Tethys Oil AB

STO:TETY

Earnings Call Transcript 2020-Q4

[Operator]

Welcome to the Tethys Oil Q4 Earnings Report 2020. [Operator Instructions] Just to remind you, this call is being recorded. Today, I am pleased to present Magnus Nordin, Managing Director; and Petter Hjertstedt, CFO. Please begin your meeting.

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

Thank you very much. Good morning, everyone. It's good to have you with us for yet another quarter to be presented from Tethys. It feels like it was only 3 days ago or so since we talked to you last time. But let's delve straight into the presentation. And if I could have the first slide, please. We can happily see that for as much as 2020, it turned into a year that I don't think we could have imagined such a year ever occurring. Tethys Oil prevailed and sailed through the year with quite high mass supplies. Production came in at 11,000 barrels of oil per day for Q4, which is considerably better than the low points of close to 9,000 that we saw in the middle of the year. And the 3&4 asset continue to perform brilliantly. And for the 10th year in a row, we now have reserve replacement ratio above 100%, and actually the highest reserves in the company's history. So while we keep producing, we also keep growing. And that's, of course, key to where we're trying to take Tethys over the next couple of years. Despite all the turbulence, we came in the year -- with the quarter with a free cash flow of $9 million, which I must say is certainly not bad given the circumstances. And we have been -- had a very active year also in expanding and rearranging and optimizing the asset portfolio. Apart from Blocks 3&4, we now have a 65% interest in Block 56. And we couple that with a farm out of Block 49, where we dropped from 100% to 50% interest, and this happened more or less on the eve of spudding our first exploration well in Block 49, the Thameen-1 well which is currently in a drilling phase, and we hope to have a result within the next couple of weeks. And least but not last, certainly, we continue to distribute cash to our shareholders. We generate cash. We have cash in the bank. We need cash to expand, but we have enough cash to do that. And therefore, we are still able to share cash and distribute cash to our shareholders. So the ordinary dividend stands at SEK 2 per share, and we are doing an excess dividend -- distribution of SEK 2 per share as a redemption scheme as we have done for the last 4 years. So that really summarizes what the quarter has been all about. And of course, a very strong quarter, not least given the circumstances. And unless you want the details, you feel free to do something else. But if you want to continue to listen to us, let's have the next slide. Q4 financial highlights. Petter will give these in much more detail, but healthy revenue of $22 million, EBITDA of $10 million. Yes, it's a lot less than we had last year, but it's a lot better than it could have been. Operating results, slightly negative. Free cash, yippy, $9 million. Average selling price came back nicely at above USD 40 in obviously, USD 42, if you compare this to a forward month currently, above USD 60, looks quite measly, but we should be very cautious as to how the oil price actually will develop over the year. Remember, we are still in the pandemic, and in particular, the OPEC+ countries and the lead OPEC nations have implemented rather severe curves. OpEx came down, and we are sitting at USD 9.8 for the quarter compared to USD 10.50 for the full year in 2020. It's risen a little bit compared to Q3 in line with production, I'd say. And production, of course, up from the quarter -- the previous quarter. So the details will come from Petter, and I'll move into the next slide, where we will comment a little bit on our reserves and record reserves as usual. The end number for the 2P is 26.9 million, almost 27 million barrels of 2P reserves from Blocks 3&4, and that's the highest recorded number. If we add on the 2C at 13.9 million, almost 14 million barrels, we can also conclude that the resource base stands at the highest point in the company's history. Combined, 2P and 2C numbers are the highest combined resource base we've ever had. So 3&4, as the assets continue to deliver increased reserves while we continue to produce. And 120% reserve replacement ratio is something we are quite proud of. We have a quick look at the development of reserves. You can see from this slide, which is a little bit complicated, but if one does penetrate it, it shows a very, very nice trend. And while, as I say, we continue to deplete the 3&4 blocks onshore Oman, we also continue to increase recovery ratios and find more oil. So reserves, of course, the back burn of any oil company. If your reserves diminish, you will eventually disappear. And therefore, we are quite proud that we are mainly maintaining this reserve replacement ratio. Turning to the next slide. We just want to remind you, of course, the current cash is what's most interesting to our shareholders. Ordinary dividend of SEK 2, has been stable since 2018. And the extraordinary distribution down a little from last year, but still a quite significant, I'd say, SEK 2 per share for a total of SEK 4 per share. And of course, the -- it reflects both our ramped up exploration program and investments in future growth, but also maintaining a bit of extra cash on the balance sheet, given that we still face a 2021 that could turn out to be volatile. So on that note, I'd like to hand the floor to Petter to give you a much more detailed discussion of the Q4 numbers.

[Petter Hjertstedt, Chief Financial Officer]

Thank you, Magnus, and we can start off by looking at the production, the quarterly production for the past few quarters. The Q4 production was just above 11,000 barrels per day, and which is up 4% from Q3 and significantly up versus the low point in -- around midyear, as Magnus mentioned earlier. And we'd like to remind you that Oman oil production is still subject to the production limitations under the OPEC+ agreement and the Blocks 3&4 are in fact under -- formerly under production limitations since May. However, we have been permitted to produce at a slightly higher level throughout the fourth quarter. For the full year, we had production of about 11,300, and that was boosted by the high production under the first quarter of 2020. The oil price achieved in the quarter was USD 42.3. That's just down very, very slightly versus the third quarter. Full year ended on USD 47.7. That's once again, very much influenced by the higher numbers in the first quarter, and as I'm sure most of you are aware, there is a 2-month lag and how we achieved prices is -- comes into our numbers. So the acceleration of prices that we saw towards the end of November has yet to make its mark in our accounts. And you can see on the next slide here with the official selling price, exactly how that works, how the official selling prices during the fourth quarter were, in fact, the market prices for August through October. And the Q4 prices are mainly influencing the current quarter, the first quarter. So looking at the current quarter, the effects that came through at the -- in December and now in January, they will be influencing the first quarter achieved price. And just looking at an unweighted average OSP, it's roughly $50 per barrel. And I would like to remind you that, that in our accounts, that would be influenced by the production levels in the respective months. So it doesn't translate exactly to the expected achieved price, but it will be thereabouts, I would say. But that's not the only factor. Moving on. Net entitlement, of course, is the amount of oil produced that we are permitted to sell. That is governed by our exploration and production sharing agreements. The full amount that we are permitted is 52%. And as we could see during 2020, if we do not utilize the full 52% earlier in the year, we have the ability to catch up in subsequent quarters until the end of the year. However, year-to-date entitlement can never exceed 52%. And there is a number of factors influencing this, of course, which is the production levels, the oil price, the cost incurred and the balance of unrecovered cost in the cost pool. And at the end of the year, we had approximately $1.8 million in that cost pool coming into 2021. Moving on to over and underlift, another factor that can influence, particularly the cash flow. As we nominate the liftings, the actual oil sales, 2 to 3 months ahead of the actual month. It means that they will not always correspond exactly to the production in the month. And that can result in this over an underlift situation where we, in fact, have sold more or less oil than we are, in fact, entitled to. This is a situation that became very clear throughout the year, not least due to the imposition of production restrictions which, of course, reduced production, while there already had been nominations made that resulted in an extraordinary volatility in the over/underlift position throughout the year. This is -- this influenced the Q3 numbers, in particular, where we had a significant underlift position. And as we are contractually obliged to neutralize this over time, this was reversed in the fourth quarter, and we have ended the year with a slight 3 million-barrel overlift position. Moving on to revenue and other income. Fourth quarter, we had $22.3 million, up 9% versus Q3. And that is mainly due to the higher volumes of oil produced, offsetting the slightly lower price, which is a level significantly lower than a year ago, but we see it steadily improving in the past quarter. Coming to expenses. This is, I think, something that has been one of the strong points of this year in reacting to the effects of the pandemic, while there's very little we can do about the oil price and with production levels being impacted by the OPEC+ agreement, which is ultimately beyond our control. Expenses is something that is much closer to home and control. And we've seen the partnership on Blocks 3&4 reacting very, very positively to this. You can see that the fourth quarter, we had an OpEx of $10 million. That's a significant improvement year-over-year and slightly up versus the third quarter, but that's influenced mainly due to the increased production. When it comes to admin costs, they are up slightly in the quarter, but that's mainly due to currency effects due to Swedish kroner and U.S. dollar as well as a change in timing of the recognition of variable compensation, which is something of a onetime effect this year, which brings us to the OpEx and netback per barrel, which I think is a good metric to look at under the circumstances, the thing that we can achieve a netback of $12 per barrel under these very, very low prices. You can see the history of what the netback has been under some of the higher prices. So that's a positive and shows a resilience in the license and the operations. We are particularly proud of the OpEx per barrel, which in the third quarter came down to a very low level of $9.5 million up to $9.8 million in the fourth quarter, still very, very good. That is driven mainly due to the increased production. And as we've mentioned, in cutting back production, it was prioritized to cut back and particularly the high cost production. And as more wells are being brought online, the incremental effect is a slightly higher OpEx per barrel, but we have also seen some savings that we hope to be able to keep as we go forward. Moving on to EBITDA. We had $10 million in the quarter. And as Magnus mentioned, of course, this is significantly lower than what we've seen just a year ago. However, under the circumstances, we're very happy to see these levels, and we saw it improve in the fourth quarter versus third quarter, driven mainly by the improved revenues. Moving on to free cash flow. We're very happy to have achieved our goal of positive free cash flow in the fourth quarter and for the full year. And we saw the third quarter being particularly negative, but that was no small part due to working capital relating to the timing of liftings and the over/underlift situation. In the fourth quarter, we saw working capital situation normalize and thus getting positive cash flow effect of that in the quarter. And over the full year, working capital effect on cash flow was neutral, and we have a free cash flow of $6.7 million, which is something we're very happy about given the very tough circumstances and the operations we're dealing with throughout the year. Now part of that free cash flow or part of what impacted that cash flow is, of course, the investments we've made. And in the fourth quarter, we saw a slight rise in investments versus the third quarter, particularly in Blocks 3&4 and Block 49 as we initiated drilling operations on the Thameen well. However, that did come very late in the quarter and some of those investments that we were expecting this year have, in fact, been moved into the 2021. And here, you can see the quarterly cash reconciliation from the end of the third quarter to the fourth quarter cash position of $55.4 million. And you can also see, we spent about $1.8 million on share buybacks. The balance sheet remains solid. Strong cash position of $55 million. No debt, very straightforward, giving us a very comfortable position to not only be able to weather the storms of volatile oil price and the environment, but also being able to distribute and invest at the same time and keep having plenty of options open in how to capture value and produce returns. So this is something we are very, very proud of. And with that, I conclude the financial review and hand over back to Magnus.

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

Thank you very much, Petter. So let's turn to the operations section. And the main take, I really want to convey here today is that with the strong backbone of the 3&4 assets, which has shown remarkable resilience in 2020 and continue to generate positive cash and continue to increase reserves, we have also, over the last couple of years, assembled an increased portfolio of other assets in Oman. And we are, as we have now entered 2021, in a position of starting to seriously explore for new resources in these blocks. And we are actually poised for the largest increase in exploration efforts in Tethys since we entered Oman more than 10 years ago. You know, of course, where we are, Oman, bordering United Emirates and Saudi Arabia, Block 49, where we are currently drilling the Thameen well, borders directly Saudi Arabia, and we are actually drilling a well in the Rub'Al Khali basin, which is home to most of Saudi Arabian reserves, although a very little production has come from the Rub'Al Khali basin in Oman. Hopefully, we'll be able to change that by -- with the well where we are currently drilling. And 49, we should have a result within the next couple of weeks for -- at least before the end of February. If you look at the map also, you can see that we actually cover a fairly large part of Oman. And apart from 3&4, we've added 49, 58 and 56, and we actually hold almost 18% of Oman's total areal extent under license at the moment. And Oman remains a very potentially, more prolific region than Oman has been for, say, the last 10, 15 years. The country was quite out of fashion in the mid-2000s when Tethys entered, 2005, 2006/'07, when Tethys entered, but has come back in fashion, as new discoveries have been made over the last 4 or 5 years. Let's turn to the next slide, and let's look a little bit more the details of our asset portfolio. It is a portfolio and we've tried to optimize it, both from a geological exposure but also to have good partners and to diversify our interest, while maintaining operatorship in areas where we know we can make a difference. In 3&4, we have 30%. Operator remains our friend as ever, CCED and Mitsui. We've been a joint venture now since 2010. And obviously, the joint venture has performed extremely well. In 49, we got that block 3 years ago and took it to the -- through the first exploration stage by doing a seismic and coming up with a nice prospects that we are currently drilling. We had 100% and had the opportunity to farm out to American company, EOG, which apart from adding all their experience, they're also a very skilled operator when it comes to unconventional resources. And we hope that the current wells, I mean, 1, whatever results will be, it will also add a lot of knowledge as to how the Rub'Al Khali basin can best be understood and possibly produced, both from a conventional and an unconventional perspective. Unconventional oil is not produced. With unconventional, we need mainly shale and that kind of technology is not really produced in Oman today, whereas we have seen a number of tight gas fields come in production and doing very well indeed, the star performer there being the BP operator, Khazzan field. So we do believe there is substantial potential also on that side, and we are very happy to have the EOG as partner. 58 -- sorry, 56, if we look at that -- sorry, let's look at 58. It's adjacent to 49. It's actually an extension. However, we are leaving the Rub'Al Khali basin behind and moving into the normal Omani basins that we are familiar with from 3&4 and 56. 58 is a reasonably compiled block, and we are very happy to have been able to sign it last year. We see some significant potential from known Omani place and where also our experience on 3&4 can play in very well. We just signed the block. 2021 is going to see a lot of desk work. And towards the end of the year, we may get ready to do some seismic. But we do have quite high hopes for the block, and we will spend a fair amount of money on it over the next couple of years. 56 is a little bit different story. It borders that producing field operated by our partner, Medco. We believe that the producing field play continues into Block 56. And large part of the work program, the current year will be to evaluate the potential of that play. But we also think that there is a substantial upside in the central parts of Block 56 where we will interpret, reinterpret existing seismic and then design our own seismic program, the same way we did for Block 49. And we are going to have -- see some interesting investments in 56 also this year. So with this summary, I would like to say that we are actually entering a new phase in Tethys' history, where the focus on exploration also outside of 3&4, while that still continues, is going to be much more prevalent in how we spend the money that we do not distribute to shales.So let's move on. I'll be a little bit briefer as we move on to Blocks 3&4. We've had the block now since 2008 and it is the mainstay of our production, of course, and the backbone of the cash that we can spend, both distributed shareholders and spend on other assets. Exploration activity was very limited for obvious reasons in 2020, but the 1 exploration well we drilled -- we did drill, the Anan-1 came in with good oil flows. And for 2021, we'll continue the development, drilling continue to try and mature, continued resources to reserves, and continue to upgrade the infrastructure to be able to maintain and possibly increase production, and we will continue to interpret seismic and drill, we expect more exploration wells in 2021 than we did in 2020. And as the good reserve replacement ratio and the success of the Anan-1 well shows, there is still strong exploration potential in 3&4. Let's turn to the next one. 49, southern part, Rub'Al Khali basin farm out from EOG. Next slide. And we are drilling the Thameen-1 well in the northwestern corner of the block. We have some 6, 7 wells that have given us back to pick this location. We have good seismic, 2D and 3D adjacent. Targeting, in particular 2 targets, a Hasirah late Ordovician sandstone and a mid Ordovician sandstone, reasonably deep, close to 4,000 meters. Previous wells have had oil shales, although no oil has flown to surface. But we've learned quite a lot about the Rub'Al Khali basin and how the geology works in this part of Oman. And we'll see what the well will teach us. We should know before the end of February, as I've said, and this is our first milestone in 2021 where we may have some exploration excitement or not as the case maybe. Whatever happens, we learn a lot about the Rub'Al Khali basin. And as you know, it is quite a prolific basin on the Saudi side, and it's fairly underexplored in Oman. So whatever the outcome of that means we are hopeful that we will be able to do more work in this block. Let's move on to show you the -- what was going on here. We are actually using a rig from the Abraj company and it's a rig that has drilled a number of wells for us in Blocks 3&4 and incidentally also drilled Tethys' first wells in Oman drilled in 2007 and 2008. So it's a rig we are quite familiar with and are very happy to work with. Turning to Block 56. We are getting our heads around the block. The -- we first got to block over a year ago now. We have consolidated the operator -- the partner group, and we will be able to gather operatorship as soon as we get government approval for all the transactions involved in increasing our interest. Turning to the next. It's a familiar -- it's a geology we are quite familiar with. This is a continuation of what we have in 3&4. But it also gives us exposure to several potential plays in several basins, whereas the eastern flank is similar to what we are dealing within 3&4 and the much younger tertiary basin has a potential system of its own. And in particular, in the middle, along that thick, that's what you see where the, say -- call, Umq-2 well was drilled and shows some very good potential. And as you can see on the next slide, we have a number of leads identified on 2D, and we will try and mature those as best we can from the existing seismic, and then we will come up with a seismic program for later this year. And in parallel, we're evaluating the border line to the north -- northwest, where we have the potential extension of the producing field on the other side of Block 56. And Block 58, somewhat similar situation to 56, different basin, close to 49. And if you turn the next slide. We have 2 wells drilled, that it has given us a lot of interesting information, but in particular, we also have some interesting leads that we are also trying to mature. Most likely, we will see the need for additional seismic, and we will develop the seismic program here in line with Block 58. And you should expect more updates here on the seismic side as the year progresses. So with 3 new or 3 blocks outside of 3&4, where we now see some quite increased activity, we do believe we will be in a position to take Tethys to a new level of both production and reserves if we have exploration success over the next couple of years. So turning back to what we can expect on the financial side from 2021. I will actually hand the floor back to Petter to guide you through where we hope to see our financial numbers from some of the most salient parameters. Petter?

[Petter Hjertstedt, Chief Financial Officer]

Thank you, Magnus. I'd just like to say that given the circumstances, we're currently operating on with production limitations and the uncertainty in the overall macroeconomic environment, we have elected not to provide the customary production guidance this year. And instead, we will continue to issue the monthly production updates. But we do -- we will provide guidance on the investments we are expected to make on the various licenses that we are -- have interest in. And on Blocks 3&4, we expect $32 million of CapEx relating to our share of the operations. On Block 49, on a 100% basis, we expect $5 million to complete the drilling and the testing of the Thameen-1 well. And on Block 56 under the assumption of the completion of the agreement and with Medco and obtaining 65% interest, we expect to spend $5 million on operations there, that is particularly relating to drilling of 3 wells towards the end of the year. And on Block 58, on a 100% basis, we expect $5 million of expenditure in preparation and execution of a 3D seismic survey. So all totaling $47 million and -- for 2021. And that is what we have to provide in terms of financial and operational outlook out there.

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

Thank you, Petter. So to conclude, we have had a very strong end to turbulent year with positive free cash flow and reserve replacement ratio of 120% and the highest 2P reserves number ever at 26.9 million barrels. We continue with our significant cash distribution to shareholders. And we have a very comprehensive exploration program on all blocks, including 3&4 in 2021. And the first milestone, the first result should be that Thameen-1 well, where we expect to have results in before the end of February. And the main take of the presentation today is that Tethys is embarking on a strong growth path. And we are able to continue our distribution to shareholders without holding back on our plans for growth. And we see that we will be able to offer both interesting exploration, continued distribution from a very interesting asset mix in Oman. So I do hope we will have the opportunity of addressing you again with new financials and exploration update about 3 months from now in May. But before that, let's see if we have any questions from the participants.

[Operator]

[Operator Instructions] Our first question comes from the line of [ Siegfried Fackler of Fackler ] Investments.

[Unknown Analyst]

Yes. I have a question for the production guidance. As far as I understand, OPEC+ is talking about easing the cuts in 2021. So can you -- maybe you can't give a production guidance, but can you maybe say that the production may be -- would not be lower than in Q3 or Q4 2020? Or is that too much? Because just no production guidance a little bit fog for us as investors. That's my first question.

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

Thank you, [ Siegfried ]. No, it's a little bit fog for us also, as I think we -- if past experience is anything to go by, we can conclude that all of the third quarter, we were allowed a higher quota than originally communicated. And the -- if you are right that OPEC+ at the next meeting would reduce the quotas, we would be hopeful that, that would mean that we also could continue to produce at current levels or possibly more. But it is really all speculation. And we don't feel that we have enough hard data to actually offer a guidance. And that's why we -- while we remain hopeful and we can conclude that during the third quarter, we were allowed to produce, as we noticed, around 11,000 barrels of oil per day throughout. We will follow, of course, what happens, and we would certainly welcome an easing of production. But we are not in a position to really offer a meaningful guidance. And of course, we are also happy that the oil price is at $60 per barrel now. And of course, there is a trade-off, both for us, for OPEC+ and the entire market, where -- I mean, obviously, we'd rather do 11,060 than 12,035. So with that said, keep following our market updates. We remain hopeful we can continue to produce at -- as higher numbers than the original quite allotted, but we have no guarantees.

[Unknown Analyst]

Okay. I have another question. Is it a problem for you as a company that you maybe not get the person to Oman now? Or is -- can you guide your people quite good from video conferences?

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

We have not had any problems at all. We have -- we are fully staffed in Oman, and we have also had an exchange of people going back and forth between Oman and Sweden. But the Oman office is fully staffed, and they are an autonomous unit doing their technical work with a little bit of financial guidance from stock, which is easily transmitted by video conference. But the entire technical team is 100% intact, and we have also not had any problems getting people in and out -- either after the in and out of the fields or also in and out of Oman in connection with the drilling of the Thameen well. So no restriction or no impact at all.

[Unknown Analyst]

Okay. One more question from me. This electric vehicle movement around the world is gaining traction. And maybe 1 day or now a little bit, it influence oil demand. What's your position as your company to this? Is there a scenario that you cash out of your investments as an old oil company like maybe big oil likes to do it now? Or do you see, in every scenario, you as a company investing in Oman and producing there for the next 20 years?

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

Obviously, we will have to adjust as the world evolves. But our expectation is that there will be demand for our products for many years yet to come. We would certainly do not expect that any oil that we will find in Oman now will become stranded. And I'd rather say that with the trend where you see some of the majors get out of the oil business into renewables, that will just create more opportunity for specialized niched companies like ourselves to maintain an environmentally friendly production of lighter oils for as long as that's needed. I mean Tethys also is very much a niche player in that sense. I mean, we are an exploration production company. We are not -- we do not have expertise to build with offshore wind farms or things like that. We happily leave that for the majors. We will happily continue doing what we do. And if it is so that the majors are divesting assets leaving value on the table, it's certainly something we would contemplate also maybe picking up. So for the time being, we are quite confident that this business will have many years yet to deliver value.

[Unknown Analyst]

And one more question to the buybacks. It's great that you do buybacks in a bad environment. That's very good, and I appreciate that. But the timing of the start of the buybacks you've done in, I think, mid-December or something like that, the timing was not that perfect. I don't want to criticize it. But you approved the program way before the Q3 numbers were out and then were big volume to very cheap prices. And you were not on the market as far as I can see. Why was there a lag to mid-December? I don't want to criticize it, but just a question.

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

No. So just to say also, I mean, the -- we are not in the market really to speculate on the share price. So I mean, the buybacks is just one of the tools we have for distributing value to shareholders. And the -- it's not so much about timing as it is, should we do buybacks and buy more of our own assets or should we distribute pure cash as dividend and redemption shares to shareholders. So the timing for buybacks is actually less of a parameter. It's more having over time and optimize the capital structure, which is also entirely in line with the rules and framework for buybacks and other distribution.

[Unknown Analyst]

I understand. You focus on the company, not on the stock price.

[Operator]

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

[Stephane Guy Patrick Foucaud, Head of Research]

Congratulations for the performance of the Q4. A few questions for me. First, a bit of clarification for Block 49. I think I know the answer, but I want to make sure I've got that right. So the CapEx for 2021 is $5 million, assuming 100%. But then you expect a $50 million reimbursements associated with the carry from EOG. So net-net-net, rather than a cash outflow of $5 million, that should be a cash inflow of $10 million. If you could confirm that, that would be great? And my second question is around Block 56 and the area. And I wanted to know to have a sense of the sort of size of what you're targeting by the drill bit out there? And whether you are looking at individual, independent prospect or whether it's all related to that is the first well comes good, then it would be another 2 wells, if it doesn't, that you might be doing something else?

[Petter Hjertstedt, Chief Financial Officer]

Thank you, Stephane. I think I can take the first question. With regards to the Block 49 format, yes, you are correct in your assumption that we are budgeting on a 100% basis. Simply, that is the budget that also has been put to the Ministry and been approved. And irrespective of the timing of the actual closing, that is what will be spent. At closing, we will be reimbursed by EOG under the terms of the farm out transaction, where we can be reimbursed up to $15 million for the incurred costs and drilling. So that's right. It will be offset with a positive consideration at some point during 2021. I think for the second question, Magnus, if you want to...

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

Certainly. Well, the -- what we have is the Al Jalmud is a -- structuring isn't right, where we have good indication that it could turn into a commercial opportunity. We are not quite there yet. But we're, of course, hoping to get it now. There isn't a cluster of similar structures, prospects along the border with -- which, in effect, is Block 6 and the small field area, which is immediately outside of the border. And of course, what we have to do is to show that the [indiscernible] field which is -- has been in production for a good 10 years in Block 6, that it doesn't extend into Block 56, but that's the same kind of play within the prospects and structures that have been identified will work also in 56. And that's going to be one of the main focus areas for the block. But to answer your question, it's a whole set of prospects. And the -- if they work and if we can get them into commercial significance, it's something that would be of interest to develop. Does that reasoning answer your question?

[Unknown Analyst]

And what would be the typical size of the prospects at Al Jalmud.

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

Yes. I think we'll hold off a little bit on defining that until a little bit further along with our seismic interpretation. But it's certainly a question which we'll be able to answer, give us a couple of months.

[Operator]

And our next question comes from the line of Teodor Nilsen at SB1 Markets.

[Teodor Sveen-Nilsen]

A few questions from me, please. Petter, you mentioned the cost oil pool of $1.8 billion (sic) [ $1.8 million ] for Block 3&4. Could you just confirm that number? Second question. I acknowledge that it's difficult to provide some guidance for 2021 production. But we would have fair working assumption be that fourth quarter production 2020 is a fair estimate for the full year 2021 assuming that nothing changes on production limitations. And my third last question is just on timing of CapEx. Which of the quarters this year will be the most CapEx intensive?

[Petter Hjertstedt, Chief Financial Officer]

Thank you, Tedor. Yes. I can confirm that, that in the cost pool at the end of 2020, we had an approximate $1.8 million, and that is net to Tethys, so it's Tethys net share. And when I say approximate, there is always some reconciliation that can be made as the year is closed. So there might be some slight movement from that, but that should be a good starting point. Otherwise, when it comes to the production guidance, yes, well, of course, our ambition is -- would always be to try to produce more, but we are working with uncertainty and under limitations. So hence, the -- I think, looking at the current production levels is a good indication of at least the starting point. And thus, we have our monthly disclosures. When it comes to CapEx timing, I would expect -- well, when it comes to Block 49, of course, we would expect most of that CapEx in the first quarter. Block 56, we would towards the end of the year. Likewise, for Block 58, Blocks 3&4, we would probably see a step-up throughout the year with sort of accelerating CapEx is our expectation. So that's -- If that gives you some clarity.

[Teodor Sveen-Nilsen]

Okay. So a little bit back to lower CapEx, if until produced?

[Petter Hjertstedt, Chief Financial Officer]

Yes, that would be the expectation.

[Operator]

And our next question comes from the line of Jørgen Torstensen of Fearnley Securities.

[Jørgen Torstensen, Analyst]

A couple of my questions have actually been answered, but specifically relating to the CapEx situation on Block 49. But maybe I can ask another one. In your previous presentations, you had some slides showing leads and prospects on Blocks 3&4, which has been taken out at some point. Could you just give us an update on what this looks like today? Has the potential, in general, dropped or grown over the past year or so?

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

Thank you the -- I'd say the potential is reasonably stable in the -- not much exploration activity was carried out in 3&4 in 2020. In the first quarter, some new seismic was short. And we expect to have that interpreted before the end of first quarter -- current first quarter. So I would expect that leads and prospects map to be part of the show in May, and then with some updated seismic coverage, and hopefully, also with a little bit more guidance as to what leads and prospects or what I should say, then what prospects we will be targeting for the current year.

[Operator]

[Operator Instructions] Okay. As there are no further questions coming from at this time. I'll hand back to our speakers for the closing comments.

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

So thank you very much. We hope to address you in this forum in May with an updated Q1 report and update on the -- our exploration efforts in all the blocks. And in the meantime, stay tuned for any announcements as to how the operations evolve. Thank you very much, and talk soon again.