidelines. There have been some weather events that have affected production in the near term, but the trend from the production side, we believe to be stabilizing. But more importantly, I'd like to talk about our operating blocks. So Block 56, just to remind you, we are on the eastern side of Oman. Main focus right now, geologically, is in the Eastern Flank of the South of Oman Salt Basin. We've been working as operator for this block for almost 3 years now, and we are focusing on a few discoveries that we are now trying to bring into development, and we are also working on the exploration potential of the block. Block 58, we are in the final preparation to drill the Kunooz well. We are targeting a large structure that if it tells oil could be quite significant. And Block 49, we've actually entered the second exploration phase to be able to properly evaluate both our Thameen-1 well, but also the overall prospectivity of the Rub Al Khali Basin in this part of Oman. With all these activities and with the performance of 3&4 in the background, we are reviewing our portfolio composition and have taken some advice from the eminent investment bank Jefferies to assist the board with the strategic review, what should be the company's main focus going forward among all the projects we have to choose from. And we've also signed a Head of Agreement with the state – Algerian state oil company Sonatrach. We have agreed to work towards a signing in PSA over 2 areas in Algeria, which we believe could be an excellent second country entry for Tethys. It's been a couple of years since we really talked about a second country entry, a second leg to stand on. We had a lot ongoing in Oman. We were looking at other places, not really finding something that was all that attractive. But now having set foot on Algeria, we see a lot of geological and technical upside, and we are in fruitful negotiations with Sonatrach, we see how far we can take it. And Blocks 3&4, of course, 8,000 barrels of oil per day for the quarter. Revenue of $30 million and then EBITDA of $13 million. Down from last quarter, both from the production perspective and oil price. Oil prices, of course, are again higher in the second quarter, and our CFO, Petter will guide you through our financial results in detail. So let's move on then to Block 56 and the Field Development Plan, which is in the final stages. The Block is right adjacent to Block 6 and the Medco operated Karim Small Fields, small fields is an internal description of the fields that are owned by PDO-operated by third parties. KSF has been in production for a good 10 years. And it -- what we are facing and about to develop in Block 56 is really the continuation of the Karim Field. We have a number of discoveries on the block. We have the Al Jumd, where we performed an extended well test, which is now at the core of the Field Development Plan. We have the Sarha discovery, which we didn't make, which we have further appraised. And the Menna-1 well that we drilled earlier this year and continue to test with encouraging results. So the Field Development Plan, we focus on bringing these 3 discoveries to production. We are looking at an early very uncomplicated early production system initially with trucking. In effect, we are starting up again where we shut in the extended well test now about 6 months ago. In addition, we are busy interpreting seismic. First, over the Eastern Flank, so as to support the pending development of Al Jumd, Sarha, and Menna with a number of additional prospects in, so we say, near-field exploration mode. Then we are also looking at the Tertiary Basin, which is a completely different basin further to the east of the block, where we have a number of prospects, but this is a little bit further down the line on the exploration side. Interpretation is ongoing. But the main focus right now is to have a very clear exploration strategy also within the Field Development Plan. And we hope to finalize this within the next couple of weeks and submit it to the Ministry for approval and for declaration of commerciality of Block 56. This is, I should say, by far, where we put most of our efforts at the moment. And I hope we will be able to share the details of the plan within the near future. Turning to 58. This is much more of an exploration block. No discovery is made, but exploration is exciting and interesting as it comes. This is really the proverbial [indiscernible], we're a company already. But if this comes in, we will be an even a much larger company. We have 2 areas here, the Fahd area and the South Lahan area. South Lahan has been the focus for additional seismic interpretation and volumetric interpretation. And we recently announced a quite high prospective resource number for the South Lahan area. We are looking at what is in effect an analog to the green fields you see to the right of South Lahan, the PDO-operated Harweel Cluster of Fields, which is in production for the better part of 10 years. And South Lahan is a perspective for the same kind of play carbonate stringers embedded in salt. But our first target is the Kunooz-1 exploration well. We expect it to spud in June. We are target 120 million barrels of unrisked prospective resources, which will make it by far, the most high profile well to be drilled in Oman this year. Site preparation is completed and the rig contract was signed a couple of months ago, and the rig is now being mobilized to the site. Again, we're looking at a carbonate structure. It's actually the same target that we produce from in Blocks 3&4, and that was one of the reason why we took up an interest in Block 58. We see -- we are here we are on the Western Flank of Oman Salt Basin, and it's quite underexplored, but we see similarities with what we have on the Western side. And the difference being that we have yet -- we have not found anything even remotely as large from a prospect perspective as we have in Block 58. So clearly, it will be quite an exciting well. If it doesn't come in, it's not going to change our perspective dramatically. But if it does come in, it's going to be a significant addition for future development. Turning to 49. [indiscernible] well 3 years again. Logs indicated 30 meters of hydrocarbons. We've done a number of studies, and we have planned to conduct a hydraulic frac of the tight sandstones to see what -- if we can get anything to surface.But in parallel, we have also been looking at the overall prospectivity of Block 49, incorporating also data from adjacent Block 36, which was, at the time, held by EOG of the United States company that was our partner in 49, while we drill in Thameen well. We believe there are synergies between the blocks. And in particular, we believe there is a potentially very interesting geology in this part of Oman. It's a completely different basin from what's producing today in Oman. This is the Rub' al Khali Basin, which is really more to do with Saudi Arabia and with Oman. Our funding so far suggests there can be some quite interesting opportunities here also outside of Thameen. So we'll be elected to enter into the second phase to be able to properly evaluate not only Thameen, but also the overall prospectivity of Block 49. We expect to see activity in the second half of the year. And as we are now focusing one, finalize the FDP and get that [ forty to six ] and get that submitted to the Ministry. Finalize preparations for Kunooz and spud that well in Block 58. And then we will concentrate in the second half for resources on Block 49. Block 3&4, still all our financials and most of our balance sheet. Although we are slowly transitioning away from that fact. A number of wells drilled, 6 development wells, all producers, workovers, and water injectors. Appraisal wells within the greater Farha South and Shahd areas and exploration wells -- near-field exploration wells to be drilled in May.A one in the Farha South targeting the quite prolific Barik formation and 2 Shahd exploration wells targeting additional potential in the Khufai formation to be drilled expecting spot in July and November. And the large seismic acquisition program is nearing its end. We expect it to conclude in the third quarter this year, but of course, interpretation primarily by the operator CCED has commenced. We remain positive to exploration potential within Blocks 3&4, both in the near field, which the operator is now targeting in the near term, but also in the far field, the Jari-1 discovery in Block 4, for example, warrants additional exploration. We'll also see what the addition -- what the new seismic is going to yield, both when it comes to gas potential in the northern part of Block 3, you see the purple dots there and also additional opportunity around the Jari area in the southern part of Block 4.On the infrastructure side, the gas to power project started up in Q4 is now being further implemented in Q1. And the purpose, of course, is to use associated gas to generate electricity, both to lower the carbon footprint from the associated gas, but also to limit the diesel consumption at a substantial saving for the production. Diesel is used primarily to fuel the pumps that are instrumental in bringing the production in Farha and Shahd service. Investments ongoing and the second phase is expected to be completed towards the end of this year. Production stable above 8,000. We see the continued downward trend, but now at a slower pace and production in Q1 was affected both by planned shutdowns in -- for maintenance purposes in February and also weather-related shut-ins because of the rains in March. As we stand by the guidance for the year, and we noticed a clear trend of improvement from the operator side when it comes to forecasting and delivering production. That said, we announced in February a strategic portfolio review. And if you look at our portfolio here, we have blocks 3&4. We have 56, 58 and 49. 3&4, of course, are our main producing area in Oman. We have been active here and in production since 2000, in commercial production since 2012. It's been 14 very good years. Based on the knowledge we had from 3&4, we got interested in other parts of the Salt Basin in the Eastern and Western Flanks of 56 and 58. And for something completely different Rub' al Khali in 49. With 3&4 in the situation where it's at and with 56 approaching Field Development Plan and thereafter pending declaration of commerciality. We decided to take a close look at our portfolio mix and also to review our strategy going forward. We have come from a period of great harvest having distributed large amounts of cash to shareholders while building our portfolio of exploration assets and appraisal assets in 56 in Oman. We may have come to a point where we have to refocus more on growth to be able to harvest even more in the future and to make sure we have a good base for decisions. The Board has mandated Jefferies Financial Group Inc. eminent investment bank where we worked with the oil and gas team out of London to assist the Board in assessing strategic options and come up with the best strategy for Tethys going on in the future. It could entail divesting all part of 3&4, increasing our stake, maybe in 56, where we are nearing commercial production with the Field Development Plan and also realigning various parts in 58 and 49, not least depending, of course, on the outcome of the ongoing exploration program. This is a review that we expect will continue for a little while longer. And we will, of course, keep you, shareholders in the market where any interesting developments as they materialize. To complement Heads of Agreement with Sonatrach. This is not a license yet. It's just an agreement to negotiate for PSA. We are particularly focusing on 2 areas: the El Hadjira II & El Haiad II. We've been through the data rooms, and we are discussing details of work program and commercial terms. If successful, we would hope to sign a PSA later this year. And we also keeping the door open for other opportunities in Algeria, which we believe could be an interesting complement to what we have in Oman. And as you've understood, we are very much an oil company. We are focusing on bringing new production in Oman. We are reviewing the option mix of our oil and gas assets. But we are, of course, also aware that we need to support the energy transition. Our primary focus and primary way of doing that is, of course, to do what we do best, supply the world with oil and natural gas for as long as the world needs these products for its energy consumption. But we are also looking at contributing to that transition outside of producing oil and gas, where our expertise and our knowledge of geology and the subsurface, the underground can be of assistance. For example, we are looking at carbon capturing and storage, which we believe is a very important part of the energy transition to remove carbon from the atmosphere or to prevent carbon from entering the atmosphere and instead sequestering it in, for example, depleted oil fields and the depleted gas fields are projects that we believe can be quite important for the transition, but also can add an interesting source of revenue for companies with an expertise in the area as the demand for these kind of services increases. So we are keeping a small eye on this, and we are looking, in particular, at what we can do in areas where we are all already present. With that, we have reached the financial highlights, and I will turn the microphone over to our CFO, Petter. Please?

[Petter Hjertstedt, executive]

Thank you, Magnus, and good morning, everyone. The first quarter of 2024 is largely in line with the expectations we had and the guidance we provided in the fourth quarter report earlier this year. However, it was a financially unimpressive quarter with a lower oil price, the low production, and higher OpEx combining to give us a lower result and weaker cash flows than we have seen for quite some time. On revenues, we had $30 million compared to $36.5 million in the previous quarter and EBITDA of only $13 million compared to over $21 million the quarter before. However, we do see some signs of improvement. And hopefully, this should be one of the low points of the year. So if we look at the oil sales in the quarter, which, of course, was a key factor in this it was down somewhat compared to the previous quarter, but with a big step down in oil price, that had a big impact on the revenue side. Worth noting though is that we have 20,000 barrels of underlift, which will be lifted, hopefully at higher oil prices later in the year. Net entitlement on Blocks 3&4 remains at the maximum 52% and it largely follows the production trend when it comes to volumes. And the value, it follows the oil price, as you can see from the graph to the right. OpEx, a key factor in this quarter was as we guided for the Q4 report higher than the full year guidance. And this is largely due to the higher cost at the start of the year as a result of the implementation of the gas to power project at the same time as we do have the usual slightly higher annual benefits cost at the start of the year. But we remain with our guidance of 17.5% for the full year, and we expect this to trend wise improve as the year proceeds. Cash flow from operations. Well, that's largely a result of all the aforementioned factors of lower revenues and higher costs in combination with a newly large working -- negative working capital movement, and that is largely due to a reduction of payables to our joint operations, which does happen from time to time, as you can see from the graph. Investments in oil and gas properties have been trending down for a few quarters now, and we do expect that to improve throughout the year, trend wise. However, the investments on 56 and 58, we would expect to be recognized towards the latter half of the year. And that should, of course, impact the free cash flow in a positive way. In this quarter, we had almost minus $11 million of negative free cash flow as a result. And that is particularly that negative working capital movement making a big difference. And that gives us a cash position at the end of the quarter of about $15 million. And I'd like to remind you that we do have a credit facility that will be available before the end of the second quarter, ensuring that we are fully financed for all our operations with ample room to manage any fluctuations in oil price or production if that were to happen. At the same time, we also have seen a buildup of cost pool on Blocks 3 and 4 that was almost $29 million at the end of the quarter, and that is essentially deferred cash flow that we will get back in the future as profitability in the project improves. And with that, I would like to take us through the -- our production and financial guidance, which is unchanged from the previous quarter. We still expect production to be in the range of 8,200 barrels per day plus/minus 400 barrels. And as mentioned previously, operating expenditure for the full year is expected to be around $17.50 per barrel, thus seeing an improvement on the level we saw in the first quarter. And with investments in oil and gas assets expected to improve as the year proceeds. But with the exception of the exploration expenditure, which will be focused to 1 or 2 quarters only. And we expect to finance that with our own cash flows as well as the cash we have on hand and the external debt that we are making available. And with that, I'd like to hand it back to Magnus.

[Magnus Nordin, executive]

Thank you, Petter. Well, 3 and 4 continues on its calls. And as Petter pointed out, we stand by the guidance. And we believe that the operator is going to deliver a robust second quarter. While we focus on Block 56, Field Development Plan and declaration of commerciality for our second commercial production stream from Oman. This part of the high profile Kunooz-1 well, and of course, the successful conclusion of the strategic review. All of these, we expect to be able to set information and additional move forward on in the second quarter. I think on that note, we are ready to take questions.

[Operator]

[Operator Instructions] And the first question comes from the line of Stephane Foucaud from Auctus Advisors.

[Stephane Guy Foucaud, analyst]

I've got a lot, but I will try to focus on just to start with. So first on Block 56, what is the -- if you can say, the size of the reserve you have submitted in the FDP for the EPS development? And when would you announce the next step or the start of the development or at least what would be the next announcement? Is it at the time you submit the FDP? Is it afterwards once you have the approval? Would be interested to have a sense on that. Then on the strategic review process, you indicated that it's coming soon. Could you give a sense of the sort of timing? Are we talking weeks? Are we talking months? And related to that, I remember you were in discussion with a potential farm-out partner. Is it still ongoing? Is it part of it? Great to hear about that. And lastly, for Algeria. [indiscernible] put some colors. Was it a [indiscernible] process? What bank did you approach on that track? [indiscernible] from Tethys? What sort of stuff are you looking for? I assume it's a production? Is it oil? Is it gas? And when could we expect the next step to be announced?

[Magnus Nordin, executive]

Rather comprehensive questions actually. So we start with 56. We would expect -- I'm currently not able to comment on any details on the FDP. We would expect to announce when the FDP has been submitted. And of course, we will announce when it is approved. We expect also to have a third-party reserve resource reports in connection with filing the FDP, which we should then be able to share with the greater community. And as we are saying in the report and as I said earlier today, we expect to file the FDP within the industry before the end of this month. That's one. And your second one was, sorry?

[Stephane Guy Foucaud, analyst]

The second one is around the strategy review process.

[Magnus Nordin, executive]

Yes, it is ongoing. And obviously, there has been a lot of brain wrecking within the Board. And we have looked at several scenarios. Jefferies has been mandated with that input. And I mean we -- it will take, of course, it take the time it takes. And we continue focusing on our focus area while this is ongoing. But I think it's fair to say we would expect to have more input on the strategic review, how it is moving forward during this quarter.

[Stephane Guy Foucaud, analyst]

And the [indiscernible] potential partner that I think you had talked about at some point. Is it still ongoing? Is it part of the process? Are they gone?

[Magnus Nordin, executive]

We are looking at several alternatives for all our outlooks. Obviously, with 100% in the 58 and 49, we would welcome a partner at the right terms, of course. And now nearing the drilling of Kunooz, maybe we would prefer to see the results of the well before we do a [indiscernible].But as I say, that does everything else is subject to the terms that can be agreed and everything, including percentage always saying at the right price. So turning then to Algeria. Let's say, we have been in discussion with Sonatrach for some time off and on. As you may recall, a couple of years ago, we were actively talking about sourcing a second country entry and the second leg for Tethys to stand on. And as this process has been going on, we've reached the point where we have designed to have some agreement to enter into final negotiations over these blocks. We are looking at both appraisal and exploration opportunities and both for oil and for gas. But as I say, nothing has been concluded. We are, of course, encouraged by having [indiscernible] this fund, and we are hopeful we will be able to continue to go. But we will, of course, keep you all posted as the present.

[Stephane Guy Foucaud, analyst]

And will you have a sense on if we are talking months, weeks, next year?

[Magnus Nordin, executive]

Let's say we are looking at over the next couple of months.

[Operator]

The next question comes from the line of Knut Martin Karlsen from Commandeer Capital.

[Knut Martin Karlsen, analyst]

I would like to start with a question on the Sonatrach transaction in Algeria. And please correct me if I'm wrong, but similar to Oman, it's the Ministry of Energy and Mining that grants the PSA, which means that you are discussing a farm in with Sonatrach on the 2 fields? Are those correct?

[Magnus Nordin, executive]

We are discussing with Sonatrach the terms of the PSA, but it's correct that Sonatrach would certainly be a partner in that these areas.

[Knut Martin Karlsen, analyst]

So the PSA is already granted by the Ministry of Energy & Mining to Sonatrach.

[Magnus Nordin, executive]

Well, the -- let's say, that not going to get too technical, but we are in discussions over a PSA with Sonatrach. And then, of course, Sonatrach has a license over this area that they are able to negotiate over in this case with us.

[Knut Martin Karlsen, analyst]

The second question is related to asset pricing on producing field versus exploration in the -- in today's climate. And on previous interviews, you've been quoted to have said that everything is for sale at 2x book. And our view is that the current market is very unfavorable for exploration activity and more favorable for producing assets that will generate cash in the short term. Could you please share some of your views on that point?

[Magnus Nordin, executive]

We are focused primarily on bringing oil and gas to sellers and to sell the product. We recognize a need for investment in exploration and appraisal as well as an ongoing need to produce. And this is exactly what the strategic review is all about, to optimize that exposure for ultimate optimal shareholder value creation. Is our mix between producing assets and price development asset the best one, the current one. Should we maybe realign a bit, should we focus on more growth for a period of time, as I suggest in the management letter today. We've come from a period of strong harvest. We have seen production from 3&4 diminish. Maybe it is time to focus more on growth again, so as to be able to return to substantial harvest again in the not-too-distant future. And as those -- the various means for that mixture is exactly what the strategic review is all about. And where we will end up, I think, is a little bit -- is it still, of course, too early to say, but we have a number of options on the table, and they will be communicated as soon as they are there.

[Knut Martin Karlsen, analyst]

And then a follow-up on the strategic review and the time line. When the Bloomberg rumors entered on the 9th of April, you commented that the 15th of May with the AGM would be a date for an update on the strategic review. But is that perhaps moved further out or?

[Magnus Nordin, executive]

There is an element of update in this report. And the next update will be when available. And as I said earlier, we certainly expect something during the course of the second quarter. And the -- it's a little bit more light in the report, and we'll communicate again as soon as we have something concrete that we can communicate.

[Knut Martin Karlsen, analyst]

And then just a short question on the cost pool. It's nearing $28 million. Is that an off-balance sheet item? Or is it included in the book value of?

[Petter Hjertstedt, executive]

Yes, that's right. You can't -- well, it doesn't actually -- it's not visible on the balance sheet essentially. So I mean, the -- however, in the valuation of the oil and gas assets, we will be taken into account factors such as the cost pool, but you will not from quarter-to-quarter, be able to track the cost pool in the balance sheet. It is off balance sheet to that extent -- but it was a factor that influenced say, the valuation when we did the impairment on Blocks 3&4. So it certainly was accounted for that.

[Knut Martin Karlsen, analyst]

So I guess that was a positive input on the impairment?

[Petter Hjertstedt, executive]

Yes. I mean -- as I said, it's essentially deferred cash flow. So instead of receiving that money through cost oil at now, we will receive it in the future.

[Knut Martin Karlsen, analyst]

And then just a final one on the fracking operations on Block 3&4 and given the complicated tender offer on Block 49, I'm sorry, 49. Is it more complex with regards to the wells? Or is it just further away from infrastructure that makes the fracking on Block 3&4, should we say, easier?

[Magnus Nordin, executive]

Sorry, are we referring to 49? The fracking on 49?

[Knut Martin Karlsen, analyst]

Yes, I'm referring to the fracking operations on Block 3&4 that was commented in the report and then comparing that to the--

[Magnus Nordin, executive]

Yes. I think it's a combination both of design and execution, but also that it is reasonably far away from current infrastructure. So it's a reasonably complicated operation. I mean, the [ Jari ] well was successfully fracked with oil to surface. But the reservoir is not fully understood, and the evaluation is still ongoing on that.

[Knut Martin Karlsen, analyst]

I think I'm just going to end by saying that we're very happy that you're not doing the short-term financial management in a long-term industry, which seems to be prevalent with some of the companies, and we wish you all the best of luck in 2024.

[Operator]

The next question comes from the line of Martin Moses from ABG Sundal Collier.

[Martin Moses, analyst]

Firstly, on the Q1 numbers, could you comment on what cost increase in OpEx and the negative working capital moment in the quarter? And then secondly, you reiterated your production guidance. But given the kind of performance so far this year, could you comment on how you expect the production to develop for the remainder of the year? And then thirdly, on the agreement with Sonatrach, could you please elaborate on what kind of opportunities you are preferring or looking at what kind of assets, early phase exploration or more mature producing assets?

[Magnus Nordin, executive]

So we start with OpEx. Petter, do you want to take the OpEx one?

[Petter Hjertstedt, executive]

Yes, sure. Well, OpEx, there are a couple of factors at play this quarter. In part, we have the normal seasonal costs where the annual benefits are paid to all the employees and the operators organization that's recognized through our OpEx. So that's year-end bonuses and other disbursements. So we see that pattern every year with Q1 having a bit of bump in cost. We also, on top of that, this year, have the -- some small amount of cost from the extended well test that came in late and have been recognized late. That's on the extent of wells of about 56. But in particular, this quarter, it is, in fact, the cost of the start-up of Gas-to-Power. The Gas-to-Power project was kicked off at the very end of 2023. And as the first phase is being rolled out, we are seeing the cost of that project being taken at the same time as we still have the diesel generators in place and consuming diesel. So there's a bit of a double energy and power cost for the first quarter. We will see some of that as well into the second quarter. But at that point, I think we should see, particularly in the second half of the year, improvement on OpEx as a result. So this was expected that we would have this sort of a bump in the first quarter in particular, but also sort of slightly elevated in the first half of the year. Your second question was on the working capital. I mean, our working capital, there are some of the main factors in that in this quarter is that with the slowdown of CapEx in the past few quarters, payables are, in fact, catching up with expenditure. So while we recognize expenditure in the quarter, it's been spent. It's usually paid 1 to 2 quarters later. So we see the cash flow effect when that slows down. When you have an increase in CapEx, you see a buildup of these payables. And when it slows down, you see that -- those payables reduced and it was largely that effect that we saw in play in this quarter. Your next question was on production. Yes. I mean, the quarters production was aside from -- well, we did have one planned event that was the maintenance of the [ Saiwan ] facility in February. It was closed for about 11 days. And we saw that the other days when it wasn't closed, we were at stable production versus the previous months. Thereafter, in March, we had some adverse weather, which is common for this time of the year, but it was a bit more extreme than usual and had slightly more impact with us having to suspend production from certain wells for a certain number of days. However, those wells will be able to produce that oil in the future. Same thing happened in April, as I'm sure many have seen the with a quite extensive flooding across the Gulf and particularly in Dubai, which is some of the most extreme weather we've seen in modern memory, so to speak. So we have had some impact, both in March and in April, which are not let's say, they will not impact the actual amount of oil we are able to produce simply the timing. So we do believe we will be able to see that produced later in the year, and thus, we are sticking to our guidance for the moment and do expect, I think, as Magnus mentioned that the underlying trend is actually quite stable, but obscured by those one-off effects. And your final question or your next question?

[Magnus Nordin, executive]

I think was Algeria, yes. Okay. So I mean what we would be looking for and what we are currently negotiating for is both in exploration, but in particular, we are interested in appraisal and reasonably early development situations. Ideally, we would go for something with what an early production system could be put in place quite quickly to generate under an appraisal program, generate production and also income. And coupled, of course, with a strong exploration upside, which, of course, is what everyone is looking for, an appraisal in close to field development with exploration upside. But Algeria is very rich in technical and geological opportunity. And that's partly why we settled on Algeria as a strong possibility for the second country for Tethys to operate in. And having now mutually got to know each other between Sonatrach and Tethys, we are at a stage where we are in final negotiations. Still no guarantees that we're going to successfully conclude. But [ Susan ] report, both sides are eager to reach an agreement and to bring these particular areas forward towards, of course, commercial production as the endgame.

[Petter Hjertstedt, executive]

That's somewhat we give a little bit more color on what we are doing.

[Operator]

The next question comes from the line of Stephane Foucaud from Auctus Advisors.

[Stephane Guy Foucaud, analyst]

As a follow-on, I was looking -- so you talked about increasing appraisal activity at Block 3&4 in 2024. And there have been quite a few well -- appraised well that drilled in Q1. It seems that most of them have been put in production, I think, 5 out of 6. So I was wondering how you feel about the appraisal at Blocks 3&4 so far? And what it might mean for reserve given that 5 out of 6 seems to have been put in production?

[Magnus Nordin, executive]

I think it's fair to say that, I mean, the program for the first quarter has been not 100% success but has certainly underscored and is well within the risking of the wells. So I think the -- it's fair to say that the reservoirs are quite well understood. And the spacing and well program and the placing of the wells, it's also quite well understood. So I think the result is quite within expectations. And as Petter noted, I mean, apart from the adverse weather effects and the short-term for maintenance, we would have expected production to be higher and thoroughly in line with expectations. I think it's still a little bit early to say what impact it would have on reserves. But certainly, it will have a positive impact on the reserve replacement in that this is on the appraisal side. I mean we are not -- in the development, we are moving undeveloped to developed. But on the appraisal side, we are moving new barrels into the reserve categories. But it will be too early to quantify at this stage.

[Stephane Guy Foucaud, analyst]

That's the direction you feel it's positive?

[Magnus Nordin, executive]

You're certainly going in the right direction here. And as I say, I think the overall assessment is that first quarter wells on balance were as expected, [indiscernible] slightly better.

[Operator]

As there are no further questions, I would now like to hand back to Magnus to close.

[Magnus Nordin, executive]

Thank you very much. So first, thank you for listening in today. It's an important call. It's an important, a very important time for Tethys. And please stay tuned for the recent developments that we expect. Talk to you soon. Thank you.

[Operator]

Thank you. This concludes today's conference call. You may now disconnect. Speakers, please stand by.