Tethys Oil AB

STO:TETY

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Tethys's Second Quarter Earnings Report 2023 Conference Call. At this time all participants are in listen only mode. [Operator Instruction] Please be advised, that today's conference is being recorded.I would now like to hand the conference over to a speaker today, Magnus Nordin. Please go ahead.

[Magnus Nordin, executive]

Thank you very much, and good morning everyone. We are looking out at the coastal area of Block 56, Onshore Oman, it is started there, where we have had a lot of activity during this quarter. Let's go straight for the presentation. Could I have the 1st slide please.Very good. So we have had significant activity, particularly in our operative Blocks. Of course Blocks 3&4 is still where most of the production comes from, we are not the operator, but we'll discuss that, of course, also in some details. On Block 56, we saw -- we seen the results now of the long awaited extended well test on the Al Jumd discovery, which has yielded some very encouraging and positive results.On Block 58, we have continued prospect maturation now with the South Lahan area, and we are in the process of tendering for a rig and also looking for a potential partner in 58 as we will try and unlock exploration success there later this year early next year.Production came in somewhat disappointing 8,994 barrels of oil per day it's done almost 500 barrels per day from the first quarter. We are seeing the decline in 3&4 continue however at a much lower rate and stabilizing, and as you have seen, we are guiding for around 9,000 for the full year 2023. It's still us good cash flow and cash flow from operations stood at $25.7 million. A lot of that as being reinvested particularly -- in particular in Blocks 3&4.We remain one of the largest acreage sellers in Oman, as you can see on the next slide, with interest in Block 3&4, 30% since 2007 in production since 2011 and commercial production license since 2012. We're now 100% in Block 49, where we have drilled 1 well back encountered hydrocarbons, and we are eager to try and do a hydraulic frac of the tight sandstone, and see if we can get some hydrocarbons to surface. 56 is the most activity is there. We've drilled several wells, we've acquired 3D seismic, and of course, the proof is in the putting you have to get oil to surface in commercial -- in commercial viable quantities to create value. And that's what we hope. We are on the cusp of drilling in 56.And 58, seismic acquisition completed in 2021 and successful interpretation since then. That said, let's move on and look at Block 56. Let me take one step back and just remind us a little bit what we have -- what you're seeing is the blue line is the border between Block 6, which is the central Block in Oman owned and operated by PDO. Rights where approximately the Al Jumd sign is, and the along that side of the border, Indonesian company Medco on behalf of PDO operates the Karim small fields project.Karim is a cluster of discrete structures that have been in production for more than 10 years, and what we are seeing on our Block 56 is simply the continuation of that same kind of structure into 56, that's why we are seeing the blocks here is the -- from seismic identified structures that are on outside, some are leads some are prospects. Al Jumd is the 1 where we have done most of the work and where we have drilled 3 horizontal wells and now carried out an extended well test for more than 3 months.We have added the production to try and optimize it, to try and get an idea of what would be an optimal rate, what can one well -- horizontal will produce over time? And how can that be related to the estimates of all in place that we have made.So in combination of these data, and we produced some 35,000 barrels during the quarter as part of this extended well test. This is also oil that we lifted in July, and there will be some proceeds that will be divided between the government and ourselves and our joint venture partners.And apart from the drilling of Al Jumd and testing it, we started doing serious interpretations of the 2,000 square kilometer state of yard 3D seismic we acquired in 2022. We are really interested in looking at the central part of the block, where we have an interesting fault system with several leads identified on 2D, which was also to be a closer look at what's around Al Jumd with now additional 3D. And we can confirm that the trend continues along the Block 6 border. I think we now count up to a dozen leads. And we have identified a new prospect that is a great analog to Al Jumd. And however, it's somewhat larger.So we are quite encouraged by what we have seen. And if I should draw a parallel to Block 3&4, this is started to look a little bit like what the Farha South trend looked like some 12 -- 10, 12 years ago. What we then saw was a number of discrete structures, some of which have tested oil along a fairway longer trend.A Farha turned out to be a set of adjacent 4 blocks that each compartment contained oil and is now still the mainstay of Block 3&4 production. Al Jumd, we see a number of discrete structures, but all with similar characteristics, and if we turn to the next slide, we are going to continue to work on this trend and to try and bring this block into commercial production. Some of them, I made milestones are there, the milestone of the extended well test.We have the Sarha 3 discovery that where we've driven appraisal well on, we want to recast some zones that weren't tested or that we got to oil from the deeper zone, and we want to drill the new prospects that we have done -- that we have discovered. All this, we would like to do over the next couple of months before the end of the year. And we have instigated discussions with the ministry to extend the exploration part of the license.We are in the final exploration phase, the 2nd exploration phase. The next step is to bring the block into commercial production and declare commerciality of the block. We believe, we are very well on the way of doing that after this extended well test, but we would like to do a bit more appraisal. We would like to retest Sarha, we would like to drill a new prospect while start working on the field development plan, how began to plan to do with those produce Al Jumd, but also -- we also planning to integrate other Al Jumd trend prospects into a production system.Today, we are tracking the oil from Al Jumd to the C&C facility. And we will look at other basic opportunity, but also if it would be sufficiently economic to say, build a pipeline and a processing facility somewhere in the middle of the Al Jumd trend. But all this is to be found out with additional work, and we expect to see a very active fall here in Block 56 in the Al Jumd area. And not least given the continued disappointing results from 3&4, bringing a 2nd field, giving us a 2nd production stream from Oman remains a very high priority for us, and 1 that hopefully we will bring to creation in the course of 2024.That said, on Al Jumd, of course, we are still continuing to mature lease in the central area, and there we see a possibly completely separate petroleum system that will be appraised once we have the Al Jumd area up and running with our current plans.So that said, on 56, let's move in to 58. The main excitement on 58 last quarter was the announcement of prospective resources over the Fahd area in the block. This quarter, we focused on the South Lahan prospect area, where we have a set of carbonate stringers along to the PDO fields that you see as green blobs here on the slide. Again, we are flanking PDO, the orange generis line here to the left is our Block 58. To the right is Block 6, where PDO themselves operate the have wheel cluster of carbonate stringers.So we are quite encouraged that we have been able to firm up a number of prospects in the area. They are clearly visible on seismic -- they are deep, around 4000, 5000 -- 500, 5,000 meters. They are in case solved and do present to be it to a drilling challenge. That's why they are certainly not our 1st choice to be drilled, although we expect to see possibly a higher chance of success in Lahan that we have in Fahd.But Fahd remains the 1st drilling location, we expect to drill Fahd later this year or early next year. We are tendering for rig. We had 1 rig in mind when that was delayed. We also noticed that the rig market had opened up a bit, and we are now tendering with a number of participants and hoping that we can get maybe a slightly more adequate rate and also at a slightly lower price.At the same time, we are testing the waters for farmout. We have fix the 100% of Block 58. So we have ample room to farmout to a suitable partner if such a partner can be found, and of course, at good commercial terms for ourselves.Leaving to 58, and moving slightly to the northwest. We are back to Block 49. Focus there has been to get the operations going so that we can do the reentering of the Thameen-1 well and see if we can fracture the sandstone and get some more to servers. It has taken longer than we expected. There are a number of moving parts in conducting an operation like this, and initially, we set out to try and tender for those separate parts independently, turned out to be time consuming and possibly slower than trying to go for an integrated contract for every -- for a contractor capable of doing everything from reentering the well to actually conducting the fracking operation and also doing the testing of the well. And we are currently evaluating the results of that tender, and we'll get back to you as soon as we have a clearer plan for what and when we are going to be able to action the Block 49 reentry.With that, we move over to Blocks 3&4, where our producing well, where sandstone producing and block where we have a 30% interest and have hired back since 2010 when we farm down 20 percentage points to our steel partner Mitsui. The diagram is pretty self-explanatory, we have seen -- ever since we came back from the COVID lockdowns. We have seen production 4. We are stabilizing now around 9,000, we are hoping, and there are a number of reasons for this. We have seen surface issues that have been mitigated. We have seen wells that have not quite performed as they were expected too. We are seeing work in them being worked over recompleted.And all in all, there is still a lot of activity in trying to stabilize and of course, eventually also increase production in 3&4. However, we must conclude that some of these fields have been in production since the early teens, and we would expect the natural decline, you would also expect to increase water handling. We are seeing all of this, but we would also expect production to make stabilize at least these levels for the coming quarters. And of course, with an active exploration program that we can look at further on the next slide. We have seen actually 3 exploration wells come in positively. Maybe the most interesting one is the Abu Mahara in the southern part of Block 4, where there appears to be a rather large resource base in pre Cambrian carbonates, and we are now trying to establish and understand how best to produce the among others Abu Mahara sandstone.All has been brought to surface and there is definitely an active patrolling system. It's a tight reservoir, and we knew that. And we now -- and the operator is now working on the best way to try to evaluate and see how best we can bring this to production. And needless to say, a new discovery to the, I mean it's particularly a large area of 3&4 that can be developed for new production will be instrumental in getting 3&4 production to stabilize and then to eventually increase.So to sum up, and we can move to the next slide. We've had a very active quarter and a very encouraging quarter, in particular in Block 56, and we working hard to get a 2nd production stream online in Oman, and we are hopeful we will be able to supply you, our shareholders and market with use of and how 56 -- and how 56 materializes over the year, the rest of the year. And then, of course, that we can bring it towards commercial production in the course of 2024.While waiting for that production stream to materialize, we are having all our financials income related to Block 3&4. We had an okay oil price of $81 per barrel, given us revenue of $34.7 million, quite close to where we were in the first quarter. And the [indiscernible] $16.9 million, investments in oil and gas properties $21.4 million, using a free cash flow of 4. A lot of investment in 3&4, both to mid to finally upgrade the surface, but also in order to rework some wells to increase production.We had our share redemption. We have had repurchased -- a share repurchase, and the combination of these revenue streams, the investments and the distribution left us with still a quite healthy cash balance of $33.9 million at the end of June.And on that, I would actually like to turn to the next slide, and hand the floor to our Chief Financial Officer, Petter to do a more detailed rundown of the quarter's financials. Petter, please.

[Petter Hjertstedt, executive]

Thank you, Magnus. I think we'll stick on the financial highlights slide for just a moment and try to summarize the bigger picture of what we see here. The quarter -- the second quarter compared to the first quarter is relatively flattish in development, particularly on revenues, down a little bit as production came down somewhat and oil prices were stable. However, we do see a slightly lower -- slightly lower earnings on an EBITDA level.So the 2023 is so far in a flatter trend than the increasing trend in earnings and -- sorry, in revenues and earnings that we had through 2021 and 2022. And there are a number of reasons for this, and we will come back to that in more detail.I would say otherwise, we are very satisfied with the free cash flow and the net cash position of almost $34 million at the end of the quarter.Oil sales in terms of barrels a fairly flat compared to the first quarter as was the oil price, a slight single-digit downtick in those volumes. And as a result, revenues were relatively unchanged. However, as we know, the production was down somewhat, and we have now moved to a minor overlift position compared to being underlifted for quite some time.We can see that the current production trends in the oil price will be reflected in Q3 that we -- and that will impact, of course, the oil sales and revenues from that. We will touch on that a bit further down as well. And if we go to net entitlement, that is the oil that we are entitled to sell from the total production. We are currently at a net entitlement of 52% of total production. That is the maximum allowed under the PSA. And also, consequently, we are not recovering all the costs that we are generating at the moment. So we do have a cost pool. And for the end of the quarter, we had $10 million of costs unrecovered that we are entitled to receive through oil in the future.You can see in the graph to the left that the value of net entitlement is somewhat lower this year than last year. That is primarily a consequence of 2 things: the lower oil price and the lower production. And -- but much as we see in the profit and loss statement, it's kind of flattish development in the year so far. And the fact that we are operating at full net entitlement does have an impact also on the cash flow, which is notable if you compare it year-over-year.Moving to operating expenditure that we've seen that trending upwards for quite some time now, both in absolute terms and per barrel. In absolute terms, what we see is the effect of increased fuel consumption and fuel costs and also the -- which is primarily driven by the increased water handling and relating to the maturity of the field. We also see increased cost for workovers, which is both an effect as well of the high activity on the field, but also that some of those costs have recently been a bit more expensive than planned due to using a slightly heavier equipment than normally would be necessary. That is an effect we hope to receive going forward.The OpEx per barrel in the quarter was 17.4%. That is, of course, a combination of slightly higher absolute costs and lower production rates than in previous years. And going forward for that to come down, we really need to see a turnaround in particular production, but in the meantime, we are looking at how we can improve the cost in absolute terms.This quarter, there is the -- first, we actually see the inclusion of some OpEx related to something other than Block 3&4, and that is the Block 56 extended well test added $700,000 in OpEx. And of course, now it's worth reminding you that there was no revenue recognized or production recognized as commercial production in the quarter. So that is not included in the 17.4% per barrel, but that is -- the $700,000 is the current run rate of OpEx from the extended well test. And we expect to see some proceeds from that, as Magnus mentioned, in the coming quarter.Otherwise, the Block 3&4 CapEx was down sequentially as expected with Q1 being burdened by the annual bonus and benefits payments that -- by the operator in Oman.Moving on to cash flow. Operating cash flow before working capital was around $18 million. We had a positive working capital effect of $7.5 million, leaving us with about $25 million in operating cash flow, and that is primarily the effect of the move to overlift being one of the big shifts in the positive working capital effect.CapEx, we are continued high spending on Block 3&4. That is particularly on drilling. We're seeing a lot of drilling going on this year. We have 4 rigs operational. And we have -- we've drilled 3 exploration wells this year, so far, 1 more to come. The 3 have been successful in encountering hydrocarbons. So there has been some incremental testing costs related to those. At the same time, we are acquiring some more 3D seismic getting particularly in the southern areas of the block, where we see a lot of potential and a lot of work going on to ensure the production integrity of the field and improving performance and the results of which we hope to see in the coming quarters.When it comes to our operated blocks, 49, 56 and 58. As we've said, there has been some quite low level of operational activity in the field, and that's reflected in the relatively low CapEx, but we do expect some of that to pick up in the second half of 2023, particularly relating to Block 56, as we've seen Block 58 drilling being pushed into next year.So that means for the quarter, we have a free cash flow of $4 million. That is a nice uptick having had a couple of quarters of almost no free cash flow. So we're happy to see that. But it is worth remembering, we are in an investment phase and focus is really to deploy the capital and cash that we have and create value in the field, particularly through the drill bits and using -- rather than having the cash sitting on our balance sheet. But we're happy with our performance in the quarter, and it shows the strength of the model, business model we apply.Now netback, we usually talk about being an indicator of sort of the performance of over time in terms of sort of the profit oil generated from Block 3&4 and free cash flow without the sort of fluctuations that we see. And we see this quarter that netback -- net of CapEx is in fact negative. That is -- that is due to us being unable to recover the full costs or generate 3&4. Conversely, we have the $10 million cost pool. So this is the effect of when we are at full cost recovery and recoverable cost exceeding that cost allowance. So that is cash that is being deferred and we will receive in the future.Moving on to guidance for 2023. We have made some revisions to this, particularly the production. We have seen that in the monthly releases trending and the production guidance is a reflection of what we believe the full year average to be in light of performance year-to-date, and that's 9,000 barrels per day, plus/minus 200 barrels on the yearly average.Operating expenditure, as calculated on the basis of Blocks 3&4 is expected to be around $17 per barrel, plus/minus 0.5 a barrel. That is, of course, not including extended well test. And we now expect the investments in oil and gas assets to be somewhat lower than previously in the range of $81 million to $86 million rather than the previously $85 million to $95 million. That is particularly due to the deferred drilling on Block 58 being the main swing factor in that.And before I hand over to back to Magnus, I just wanted to remind you about the effects of oil pricing in Oman. As you know, the prices are set with a 2 month lag. So we already, at this point, know what the unweighted average price will be in the third quarter, and that is $76.8 million. So that is somewhat lower than we had in the second quarter. So third quarter revenues will be reflecting that lower price that we have seen in a few months back.However, currently, the Oman export plan is trading at $87 per barrel, and that is $3 per barrel premium to Brent, and those effects we expect to see coming into the fourth quarter. So the very strong oil price trend currently will be reflected in our achieved price during the beginning of the fourth quarter, just as a reminder.And with that, I just want to hand back to Magnus.

[Magnus Nordin, executive]

Thank much very much Petter. And if we can have the next slide, just a quick note on overall oil price. It has been quite firm, as you all know, over the last 6 months. Every time we've seen $70 million is bounced up to $75 million. And now we are in solid '23 above $80 million and certainly get the impression that OPEC with Saudi Arabia at the helm is very focused on maintaining prices at a level they can say reasonable. And this survive just illustrates that both the way the quarter are set, and we should say that we are no way impacted by any of those quarters, we are allowed to produce as much as we can and we courage to increase production as much as we can.But we are seeing that the overall core trials are set at quite low levels, and actual production is even coming in below those low levels. And on top of that, Saudi Arabia has now extended a unilateral 1 million barrel per day additional limitation up through another month. So the -- that's what we see in action, and what it seems a bit that is able to produce, we and as long as the Saudi Arabia maintains this discipline.We are quite convinced that we are not going to see any serious drop in oil prices rather than maybe if there is some kind of sort of supply disruption, we may see the risk on the upside.That said, let me just sum up what we can expect. Hopeful to see Blocks 3&4 stabilized around the 9,000 as per our guidance. Also very keen to get updates on the evaluation of the exploration wells that have been grown so far this year, and our own blocks, of course, lots of focus on Block 56. We have approached the ministry for an extension, the second phase, we would expect to be able to do the work we need to bring it forth commerciality over the next couple of months. That's by far the main focus of the protesters for the quarter. The rest is progressing according to plan with the prospect maturation in 58. We see if there is an interest for farmout, in the -- that you farmout of 58 could be of interest due to form a stronger partnership down. And of course, we are also eager to see the first lot details -- where we drilled. But we're probably not going to happen until late this year, early next year.So on that note, we are happy to take questions, if there are any, please?

[Operator]

[Operator Instruction] And now we're going to take our first question from the line of Knut Martin Karlsen from Commandeer Capital AS. Please have 2 questions.

[Knut Martin Karlsen, analyst]

Good morning Magnus and Petter, congratulations on this success on Block 56. I was just wondering on the prospective resources on South Lahan and the central area of Block 56. Do you have a number on that on the PEP [Indiscernible] mean?

[Magnus Nordin, executive]

Okay. We don't have yet. Lahan, we are done with our work and are currently working with a peer review, which will result in an independent or the [Indiscernible] of Lahan, which then, of course, will add to Block 58 or 56. When it comes to 56 central area, we are delay -- we're delaying that a bit with a focus on the Al Jumd trend. So we'd not expect any prospective resources on this central area until towards the end of this year, probably most likely during Q1 next year.

[Knut Martin Karlsen, analyst]

Okay. That was all the questions.

[Operator]

[Operator Instruction] And the next question comes from the line of Stephane Foucaud from Auctus Advisor.

[Stephane Guy Foucaud, analyst]

I've got few on 56 and 58. And that's okay. We got a follow-on on 3&4. So on 56, why this activity is taking place on appraisal, looking at the commercial development, when would you expect to be able to be in a position to assumption the Block 4 commercial assuming everything work and start the green CapEx for production? Is it 2024? Is it beyond that? What's your best view?

[Magnus Nordin, executive]

The first -- thanks for the question. If we first look at the license situation, so we are in the final statement duration -- so typically, the next say forward would be due to tie commerciality. Now the duration of commerciality needs and redevelopment path and that shows how you are going to -- what kind of resources you have? Are you expecting to train it or what time? What kind of method, what kind of investment? And what kind of value your redevelopment [Indiscernible] so -- and of course, the provisional work of that has already started.We have a idea about Al Jumd. We need to do a bit more work on the 4 horizontal well. We will then have come up with an optimization of how best to brain Al Jumd. Do we need more wells? Do we need other ones we have sufficient, et cetera, et cetera. it's work that we will be done exactly a course over the next 3 to 5 months. We would like to be able to add Farha to the development plan, and we would also very much like to be at least one more prospect, as likely the one that we just identified and to put all this into one comprehensive development plan for Al Jumd Block 56.Typically, this will not take more than say, 6 months if mostly if we are recently successful and then keep the pace up. And the next step will then be to commercialize the block. So from the planning perspective, we would certainly have to get this done during the course of 2024.

[Stephane Guy Foucaud, analyst]

Great. My second question is on 58. Do you talk about looking to farmin to farmout the block and a vision for that being the cost of the South Lahan deeper well. So with the intention be to just file the South Lahan area or the entire block including Fahd. That's my second question.

[Magnus Nordin, executive]

I would say, I mean, I say we are totally pragmatic. I mean, we have 100%, and we have the money to drill if I had well, we most likely have the money to drill to South Lahan well also. But there's always risk in these ventures. In terms of success, there would also be development. And we are just curious and easier to see what kind of partner could be attractive to Block 58 at this stage? And if a good partnership could be formed, that would be depend entirely on what's achievable and what the terms would be? But most likely, I mean, the farmout will be at the Block [Indiscernible] and would -- I mean, typically what we have done in the past is we found out expertise [Indiscernible] as we did with 49, as we did with 54.So I said that's the most like a Samha. But I mean, it's entirely up to what -- if there is interest at all and in that case, what that intent can result in, what kind of deal that can result. We totally [Indiscernible].

[Petter Hjertstedt, executive]

By no means a foregone conclusion that there will be a deal, as Magnus said, we are able to finance the drilling ourselves. So it's really exploratory to see if we can get a deal that we're happy with.

[Stephane Guy Foucaud, analyst]

Okay. And my last question is on Block 3&4 and around the LF-1 and Rub-1 discovery. I think you talked about those 2 wells brought all 2 surface, and are they now in production? I mean it could select some more work to do, and if they are not in production yet, what is the uncertainty, what proven that to happen?

[Magnus Nordin, executive]

They are not to talk to the production system as yet. The [Indiscernible] tight hydrocarbon service. And we are looking at a fairly light and like tight hydrocarbon. And the -- it's really a matter of optimization how best -- how to get the best value, given the perceived product mix, how to best bring it into the current blocks, and so it's a business evaluation optimization at [Indiscernible] was gone, and we would expect that pole at least another couple of months before we have more certainty as to, when and how the can be [Indiscernible].

[Stephane Guy Foucaud, analyst]

And is it because the oil is a bit different from what you have on the rest of the sale because there is a bit of water, because a bit of gas. Why not looking them up? What's the specific where you can't put them up very quickly?

[Magnus Nordin, executive]

Well, it's really a question for the operator, of course, but we understand that it has got to do somewhat with the product mix and to optimize production from that particular product mix.

[Stephane Guy Foucaud, analyst]

Okay. That's it for my question. Thanks for give me the time.

[Operator]

Now we're going to take our next question. And the next question comes from the line of Teodor Sveen-Nilsen from SB-1 Market.

[Teodor Nilsen, analyst]

I had 3 questions. First on 2024 investment level. It seems like at this, Magnus you are pretty constructive on your oil price view. So just wondering should we expect investments next year to be higher than this year, assuming that the oil price will at least remain at this level? So that's the first question. Second question is on your balance sheet. Historically, you have a very strong balance sheet with net cash position. I just noticed now you have the lowest net cash position since 2018. So should we interpret that as you're actually now managing the company towards the 0 net cash or shouldn't interpret anything around that? And final question is just generally on cost inflation. I think we discussed that previously. But what's the latest development in the local market in Oman? Or what kind of cost inflation do you see? And which part of the value chain do you see the most cost inflation.

[Magnus Nordin, executive]

Let's see. Let's start from the beginning. I mean we haven't done about yet or done any guidance for 2024, but I think typically, we would want to see a little bit less of CapEx in 3&4, especially if we are going to see production on these levels and not higher. If we go into a full-fledged development on 56, that would certainly the demand and element of cash flow, although, of course, we would try to use cash flow from operations as much as we can. But we would expect an element of cash gain into a 56 development.And -- the -- obviously, a field development plan and I think iteration of commerciality would give ample guidance as to how much cash we would expect to see and also how much production we expect to see when, and we could then calculate a capital need there's also a lot. Otherwise, I think the -- we are in a business [Indiscernible] and we did see the occasional risk that as we mitigated.Oil prices are always volatile. We have a lot of opportunity but also a some CapEx into wells, et cetera. So I think we would expect to see the cash position maybe fluctuate a bit based on our needs, and we'll be able to be much on what we're seeing for next year once we do our budget guidance for '24.Turning to cost inflation, in our operated blocks are, we're not really seeing that much of an impact, and when it comes to the rig, that's actually opened up a bit. There has been track was, which has attracted additional payers, and they have of the research things new rigs into countries. So I think apart from the -- part from the moving costs [Indiscernible] resell or not in 3&4. We are not really seeing any clear trends, possibly a little bit on the maintain and there is a lot of [Indiscernible] activity and that is, of course, increasing demand on a good people. Otherwise, there is not really -- and then, of course..

[Petter Hjertstedt, executive]

Sorry, I can add to that. I mean, I think what we're seeing is we're not seeing any particular inflation in Oman as such that is sticks out from what we see internationally. However, on certain long-lead import items where there is tighter globally from time-to-time, that kind of pops up. I mean, we've seen that in the case with some steel tubing and casing at times, and we've seen it on certain components, but it's not something we're seeing across the board. So it's more, I think, supply chain disruption related. Sorry to break in--.

[Magnus Nordin, executive]

No no this is fine...

[Petter Hjertstedt, executive]

But just inflation pressures in Oman such that, deviate from historical patterns or otherwise. And just to add also, I mean, on the cash position, yes, it is the lowest cash position that we've had for a long time. And rightfully so, the cash is to be put to work. I think at times, we have had a higher cash -- net cash that we had planned or intended to due to both sometimes fortuitous reasons, higher oil price than planned or delays in operations. And now we're putting it to work, and we expect to do so going forward.And as Magnus said, as we look into next year and the moving parts on both 3&4 cash generation, but also on Block 56 needs given the development, we'll make appropriate plans to address that. But historically, we've had a very, very strong cash generation to support all our operations.

[Teodor Nilsen, analyst]

Okay. Just 1 follow-up on the balance sheet question on, if you were clicking a little bit when you discussed that, should we expect the company to move towards a 0 net cash position going forward as you develop Block 56 in particular and maybe 58.

[Petter Hjertstedt, executive]

Well, I can respond there instead. I mean we have no intention to -- there is no explicit target to move to anything like 0 cash position, but I mean, we will finance developments as appropriate. I mean if we feel that it's prudent to take on debt to do so and that's suitable to the returns of the project, we'll certainly consider it. And I think it's fair to say that if we see success on 58 and 56 , there will be a consistent development CapEx and long-term CapEx requirements to be that are consistent over time that we needed to plan for. But we're not targeting any particular kind of net cash position. I mean, it's really dependent on what cash generation we can see from 3&4 and what's appropriate for those projects.And I think it's worth reminding also, I mean we have 100% on 58. We have 65% of 56. That means we go into these projects with high interest stakes. And I would expect at the end of a development cycle, we would probably sit with lower interest stakes. So that's certainly part of the equation in terms of financing and meeting those requirements.

[Teodor Nilsen, analyst]

Understood. That's very, very helpful. And that's all for me.

[Operator]

[Operator Instruction] Now we're going to take the next question from Martin Mauseth from ABG Sundal Collier.

[Martin Mauseth, analyst]

So the first question is on Block 3&4. So given the revised production guidance, it's still reasonable to assume a slight increase in production levels in the second half of the year compared to Q2? Or should I expect a more flat development? And the second question is on Block 56 on the extended well test at Al Jumd, we expect to see some revenue contribution from this in Q3? And then the third question is on Block 58 and the potential farmout. So how much are you looking to farm down on the block? And what would be the ideal ownership stake in your opinion after farmout.

[Petter Hjertstedt, executive]

All right. Martin. I'll start with the revenue recognition. Yes, on 56. Yes, we did have a lifting of the -- 1st lifting of oil from 56% in July. So we are expecting to see some revenue recognized in the third quarter from that. However, I would caution that not to have too high expectations, and as the volumes are modest and those that we have reported are including both government and partner shares. The exact determination of that is to be determined. So we're not at liberty to give any guidance on exact entitlement share at this point.

[Magnus Nordin, executive]

Sorry. If I may it will be in take also. In general, I should say, I mean, an extended well test is an extended well test. And we are allowed to sell the oil, not just give it away, but serious revenue would not be able to be calculated until we have -- or close to commerciality. And of course, once we are in commercial production, then it will be transparent and predictable what kind of entitlement we will have. So while it's still an extended well test situation, there will be some revenue, but it will be incremental, if I put it that way. Sorry..

[Petter Hjertstedt, executive]

Yes. No, exactly, exactly. And I don't mind, Magnus do you want to comment on the production guidance question about the production levels in the second half?

[Magnus Nordin, executive]

Sorry, could we repeat that question?

[Martin Mauseth, analyst]

Yes. So I want to given the revised production guidance, is the treatment to assume a slight increase in the production levels in the second half compared to Q2? Or should we expect a more flattish development.

[Magnus Nordin, executive]

Okay. Okay. I mean, we've guided for around 9,000, and that's the best part of the guidance we can give based on the work program that we have from the operator and the operators numbers of expectation from the wells and also from our experience of wells.As we've commented on earlier, there were exploration focused during the first quarter. So there were fewer development was during the first half of the year, then there will be during the second half. So typically, that should speak in favor of more development wells should bring more production also in the second half. So I mean, we are confident that the guidance will stand. And we will see how far it can be taken just be.

[Petter Hjertstedt, executive]

And Martin, what was your final question? Please remind us.

[Martin Mauseth, analyst]

Yes. The third question was on the Block 58 and the potential farmout. So I was wondering how much you're looking to fund down on the block in, what would be like the ideal ownership stake in your view?

[Petter Hjertstedt, executive]

I think we don't have -- we don't -- I mean, we remain quite open-minded in terms of interest stakes. It really depends on what is on offer in terms of what an interested party offers and what they bring to the table, I would say. So we would like to keep a significant, if not a high stake at this early stage, we are yet to drill. So we want to go into that drilling with a material exposure to that drilling. I mean, we are very excited about it. So it's -- from that respect, we don't want to be letting go too much, of course. But in the end, it really depends on what's being offered on the table and the whole package because as we're saying, we're looking to build a strong partnership for not just for the one-off well, but for a full campaign and hopefully also development.So I think we'll be quite open-minded in that. But then again, we don't want to dilute ourselves too early, either. So it's going to be a balancing at between that. But that remains to be seen, where it's early days yet.

[Operator]

There are no further questions, and I would like now to hand the conference over to Magnus Nordin for any closing remarks.

[Magnus Nordin, executive]

Thank you very much. Well, thank you very much for listening. And I think there's been some excellent questions. And we are keen to talk to you again, if not before, so in early November, where hopefully, we are much further along in 56, see the controls of the new production stream, and we are seeing stable and hopefully slightly increasing production from 3&4. So stay with us and speak again soon. Thank you very much.

[Operator]

Does that conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.