Tethys Oil AB

STO:TETY

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Tethys Q2 Earnings Report 2022 Conference Call and Webcast. [Operator Instructions]. Please note that today's conference is being recorded.

I would now like to hand over to your first speaker, Mr. Magnus Nordin. Please go ahead.

[Magnus Nordin, executive]

Thank you very much. And dear friends and investors, welcome to the second quarter 2022 earnings report and earnings call with Tethys Oil. I'm Magnus Nordin, the Managing Director; and with me is our CFO, Petter Hjertstedt.

But allow me to start on Slide 2, please, Illia, to discuss the highlights for the second quarter. We're focusing very much on the development and further exploration appraisal of our Block 56, our operated block in Oman. We continue to appraise the Al Jumd discovery with two additional horizontal wells that were both successfully drilled and will be hooked up for a long-term production test over the next couple of months. In addition, we continue the testing program of the exploration wells, Sarha-3 and Sahab-1 in the general vicinity of Al Jumd.

Everything is go to in the preparations of the long-term production test. We're hoping to run a test for about 6 months by using trucking and existing facilities. Everything is being put in place and we hope to be going by mid-September and have all three horizontal wells hooked up during the course of the month of October. And in addition, on 56, where we actually have spent most of our exploration expenditure this quarter, we have also completed an exploration seismic interpretation. We're interpreting it currently and indications from 2D seismic is that we will have leads that could very well contain up to 50 million barrels of prospective resources. And of course, what we are aiming for is for the 3D seismic to confirm this.

In addition to 56, we have had the possibility to extend the initial exploration phase of Block 49, another of our operated blocks in Oman, until December 2023.

So if we turn to the next slide. The production came in at 10,068 barrels of oil per day. That's on average for the quarter. That's down from 10,475 barrels of oil per day on average for the first quarter. All our commercial production comes from Blocks 3 and 4, which is not operated by us. And what we see is continually impacts by the reduced activity and spending we saw during the pandemic. It has taken time to get wells back up to where they were. It has taken time -- that there have been issues also in flow lines, pumps, all sorts of minor things that have added up to a slightly lower production. We'll discuss this in more detail, but we are hopeful that eventually, as time moves on, this will be rectified and that we will be able to return to what we would consider a more normal production.

Oil prices, of course, has been a major success story for the quarter and for the year. And for the first time in several years, we have achieved an oil price of more than $100 per barrel, up from $80 in the first quarter. And needless to say, with production of more than 10,000 barrels of oil per day for the quarter and oil price at more than $100, The financials have been quite strong, with revenue and other income at $37.8 million, an EBITDA of $24.1 million, and free cash flow of $7.1 million. And that's the free cash flow after investments and after spending on Block 56.

And last but certainly not least for the quarter, after decision by the AGM, an amount of $22.8 million were distributed to our shareholders. That's equivalent to SEK 7 per share, which at the current share price is a yield of more than 10%.

Now let's turn to some details. If I could have Slide #4, please. Block 56. We are focusing a lot of assets on Block 56. We have been the operators of this block for just over a year, but we've already drilled 5 wells and completed 2,000 square kilometer 3D seismic survey. The Al Jumd area is where we have discoveries. At the Al Jumd discovery, the largest of these, that's where we have drilled the horizontal wells and where we are now preparing to hook up long-term production test. Of course, we are hopeful that Al Jumd will perform well under the long-term test and that we can continue to go into a proper development of the Al Jumd discovery.

And in addition, we do have a number of leads and prospects surrounding the Al Jumd discovery, including the Sarha-3 and Sahab-1 that are undergoing testing. And as the results come in, we have both to understand the overall Al Jumd area better. And of course, we would hope to get some decent flows out of Sarha-3 and Sahab-1 wells. But the big price in Al Jumd remains the Central Area.

Large leads on 2D. Possibility from what we have so far mapped on the 2D, up to 50 million barrels of prospective resources. The 3D area is now being processed and it looks very good from a quality perspective. And over the next 6 months, we'll do the interpretation. And of course, we hope that these leads will turn into drillable prospects and that we will be in a position to next year conduct drilling program on some very interesting prospects with large potential in that area.

Turning to the next slide, a little bit of a close up of Al Jumd. It's a bit of a chestnut structure at a depth of about 1,500 meters tops. We've now -- 4 wells have been drilled, 1 [indiscernible] well, the discovery well that was retested almost 2 years ago now and flowed at 100 barrels of oil per day. And then we did the Al Jumd-2, the first horizontal well, as you can see on the slide, came in at 700 barrels of oil per day at 25 degree API oil from a 430 meter horizontal section and basically confirmed the prospectivity and that it made sense to further appraise the prospect.

So we accelerated the drilling program and drilled the Al Jumd-3, Al Jumd-4 wells. They are completed and we drilled similar horizontal sections in Al Jumd-3, as you also can see clearly on the map. And the next step, of course, is to hook all these 3 wells up to the early production system and see what kind of production we will get. And hopefully, we will be able to sell any test production we have. It's not commercial production, it will be part of incidental income, but it would still be a large step towards making Al Jumd a new oil field, which is what we're trying to do by 2023.

Turning to the next slide, Slide #6, where we have to discuss the production on Blocks 3 and 4. In percentage terms, there are reasonably small fluctuations compared to the first quarter. We have seen gradual or contingent downgrades of expected production from 3 and 4 over the year. We started at about 11,000 barrels of oil per day. First quarter came in below that, mainly because we had a water breakthrough in a couple of wells in one of the [indiscernible] fields, the Anan field. That has now been stabilized and the wells are recovering.

And we saw the remedial action actually pay effect in June as production improved, but then we were advised by the operator that we will have to do a slightly major overhaul of the present facility in the Sahab-1 area, mainly replacing pumps and flow lines in the water handling system, which will affect third quarter production with some wells being shut in while this work is going on. We, therefore, expect third quarter production to drop below 10,000 barrels of oil per day, but then to increase and return to a more normal level during the fourth quarter. And this results in our revised forecast for the year where we now expect second half production to be in line with first half production; on average, 10,271 barrels of oil per day for the full year.

Turning to exploration and appraisal activities on Blocks 3 and 4. This is a slide that has been recently unchanged apart from an increasing seismic cover over the last 2, 3 years. There are a number of prospects, some are smaller and lower-risk, near-field ones, but we also have some larger ones, in particular, in the southern part of Block 4 and also in the Eastern part of Block 3. With the adding of a new drilling rig, fourth rig in, of course, the end of the third quarter, we expect the exploration program to continue while we free up also capacity to drill more production wells to catch up on the exploration.

Blocks 3 and 4 continue to provide us with good production and new cash flows, and there is still ample exploration opportunity. However, being not the operator, we fiercely follow what happens, and we are confident we are going to see some exploration wells, also some exploration success. But for our own part, we concentrate on our operated blocks and then, in particular, Block 56.

A quick summary of the projects we have in Oman. The map speaks a little bit for itself. Tethys remains the second largest acreage holder in Oman with our Blocks 3 and 4 non-operated, 56, 58, and 49. We have 100% in both 49 and 58, with 65% in Block 56, where we have partners with Indonesian oil company, Medco, that operates a field within Block 6 just north of Block 49, and 2 Omani service companies, Biyaq and Intaj. Blocks 3 and 4, of course, is the start of our success in Oman. And it's worth remembering that more than 100 million barrels has actually been produced since 2010, 2011. And that has generated very good revenue for the Sultanate of Oman and also for Tethys Oil.

56 is the block where we have gotten the furthest so far with discovery in late appraisal and the Central Area, which has some great and potentially very interesting exploration. 58 is a high-potential exploration block with a little bit more risk with 2 clearly defined areas, Fahd and South Lahan. And 49, we drilled a well in '21, encountered a tight sandstone formation that we continue to evaluate.

Quick update on 58. The Fahd area is was first attracted us to the block. Large prospect, large prospective resources. We still need to do work both on firming up the 2D seismic that has defined it and also understand the potential petroleum system better. That work is ongoing.

The Lahan area was secondary when we first got the block. But as we learn more and as we have now in the process of interpreting the 3D seismic survey we shot last year, we can see that there are a number of very interesting prospects in a proven exploration play in the South Lahan area, so from that perspective, we can say that -- I think it's fair to say that Fahd remains as interesting as we thought it was from the beginning, but Lahan has certainly increased in prospectivity as we interpret the seismic. Again, something we will, of course, return to later this year and later next year, when we have to see also some [indiscernible].

49, a very different play for Oman. It's in a different basin, the Rub' al Khali basin, which is quite prolific, both in United Arab Emirates and in Saudi Arabia. We drilled the Thameen-1 well now almost 1.5 years ago, encountered hydrocarbons, but nothing came to surface. The reservoir is quite tight. We have an extension and we are looking and working with experts in the field on how best to establish flows from them. And that's going to be the gist of the work program for 49 for next year. While at the same time, we are updating our overall geological model of the region in the Rub' al Khali basin with new data that we are continuing to see.

So it's certainly not over for Block 49, but we won't see any major action there until later in 2023. For reference, what you see towards the south in area is the Block 58 and the Fahd and Lahan.

And with that, I'm going to hand the floor over to our CFO, Petter, who will talk us through the financial highlights and give some more details on the financials for the year. Petter, please go ahead.

[Petter Hjertstedt, executive]

Thank you, Magnus. It would be my pleasure to present the financials. Can we please go to the financial highlights slide, please? Looking at the revenue and EBITDA trend on the graph to the right, it's quite clear that we have had a steady progress of increased revenues and increased operating profit, very much driven by the increase in oil price since the low end of days in 2020, but also some of the tougher moments in 2021. So the recovery is very, very visible in our P&L.

As you can see in the quarter, we had an achieved price of $100.10, a significant increase over the previous quarter. So some big steps from quarter-to-quarter as the oil prices have risen in the past few months. And this is clearly reflected straight through the P&L, demonstrating some of the operating leverage that we have in the business. And of course, while the P&L is important, a lot of the focus from our part is on investment. And that's more visible in the cash flow statement and in the balance sheet, and we will get to that, but we have very high investments, $19.6 million, however, down from the previous quarter. And strong positive cash flow of $7.1 million compared to a negative $13 million in the previous quarter.

And this is a quarter where we generated a positive $7 million after investment and yet we were able to distribute almost $23 million to shareholders and end the quarter with $40 million in cash. So planning very, very steadily to invest and plan in the future irrespective of what oil price environment we're in. This has been very much to our benefit in the recent years and is easy to forgetting those heavy days of 100-plus oil that we've had in the past years.

We can go to the next slide, please. As I suppose most of you are familiar with, the pricing mechanism for the oil that we sell is done on the basis of the Omani official selling prices and those reflect at the time of sale, spot price 2 months prior as traded on the Dubai Mercantile Exchange. And hence we see, with a consistent 2-month lag, spot prices feeding into our financials. You can see on the graph and on the tables on this slide how we are moving from $101.8 in average OSP, that's not to be confused with the achieved price, but the average OSP irrespective of what we're selling and the mix of that, and then going to $107.8 in Q3. So a 6% sequential increase in average OSP in the period.

Of course, the actual achieved price will, in reality, reflect a mix of production and sales and so on. So it won't be exactly this, but this is the underlying basis. And at the same time, we're also seeing a bit of a differential spread with the Oman Blend spreading out versus the blend that is being traded at somewhat of a discount, $6 dollars per barrel in the quarter and almost $4 in the previous. And I think that is a reflection of what's going on in the oil market, which is not only a boom in oil prices, but we are seeing a dislocation of flows and changes in trade flows and patterns that have been setting many years and that does cause some disruption in the pricing and a bit of volatility that's especially for grade like Oman Blend. But still, we are enjoying very high prices and you see the August OSP at almost $113, which is a very high level and I think most of us never expect it to see again.

Moving on to oil sales. This mainly impacts the cash flow and the working capital, and it does create a bit of volatility in our numbers. But really, it's more a question of timing effect, but it's good to track to understand how our cash flow has really developed from one quarter to the next. But over time, this is not something that really -- the volatility really does not have a major impact in our business.

However, in Q2, we only sold 2 months liftings of oil. We have a monthly lifting. Each month we sell the production that we're entitled to in that month. And this month we only sold 2 as the third one in June got pushed into July, early days of July, for various reasons at the terminal. This is quite common during the past few years due to congestion and such. It's less common now, but it's really just a question of small delays and sometimes it happens at the end of the quarter.

So it's not something to get very worked up about, but it does have some impact on this and other. And that, in particular, had a bit of impact on the achieved price and the June pricing was not included in the quarter. But instead, it will be included in the third quarter, and that means we will most probably have 4 liftings in that quarter. It also means we have an underlift, which has a number of consequences, not least an adjustment in value in the revenue and other income, a positive one, but it also has some working capital effects that we will get to.

Moving on to entitlement value and then entitlement barrels. This is really a calculation of the oil we are allowed to sell, what proportion of our production we are entitled to sell after the government has received their share. The most recent quarter was 42%, and that's mainly a consequence of higher oil prices, meaning fewer barrels are required for us to recover the cost that we have incurred in the period. So it's really not something that should be seen as a negative or be viewed as a particularly dramatic development, because you can see on the left side the value of the entitlement is in fact going up. We are not losing any value. We're just getting the same value of this fuel barrels. And as a result, we get more profitable barrels, which are, in fact, the barrels that create value for the company. And we'll get back to that a bit later on how to do that.

Moving on to OpEx, the operating expenses, a key component of the cost being generated in our production on Blocks 3 and 4. Our OpEx is purely from Blocks 3 and 4 and we have seen a slight sequential decline in Q2, which is customary, as Q1 is always a bit boosted by annual payments of benefits and some bonuses. And we've seen a bit of a decline in Q2, which is expected. Also a decline in production sequentially will have impacted some of those costs. But you can also see that trend-wise, it is a bit higher than in previous quarters, which is to be expected as we're going back from pandemic situation and work from home.

Now we're seeing business travel, training and other costs being incurred that were being deferred previously. So the comparison base is not an entirely fair one. If we go back to 2019, you'll see that these are the kind of levels that we saw then. However, the production has some impact on the OpEx per barrel and that's mainly then driven by the production levels and not so much the absolute cost in OpEx.

And we are, therefore, guiding for $13 per barrel from previously $12, with a small kind of deviation. And really, that is very much a function of production. There's no real change in our view of OpEx as such. But we have seen possibility for some savings, and at the same time, it's important that operations are run smoothly and without disrupting and that given some of the challenges with production, it's reasonable to see a good level of staffing to manage that.

Moving on to cash flows, which I believe for many will be the most essential metrics to look at. If you look at the operating cash flow, they have been very stable and growing. We're seeing that being driven by the increased oil prices and the increased value that is being captured in our entitlement. So it's very stable, it's predictable and increasing, as you can see. However, working capital reacts a bit differently to increasing oil prices and that we can see in the volatility of lifting volumes and overlifts, and it's very difficult to predict the oil price in that scenario when you have a rapid change in oil prices. That means we quite easily have a big difference between actual production and actual entitlement in the lifting that we dominate in advance. And hence, that has a bit of volatility on working capital. However, that does not have any sort of value implication in the long run, but it does create a bit of, let's say, a distortion in the short term. I think it's worth to look beyond that, and we will see it even out over time.

Moving on to investments. The next step down in the cash flow. We have seen a rapid increase in investments as our ambitions on exploration has started to realize. In Block 56, in particular, we're seeing fairly elevated levels of investments in recent quarters, and there's been seismic acquisition in drilling. But we also see a step-up in Blocks 3 and 4 investment as we expected to step up the activity from the low pandemic levels and adjust the activity levels in general and to catch up some of that spending that was deferred in the past.

A very big part of this CapEx is in fact drilling and that is probably some of the best investments you can do in the short term that you will have fairly immediate effect on production. And therefore, we see that this is very much money well spent in all cases, but certainly from the short-term perspective if we are looking at production and cash flows.

Full year guidance has been revised a little bit. It's a small adjustment from $91 million to $87 million. It's really just a reflection of some savings in some areas, a bit of underspend, and a bit of deferment of costs into 2023. We are seeing that there are pretty long lead times for certain items and also for manpower. And that means we're going a bit slower on some projects, meaning that, that spending does not disappear as such, it gets pushed a bit in the future. We've seen a bit of that in the past as well as I'm sure you will recall.

And I think it's also good to remember that Blocks 3 and 4 CapEx, that is being recovered immediately as part of the entitlement and thereafter the liftings. The costs we receive back in the same quarter as we incur them as we are operating under the threshold or under the roof level of what we allow to recover, meaning we get money back immediately. But on Block 56 and Block 58 and even 49, these are recoverable costs in the future scenario of production. So it's not just money well spent on exploration, but it is also money that we potentially get back if we achieve commercial production. That's something to keep in mind when we look at these investment levels, which brings us to free cash flow, that is the cash flow after investments.

This is a metric of cash we have left to either distribute to shareholders or add to our cash pile or do other strategic investments with foreign currency. We've seen a bit of volatility there as well. Of course, that's a consequence of working capital and, of course, a lot of the discretionary spending and exploration that we saw peak at the start of this year in some of our operated blocks. So we had a negative quarter in Q1. But now we're back in black and we're positive at $7 million. And I think that's a testament to the strength of the underlying business that we can make quite significant investment on a number of exploration blocks and spend the money when it needs to be spent and have the financial strength to really only have 1 quarter with negative cash flows after investments. That's something worth remembering.

And that you can see on the next slide with the cash flow year-to-date. We have -- combining the quarters, we're spending $44 million. That's the same as the operating cash flow generated by the business and leaving us with a negative net cash flow of $6 million, more or less still in line of working capital, which is something that we will get back. And at the same time, we're spending 23 -- sorry, we distributed $23 million to our shareholders, which is pretty much half of our CapEx budget. So that's a significant distribution, and I think also a testament to our financial strength that we can both invest heavily and distribute cash significantly. So we ended the quarter with $40 million and have ample room to continue investing in the business and a strategic alternative is open to us.

Netback trend. I think this is something we have not spoken very much about in the past, but netback is an interesting metric showing the net that we received of bringing the oil to market, that is the oil revenue after transportation and OpEx. We can see that trending very strongly per barrel on the right-hand side, $16.5 to almost $30 over a year. And in absolute terms, we're getting about $27 million in this past quarter. And after subtracting CapEx, which, of course, is an important component in the long-term growth of our profitability, we're seeing in the quarter that we generated almost $12 million in netback after CapEx.

And I would encourage you to view that as a proxy of free cash flow or even profit oil from Blocks 3 and 4, which are not always easily calculated. But this is essentially the profit margins we are receiving from 3 and 4 without the distortions of working capital and liftings and over and underlift. So this is a good indicator of the underlying profit level that Blocks 3 and 4, our core assets, many years back on asset is generating at the moment. And that is under circumstances of quite heavy investment [indiscernible].

And with that, I think I'll leave the floor back to Magnus to talk a bit about the oil market. Magnus?

[Magnus Nordin, executive]

Thank you, Petter. Indeed. So let's look a little bit at where we stand on the oil market. And if we look at the supply-demand situation, I think a major take is that demand is forecast to remain quite high as the world comes back into a more normal way of living with demand forecast at above 100 million barrels per day, which is a lot for next year.

And at the same time -- if we can have the next slide, we see that supply remains tight. We and Blocks 3 and 4 are not the only oil fields that are experiencing delays in coming back after the two pandemic years and the drop in oil price and drop in production associated with those years. And OPEC has indicated that they are not in a decision to increase production and that they don't have large amounts swing production as we also can see from these slides.

And in the United States, we are not seeing a massive inflow of investments into fair production. We're actually seeing a fairly stable trend when it comes to both fracking fluids and drilling rigs. And I think maybe the most telling graph is the one here with OPEC compliance rate.

Now with these oil prices, if there was any time to really cash in and produce as much as you possibly can, this will be the time to do it. And we can see that with the compliance rate of 300%, there is ample room for a number of other companies to produce more than they are. And the only reason that they don't do that must be that they can't. So on balance, I would say the outlook for the next couple of months and also for next year is that we are going to continue to see a rather tight oil market with a subsequent higher price than we've seen on average for the last 5 years. And that is, of course, something that we believe will be positive for us as an oil company and that we will continue to see good cash flows from 3 and 4, and hopefully also over the next year some cash flows coming in from Block 56.

So if we turn to next year, we discussed the production guidance at 10,271 barrels per day on average for the year, which is down from the 10,500 to 11,000 range we gave in May. Still we are looking at a very healthy production of 10,000 barrels of oil per day that, of course, yields good cash. And we continue to be confident that the operator of 3 and 4 will eventually overcome the hurdles and we will return to a higher production trajectory. As I mentioned, we are not the only ones within the open class family, and coming from a doom scenario where cost cutting and maximizing savings was the mantra of the day in 2020 and [indiscernible] in 2021 to having to now maximize production instead and not only get back to where you were, but also preferably increase is a bit of a challenge. And in 3 and 4, we are trying to face up to it.

If we look at operating expenditures, they will again be higher than we guided for. They are not up, in absolute terms, on the operating side, but of course with the lower production to divide the barrel to the OpEx, the operating expenditure per barrel is going up. And as for the work program budget goes, we expect to spend a little bit less than the previously guided $91 million, down to some $87 million. And this is a combination of increased investments in 3 and 4, but also in decreases following deferments and some long lead times that we push into 2023. And we've also seen an increased investment as we accelerated the Al Jumd program with the 2 horizontal wells that we just completed. But of course, with more than $40 million in cash at the end of the quarter and with healthy cash flows, there's absolutely no problem with us financing this. So it will come from operations and available cash.

So as we move on to the outlook and summary. We are in a very healthy financial position with large cash reserves. We are focusing our efforts on getting the Al Jumd area into production and also maturing the promising leads in the Block 56 Central area. We are continuing site interpretation, confirming up leads on Block 58. We expect to retest Thameen on Block 49 next year. We expect oil prices to remain buoyant for the rest of the year and at least for the first half of 2023. We'll see as we get more data on what happens to them. And we expect Blocks 3 and 4 to stay on track and eventually get out of the, shall we say, adjustments that are currently taking place, and by next year be back in a more normal fashion.

So thank you very much for your time. Do stay with us. We will certainly try not to disappoint you in the long run. And if not before, we'll be happy to address you again on November 8, when we publish the report for the third quarter of 2022. On that note, we would be happy to take any questions you have.

[Operator]

[Operator Instructions] We have our first question coming from the line of Teodor Nilsen from SB1 Markets.

[Teodor Nilsen, analyst]

I have 3 questions. Just on production, of course, maybe slightly disappointing production year-to-date. But I just wonder, regarding exit rate for this year, i.e., production by end 2022, going into 2023, should we expect a higher production than the 10,300 barrels per day that you guided for, for remainder of the year? That was the first question. Second question on Al Jumd discovery. Could you indicate any resource or reserve potential for that discovery? And my third question is maybe an oil market related question. But I just wonder, on the oil that you are selling from Blocks 3 and 4, have you seen any competition from Russian oil, particularly then in the Asian markets? Any comments around the competition from cheap Russian oil would be useful.

[Magnus Nordin, executive]

Thank you, Teodor, and thank you for a good report on us earlier today. I'll take your first question first. Since we are guiding for a drop in production in the third quarter, obviously, we would expect production in the fourth quarter to be higher and following also an exit rate to be above the [indiscernible] to make our guidance [indiscernible]. By third quarter, I think we will be able to give more details on this and also start looking into this [indiscernible] 2023.

On your second question, we expect to look at the resource potential of Al Jumd once we start getting data from the long-term production test. So we would expect to be in a position to release resource data later this year [indiscernible]. And as far as the trading goes...

[Petter Hjertstedt, executive]

Sorry, Magnus, I would just like to add there on Al Jumd, while we're unable to comment on the resource numbers at this point, the fact that we've expanded the appraisal program, I think, is an indicator of how we view this post the drilling of Al Jumd-2. We are clearly optimistic on the prospect of it. A lot remains to be done, but we certainly wouldn't have expanded our appraisal program if we were not confident that this has real potential for us.

[Magnus Nordin, executive]

Thank you, Petter. That is, of course, very true. And then getting on to your final question, Teodor. We are certainly seeing trades realign. And we understand, although we don't have any direct knowledge that Russian trades are being diverted to what [indiscernible]. We have not been affected in any way in a different lifting pattern. We could still sell most of our oil [indiscernible]. And so far, the Oman business selling price based on Oman Blend has kept up well with [indiscernible]. So as much as we see and we hear, [indiscernible] in fact this has not affected us in any way, [indiscernible].

[Petter Hjertstedt, executive]

[indiscernible] We have seen a bit of an expansion in the differentials in the paper market -- in the traded prices in the paper market that I think that's more a reflection of the financial positioning around those trade flows rather than the actual trade flows. So we're seeing a bit of that, but we haven't seen it realize really in the physical trading of the good. We've seen other qualities faring much, much worse, such as the Iranian, which is quite similar to Omani, but struggling. Various other reasons there as well. But it is a very popular quality and we expect that irrespective of these disruptive trade flows, it will find happy customer in the end.

[Operator]

We have the next question coming from the line of Stephane Foucaud from Auctus Advisors.

[Stephane Guy Foucaud, analyst]

Two questions for me. The first one, you talked about there is a slight change in the CapEx guidance, but some items went up, some went down. I was wondering whether you could give an updated split by field and particularly how much for Block 3 and 4 and how much for Block 56 of this [indiscernible] guidance? And second, now you have drilled Al Jumd-2 and 4. And I know that what really matters is the flow rate, but I was wondering probably what you saw on those horizontal legs, how does that compare with the model that you are expecting?

[Magnus Nordin, executive]

Petter, you want to give the details?

[Petter Hjertstedt, executive]

Yes. I think we're not at this moment commenting really on the exact breakdown. There is a bit of movement at the moment and a bit of spread in how it could land around the year-end, as always. But it's fair to say that our CapEx budget is really dominated by 3, 4, and 56. So while we are increasing in both of those year-to-date, I think we've done quite well on the 56 in terms of getting good value for money; and 3 and 4, I think the operator is spending wisely and focusing on the pressing questions that are on the line. And that might mean some other investments that are less of production-oriented, maybe push a bit on to future. But that's a bit too early to tell exactly the scale of it, but we are seeing a bit of movement in all places. But certainly, I think, in most cases, drilling is taking priority. And Magnus, would you take the other question?

[Magnus Nordin, executive]

Yes, certainly. Would you repeat the question, please, Stephane?

[Stephane Guy Foucaud, analyst]

I was wondering, on the two treasure wells, Al Jumd-2 and 4, so that's not been drilled. I know that what matters is really about the testing, but I was wondering how does the -- what you have found so far on the horizontal layer compared with the model that you have in produce estimate?

[Magnus Nordin, executive]

Okay. Al Jumd-2, as you know, tested at 700 barrels of oil per day in our initial drills. 3 and 4 drill is horizontal, similar lengths. And they, I should say, came in similar to Al Jumd-2, so we would certainly expect them to flow and we will need a month or so at least of flow data of all 3 wells before we really can update the model. But from a drilling perspective, they have been very similar.

[Stephane Guy Foucaud, analyst]

And this is what you were expecting that they would be similar to #2?

[Magnus Nordin, executive]

There have not been any major surprises. But again, as I said, before we've tested them, I'm not in a position to do a massive update on the model. But so far, everything looks the way we would want it to be.

[Operator]

[Operator Instructions] Next questions come from the line of Knut Martin Karlsen from Commandeer Capital.

[Knut Martin Karlsen, analyst]

Just a short question on the EPSA contract on Block 56. Will Tethys Oil be able to recover the cost incurred by OLEX in 2008 and Medco in 2019 to 2020?

[Petter Hjertstedt, executive]

Magnus, I'll take this question. Yes, on Block 56, there is a cost tool of historic cost, which has been recoverable and having been incurred according to the regulations. And we expect to pick up the cost tool at least from the start of the former operator's operations, which is Medco. I don't believe we will be recovering anything from the operators beyond that. But anything from the previous operator, Medco, who were operating during the first phase of exploration, and anything incurred now, with the exception of the minor sort of the government payments and any renewal bonuses, but simply anything operational, we expect under commercial terms to be recovered.

So any potential test production that were long-term tests that we are conducting going forward will not be deemed as commercial and will have slightly different terms than it would if it had been commercial. So a bit more limited, but we would expect in the future...

[Magnus Nordin, executive]

So Petter, you're quite right, but just to clarify. So the current exploration production revenue [indiscernible] Medco in last 4 years ago. And all costs incurred under the current [indiscernible]. However, the work done by previous operators under other assets before the current [indiscernible] will not increase.

[Operator]

We have no further questions at this time. I hand back the conference to you for any closing remarks.

[Magnus Nordin, executive]

Thank you very much for listening. Good trading. We look to see you again, if not before, on November 8. Thank you very much, indeed.

[Petter Hjertstedt, executive]

Thank you very much, everyone. Thank you for calling.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect your lines. Speakers, please standby.