Tethys Oil AB

STO:TETY

Earnings Call Transcript 2022-Q4

[Operator]

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

I would now like to hand the conference over to your first speaker today, Mr. Magnus Nordin, Managing Director. Please go ahead.

[Magnus Nordin, executive]

Good morning, everyone or good afternoon or good evening depending on what parts in the world you are when you listen to this webcast. Thank you for listening. Tethys Oil's representing its full year report for 2022 as well as the result for the fourth quarter 2022. I'm actually going to start to talk about a number that used to be important in the world and that's the P/E ratio of a company, because our net earnings for the year are actually up quite a bit.

In 2021, we earned $0.51 a share; and in 2022, that increased to $1.79 per share. That's an increase of 350%, which, by any measure, it's quite a substantial achievement for the year. That gives us actually a P/E ratio below 3. And if we look a little bit further down the line, we can conclude that we had an operating cash flow, that is the cash flow from our oil production in Blocks 3&4 of $86 million -- $87 million for the year. At current exchange rates, that translates to more than SEK 900 million, which at today's share price gives us a price cash flow or operating cash flow of actually almost exactly [ $2 million ]. So I think any disappointment in Blocks 3&4 from a cash flow generation perspective is rather misplaced. The Blocks 3&4 asset continues to generate excellent cash.

Our free cash flow for the year, however, is negative, minus $2.3 million, that's because we have invested a lot of money in 2022, $89 million actually, in oil and gas assets. And $63 million of those $89 million went into Blocks 3&4 to try and maintain production, increase production. And as the year moved on, a number bottlenecks occurred, drilling rigs were late in commissioning, and we had a fair amount of problems resulting in a somewhat disappointing, it's yet quite profitable production.

So we're going to look in some detail at this call what we expect from Blocks 3&4 for next year. But do remember that the cash flow generation from the asset continues to be quite, quite strong. We also invested in our exploration assets, Block 49, Block 56 and Block 58 in Oman. In particular, Block 56 was quite heavy in investment with $24 million. And the bulk of that went into seismic and drilling wells for the Al Jumd discovery, which we hope -- which we had hoped to have in early production before the end of the year. It has taken longer than expected. We are now hoping to be up and running by March 1. And of course, we'll happily provide some more details during the call.

So all in all, it has been a strong year. Obviously, Tethys being an E&P company has been helped by strong oil prices. But the underlying production from Blocks 3&4 and the exploration potential of our exploration blocks has taken several steps forward, and we are particularly pleased to be able to report prospective resources on part of Block 58 to the tune of well over 100 million barrels unrisked. And the risked numbers for one of the prospects here, the Fahd prospect as you've seen is actually quite impressive [ that also ]. So I think on balance, we are quite satisfied with 2022. We are happy with what we've seen from Blocks 3&4. We're hopeful Blocks 3&4 will deliver even better with increased investment in 2023, and we are very excited about the exploration potential that we are going to offer.

So let's turn then to some detailed numbers here. Production, Q4 number down a bit from Q3, again, primarily due to late wells and bottlenecking in the surface structures. We expect -- we have been expecting this, but we do see some good progress from the operator. Problems have been identified. They were not identified 6 months ago, and we are confident that they will be solved as 2023 moves on. Revenue, $43 million (sic) [ $43.2 million ] and an EBITDA of $27 million (sic) [ $27.8 million ] for the quarter, very strong and healthy numbers giving us a very, very strong base when we enter 2023.

And of course, the Fahd prospect maturation completed on Block 58, 184 million barrels is an impressive number. We are certainly not going to target all those reserves in 2023. But we should have at least one highly prospective and quite interesting exploration well, Block 58 in the second half of the year. And Al Jumd will not be commercial production first. It will give us a lot of data, hopefully, once it's up and running, and see if we can take Al Jumd to commerciality. But first, we need to get the fiscal meter installed, and we are now targeting March 1 after some pretty good progress in January of 2023. So the full year, average production for the full year, a little bit better than production in the fourth quarter, reflecting, of course, where we came from with 11,000 barrels of oil per day in 2022, and we've seen the slide in production throughout the reasons that we have discussed.

Very strong revenue, $156 million (sic) [ $156.5 million ] with an EBITDA of almost $100 million for the year. Block 56 for the $24 million we spent, 5 wells drilled and more than 2,000 square kilometers state-of-the-art 3D seismic acquired. We are in the process now of interpreting a set of seismic. So there was significant investment in 3&4, in 24, some in 58 and a little bit in 49; and $24 million was distributed to shareholders. And we end the year with 2P reserves of 23.9 million barrels. That's a 37% replacement ratio, one of the lowest we have seen for years from Blocks 3&4 but for reasons that are understandable.

And let me already here mention that the risked resources -- prospective resources in the Fahd prospect of Block 58 is more than we have in 2P reserves remaining in Blocks 3&4. So let's continue. Reserves and resources year-end 2022. Impressive streak from '16 through '20 of more than 100% reserve replacement, reflecting young reservoirs coming on stream, delivering better than expected and an abrupt change in 2021 and also in 2022. The abrupt change in 2021 coincides with the corona pandemic, which brought activity on Blocks 3&4, not to a standstill, but to a minimum of exploration and appraisal activity focusing on drilling development wells and keeping production up.

And the results of doing that in 2021 continued into 2022. So the rather low, the 37% reserve replacement ratio reflects more a lack of effort than a lack of success in maintaining that reserve replacement ratio. And given the lack of effort, we are actually rather pleased with having replaced as much as 1/3 of the production that we produced in 2022. That 1/3 comes almost entirely from revisions within the producing fields that actually continue to produce better than we originally expected. So for 2023, with increased exploration efforts, increased appraisal drilling, we are hopeful that we are going to return towards the triple-digit reserve replacement ratio for 2023.

Moving on to the production sliding scale from Q1 2021 to Q4 2022. We are guiding for between 9,000 barrels of oil per day and 10,000 barrels of oil per day. We expect continued monthly fluctuations. And the slide we saw during '21 and continued in '22 -- [indiscernible] in 2022 is a direct result of the fewer wells, lower drilling intensity, but also the bottlenecks that identified on the surface. So within those 9,000 barrels of oil per day to 10,000 barrels of oil per day that we guide for, we expect monthly fluctuations. We are, of course, hopeful that as the year moves on, we will move towards the higher end of that range.

Turning to the next slide. This is a familiar picture of Blocks 3&4. Seismic acquisition is ongoing. And before the end of -- or by mid next year, we expect to have 3D seismic coverage over the entire area of Blocks 3&4. In '23, we are going to see considerably more exploration and appraisal activity geared at finding more oil and increasing reserve total. 4 exploration wells, 6 appraisal wells, roughly with at least 1 a month that could add new reserves. And among the most notable is the Jari exploration well to be drilled in early 2023, we would expect spud within a month. It's in the southern part of Block 4, close to where the Luja-1 well was drilled a couple of years ago. This is an area that tells some large prospects, a proven oil system underexplored.

Luja was drilled slightly off and in a difficult reservoir. Jari should hopefully be drilled in a better place and with better testing equipment at the site when we drill it. And of course, if Jari-1 comes in and its discovery, it will be a game changer for in particular Block 4. The southern area contains, as I mentioned, a number of prospects is reasonably far away from infrastructure. So we would not expect a Jari discovery to contribute to production in 2023, but we could certainly see a reserve impact.

Block 56, our largest investment last year with $24 million of seismic in wells. The Al Jumd area with the Al Jumd discovery and a number of similar leads and prospects. Al Jumd is sitting there waiting to be produced. And if we get going by March 1, we should be in a position to add at least some continued resources from Al Jumd before the end of the year. Depending on the results of the test, we may also have Al Jumd as a commercial discovery. And that's something that, of course, we are working on.

And the sooner we can start that is the better. We've been waiting for approval and certification of a fiscal meter, which were required to have in order to sell this oil for money. If we just produced it without selling it, that would not have been needed. The certification process has turned out to be considerably more complicated than we believed. We believe now that we have mastered what's going on and some good progress in January, we are now hopeful that we will be able to move the meter and its skid from the construction yard in Abu Dhabi and United Arab Emirates across the border and into the Al Jumd area [indiscernible] to Block 56. So stay tuned, we will keep you updated of any progress.

The Central area, seismic, a quite substantial area, 2,000 square kilometer, state-of-the-art seismic covering an area of at least a dozen leads identified on older seismic. All substantial. And as we mature them, we hope to present a good inventory and some also impressive prospective resource numbers during the course of first half of 2023, and Block 56 will also be the focus for exploration drilling in the second half. Block 58, we've come further on the prospect maturation. 3 prospects in the Fahd area in the northeastern part of the block, Fahd, Fahd South and Fahd South-West.

Seismic interpretation is ongoing in the South Lahan area, where we have up to half a dozen plus leads identified as so-called sold stringers below a sort layer at 3,000-plus meters depth. The South Lahan play is a well-known play in this area, Oman, and similar stringers are in production, just a few tens of kilometers away from South Lahan in Block 6. But initial focus will be on the Fahd and the South Fahd prospect.

So let's turn to the numbers. It is the first time that we are in a position to announce prospective resources. And if we turn just to -- well, if you look at the Pmean unrisked numbers, we have, for example, in the Buah area of South Fahd, we have 45.4 million barrels, [ P50 ], 62 million Pmean. But just looking at the risked Pmean resources, they amount to more than 25 million barrels. So just the risked number for the Fahd is on par with our total number of reserves in Blocks 3&4. So this would indeed -- will indeed be a very exciting time for Tethys when we drill in Block 58. And if any of these comes in, it would have quite a transformative impact on Tethys.

And last but not least is the continued work on Block 49. The Thameen-1 well was drilled in 2021, encountered a 30-meter plus hydrocarbon bearing zone in the Hasirah sandstone. On test, nothing came to surface. The petrophysical studies, sidewall cores, coupled with log analysis, et cetera, suggests that the oil is trapped in a very tight sandstone reservoir. And the best way to try and get something out is to reenter the well and retest it, but this time to create artificial fractures in the sandstone to create permeability to allow the hydrocarbons trapped in the sandstone to come to surface. Work is ongoing, and we expect to mobilize to reenter and retest Thameen by mid this year. 30-meter hydrocarbon bearing zone is quite substantial and the porosity and the quality of the sandstone is quite good. If we are able to successfully create fractures in the sandstone, Thameen could turn out to be quite an interesting well after all.

On that, I would like to leave the floor to Petter to give a more detailed discussion of our financial numbers for Q4 and for the full year 2022.

[Petter Hjertstedt, executive]

Thank you, Magnus. Yes, 2022 was certainly a very remarkable year in the oil market, and financially, you can see the effects of that on our income and earnings quite clearly. The fourth quarter caps that year with revenue and other income of $43 million (sic) [ $43.2 million ] and an EBITDA of $27.8 million. You can see the trend was strong throughout the year as oil prices increased, and we kept good cost control throughout. Now the full year, we saw an achieved price of $94 per barrel (sic) [ $94.2 per barrel ] up significantly versus the year before and with revenues of $156.5 million, even that was a big jump from 2021.

And even more, you can see that in EBITDA, which almost reached $100 million for the full year. Of course, the P&L doesn't tell the whole story. And as we have spoken about a lot, we have had quite some significant investments in the past year, and in total, we invested $89 million (sic) [ $89.1 million ]. So almost all of our EBITDA actually went into oil and gas assets during the year building for future growth in the P&L. And as a result, our free cash flow was a negative $2.3 million compared to the positive number we had the year before. But that is all investments that we hope will build for future growth and can be harvested in the years to come.

Now looking more closely at the fourth quarter in oil sales. We saw flat sales in Q4 versus Q3, and we saw oil prices come down a bit from the highs early in 2022, still at a very high level in recent years of $93 per barrel. And as we had net entitlement that, that grew in the fourth quarter. We had significantly versus the third quarter, driven by the increased cost oil and lower oil prices, we also ended up being underlifted. So -- and this can be seen in revenue and other income that the -- we have an underlift adjustment. And as you see in the fourth quarter, our share of production entitlement was 54%, which is a big jump from the 42% in the third quarter as we caught up some of that cost oil allowance that was available for earlier in the year. And you can see that entitlement barrels are down year-over-year, but the proportion is higher and that's a consequence of a slightly lower production.

Moving on, OpEx per barrel. We have 2 major impacts there towards the end of the year. We did see some cost increases. There was some catch-up spending, of course, in some areas as operations picked up, particularly within maintenance. There's a lot of work going on in the field in Blocks 3&4 to improve the reliability of production. But we also saw cost of energy and consumables all very important to run an oil field operation at this size, all coming up a bit at the end of the year. At the same time, the disappointing production number that resulted in a higher OpEx per barrel, where cost increases and lower production in equal measures led to that increase to $15 per barrel. The trend, however, throughout the year was significantly flatter than if you compare to the revenue line and the earnings line. So you can see that, that cost has not been growing at all at equal pace with our income.

Now cash flow, a favorite subject to us. Here, you once again can see quite clearly that trend from the revenue line also -- and EBITDA line transforming into the operating cash flow. A strong trend at the end of the year. We had $28 million (sic) [ $28.1 million ] in operating cash flow before changes in working capital, which was almost the same as the previous quarter with about $3 million. And if we look for the full year, we had operating cash flow of almost $100 million, which, of course, is brought down somewhat by the changes in net working capital, which is a part of a normal course of our business. And as we said, with increasing oil prices, the effect of oil sales does -- do also not only increase our revenues, but they do increase the size of the working capital movement. So that is to be expected.

And this is the highest operating cash flow since 2018 on an annual basis. So a very, very strong underlying cash generation. But of course, the cash doesn't stop there. We invest and we have invested significantly during this past year. And not least in our own assets earlier in the year when we invested in some quite significant seismic during the first quarter for Block 56, but also on drilling throughout the year. But towards the end of the year, you could see the CapEx on Blocks 3&4 catching up somewhat, jumping in the fourth quarter as a fourth rig was added and the activity picked up in the seismic and also in the field operations relating to facilities and maintenance and such.

That means that from a full year basis, we had a significant jump year-over-year in total spending, reaching just shy of $90 million. So what does that mean for free cash flow? Well, we pride ourselves for many years of having very strong free cash flow. And in the underlying assets, the potential is still there and the generation certainly is. But during this past year, with that significant exploration spend that is yet to yield any income, that has, of course, impacted our free cash flow. That is a natural part of the investment cycle for a company like us. And it does tend at times to be quite lumpy. We saw that during this year with some negative movements early in the year and improvements later.

And towards the end of the year as the general operations picked up in Blocks 3&4 as well as some other investments in our operating assets, the free cash flow came down somewhat. But it's worth remembering that while we still have those significant investments of almost $90 million, we also managed to return over $24 million to shareholders at the same time and end the year with over $40 million in the bank. I think that is a true testament to the financial solidity of the company's operations even in a year where we have sometimes described our cash-generating asset as struggling somewhat in terms of production. So good cash flow generation enabling us to invest solidly for the future, setting the scene for some very exciting development in the years to come.

And netback, I think highlights that trend as well that we've spoken about. This -- especially if you can -- here you can especially see the effect on the profitability of Blocks 3&4 and the impact of what happens when we increase cost oil. So we saw a slight dip in netback after CapEx as the increased cost oil offset that somewhat in the fourth quarter. But that is something of a year-end effect, before that, you can see a quite solid netback after CapEx throughout the year and the underlying trend being very strong.

Looking a bit forward then into the first quarter, as I -- we'd like to remind you and I'm sure many of you are aware, the pricing of the oil that we sell does lag with a few months because of the way oil prices are set for exports out of Oman, which means that already at this point, we know what the official selling prices are for the liftings of all the months in the first quarter. And as you can see, this is the expected average of $81.5 is somewhat lower than the average OSP that we had in the fourth quarter. And that reflects the somewhat weaker market prices in oil that we saw at the end of 2022.

Which -- and that brings us to a completely different subject, but one of our favorites anyhow, we have a strong tradition of returning cash to shareholders while being able to grow and invest, and this year is no different. The Board of Directors proposes an ordinary dividend of SEK 2 per share and an extraordinary distribution of SEK 3 per share by way of redemption, the same procedure that we have had in recent years. The slight difference this year is that we will split the timing of the 2 distributions to smooth the cash flow and the yield effect, meaning that after the AGM on the 10th of May, we'll begin the redemption process, which will result in a split and redemption share of a value of SEK 3 per share. And 6 months later, after the AGM, a regular dividend of SEK 2 per share will be distributed to shareholders. So combined SEK 5 per share, which is a solid and very healthy distribution, we believe, not least in a year of some quite significant investments with more investments to come, giving a very balanced approach to both growth and returns.

And on that subject, we reinitiated share buybacks during the year. In Q3, we started and continued through the end of the year, and it is a good complement to dividends and other distribution given the flexibility, especially when we see that there is more cash on hand and ability for the company to buy back shares. 260,000 shares (sic) [ 263,678 shares ] in total, we purchased since the AGM in 2022. And at the end of the year, we had treasury shares of 738,000 (sic) [ 738,351 ] held by the company, that's about 2% (sic) [ 2.2% ] of our total outstanding shares.

We repurchased shares in 2022 for an average price of SEK 60, somewhat higher than the year before and certainly higher than 2020, where we were significantly more aggressive, but I think this is a signal of how different the markets view companies like us in terms of valuation. Irrespective, we will keep share buybacks as a tool in our toolkit for the future to be able to complement the distribution, especially with added flexibility than the other tools.

And when we're speaking of the future, I would like to take us through the production and financial guidance for 2023. We believe -- we expect the production for the full year to be in the range of 9,000 barrels per day to 10,000 barrels per day net to Tethys. And the range, of course, is depending on a number of factors, but including sort of the timing of drilling and the success of wells. And we're happy to say that this year, we do expect to drill significantly more wells on Blocks 3&4 than the previous year, given we have a fourth rig. And we, of course, will continue to release production updates on a monthly basis.

Operating expenditures, we expect to be at $14.5 per barrel, plus/minus $1 and that really depends on where we end up in the range of production, but also in the range of different cost estimates on the field. Investments in oil and gas assets in total, we expect to be in the range of $85 million to $95 million, the bulk of which will be from Blocks 3&4. And that really depends on the spending related to the success of exploration and appraisal wells, which will generate more need for more development, but also the timing of some facilities investments and -- which in these days can be a bit more uncertain given supply and service constraints in the industry due to high level activity. But there will be a continued focus on drilling development wells and improving the surface facilities to ensure that we do get -- we do bring the oil that is in the ground out to the pipeline and rent it to the market.

Block 49, a very modest spending, but that could have significant impact with the reentry and retesting of Thameen-1 during the second quarter, and we see a lot of potential for what is a modest amount of money. On Block 56, we have -- we expect one exploration well in the Central area, $8 million, our share of that. And on -- in the far area of Block 58, we expect to spend roughly $10 million on an exploration well that's on a 100% basis also in Q3. So all in all, we expect full year CapEx of $85 million to $95 million. We believe we will be able to finance this with our cash flows and the cash we have on hand.

And with that, I think I hand over to Magnus for some outlook and summary.

[Magnus Nordin, executive]

Thank you, Petter. So let's have a quick look at 2023. Operating focus at the moment, get that Al Jumd discovery into long-term production test. Hopefully, it will happen within weeks as we speak from today. Fahd, interesting numbers. Not that much will happen in the Fahd area. These numbers will stay until we actually drill the well. And depending on the well results, they will change and either disappear or move into contingent resources awaiting development.

Block 56 prospect maturation based on the new seismic, high hope for some high numbers. Thameen, retest -- reentry and retesting preparations ongoing, expect operations to start late Q2. And all of this continues to be underpinned by Blocks 3&4, which will continue to provide substantial operating cash flow to fund both the extensive but needed investment program within Blocks 3&4 themselves, including an increased focus for the first time in 4 years really on exploratory and appraisal drilling, which should have a sale impact. Development drilling to increase production and providing free cash to invest in Block 56 and Block 58 and eventually to be part of the future dividends and distribution to shareholders.

So stay with us, we are trying to offer something to everyone from the yield player to the explorationist.

[Operator]

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

[Stephane Guy Foucaud, analyst]

Yes. I have a few, but perhaps I'll start with production at Block 3&4. So I think the press release talk about Q4 being disappointing compared to, I guess, the expectations set at the time of the Q3 results. Could you come back on what was disappointing, what didn't work compared to what you said at the time of Q3? And maybe give us, at the same time, the sense of why you would expect the production to be volatile month-on-month in 2023?

[Magnus Nordin, executive]

Thanks, Stephane. Well, the Q -- we saw production drop in Q4 compared to Q3. And in -- by early Q3, we would have expected the backlogs of workovers and the backlogs of development wells to have been -- to start to disappear. We saw the third drilling rig that was commissioned should have been up and running by late July, early August, didn't start really until early October. Continued problems with the workover hoist delayed workovers and kept wells at a lower productivity rate than otherwise would have been the case. And we saw delays in improving water handling, leading to shut-ins of high water-cut wells, which in its turn led not to an increase in production, but a flattening of production as what seemed to be back pressure issues and other issues in the production facility system occurred.

These were -- we thought this was something that would be a part of the past as we enter Q4. Now clearly, that was not the case. It took longer to get things going. It took longer to get -- to replace pumps. It took longer to get pumps into the field than we had expected. And instead of seeing maybe there's a peak of -- or the lowest production point in Q3, production continued to drop for Q4. Efforts were then made to get as much of this work done in Q4, so as to be able to offer a strong production outlook for 2023.

And that's sort of where we left last year. We believe that the operator has a much better grip on what were production bottlenecks on the surface side, and what's needed on the drilling of development wells than they had, say, half a year ago. We would still expect that there would be monthly fluctuations. But we are hopeful that we're going to see a trend of increasing production this year except different from last year's decrease in production trend.

[Stephane Guy Foucaud, analyst]

Why were there so many delays in your view in Q4? Was it supply chain? Was it technical problem, mishandling of operation by the operator?

[Magnus Nordin, executive]

I think supply chain is a good summary. Things simply took longer. It took longer to get people in the field to commission the rig than expected. And there's certainly a corona effect. It took longer to mobilize the way, get longer to have it certified. So that everything that occurred in Q3 took 20% more time than we -- that we expected for it to. Then as the fourth quarter progressed, things improved. And as I said, that's what we now hope that we are going to see 2023 bear the fruits of that investment. Also, with the problems identified and the rather hefty investment program for the current year, we would certainly expect that to bear fruit.

[Stephane Guy Foucaud, analyst]

Yes. And that takes me to my sort of related, but next question, that's about the CapEx for Blocks 3&4. How do you see that in the following year? So I guess a bit of capture CapEx in 2023, given all the problems you described that need to be addressed. But how would you see then the run -- the CapEx run rate in, say, 2024, 2025, similar amounts, lower?

[Magnus Nordin, executive]

Good question, Stephane. I think I'll duck that for now. Do -- we should be able to have a much better idea and a much, much more accurate idea on that by the Q1. We're already seeing some of the effects from the mitigation program in Q4. But give it another quarter and we should be able to give a much better idea of where we would hope Blocks 3&4 go over the next, say, '24 and '25. The only thing I think we are reasonably certain is that it will continue to generate good operating cash flow for us to spend on shareholders and growth.

[Operator]

And the next question comes from the line of Teodor Sveen-Nilsen from [indiscernible].

[Teodor Nilsen, analyst]

This is Teodor Nilsen from SpareBank 1 Markets actually. A few questions from me. I'll follow up on Stephane's questions on production. As far as I interpret you, Magnus, you expect there may be a higher exit rate for 2023 compared to fourth quarter of 2022. So please confirm that? And next question is on net entitlement, and of course, that was higher this quarter as Petter explained. That is, of course, a function of investments. But could you give a guidance where do you expect to -- the net entitlement to stay at 54% over the next couple of quarters?

And final question, that is on dividends. I interpret that the dividend for 2022 will be a total of SEK 5 per share, which is down from SEK 7 per share last year and of course, implying then also a much lower payout ratio compared to the EPS. So should we interpret this as you will more actively use share buyback as part of the shareholder distribution mix more than before? And final question is on cost inflation. You already gave some comments on cost inflation were visible in the figures now. So what do you see going into 2023? Do you still expect cost inflation this year or should we expect it to stabilize at the current level?

[Magnus Nordin, executive]

Okay. So let's see, Teodor. I think on your 3 first questions, yes, yes and yes. And on the fourth question, I think I'll pass it to Petter. Cost inflation is not my...

[Petter Hjertstedt, executive]

Yes. Well, first there was a question about net entitlement, I believe. I think it's worth remembering in net entitlement on Blocks 3&4 is a bit of a rubber band. The total for a full year is about 52% -- is 52%. It can actually for the full net year never go above that. But if it does go below early in the year, whatever is not used of cost oil early in the year can be used later in the year. Hence, we have individual periods of higher than 52% as we had in the fourth quarter, 54%. So my expectation is not to start the year with 54% of course as that would be a bit difficult. But given that we do see a high run rate of OpEx, we're guiding for continued high investments.

And with oil prices being predicted lower in the first quarter than in the fourth quarter, all else being equal, I mean, that does have an effect that we would expect to have a higher net entitlement than what has been sort of the average rate throughout the quarters in 2022. But remember that the cap is 52%. And we do have some significant spending in the beginning of the year on Blocks 3&4. We have a number of exploration wells. We have our seismic ongoing. So I do expect that we would have -- we would be running at a high less entitlement all else being equal. But let's remember, there's always another factor and that's also production, and that's an unknown for that period. So it's yet to be seen. But keep those different factors in mind.

When it comes to cost inflation, I think we have actually seen that throughout 2022. It's not been entirely obvious always because there are so many moving parts, especially in OpEx. There's a number of categories of cost for running an operation of this size and scale in a remote place in Oman, it means that you have quite a big operation, not least in terms of support and logistics. We have seen continual cost inflation, but there's also been some offsetting factors. We don't -- I mean looking at the Q4 run rate, I would not anticipate any significant jumps from that going forward. However, we will see variation in costs depending on activity levels.

So I mean, there will be some volatility, but I would not expect the overall run rate for the year to go up significantly. But then again, I mean -- and here it's important to remember that oil prices do -- are a leading indicator of that. Would we see another sharp rise in oil prices generated here? It's not to say that we would see diesel prices coming up and other prices in the service industry following suit. But as I've said in the past, we see a quite slow trickle of those effects through in Oman and for this operation with relatively long contract being the basis for it. I think that answers most of the questions. Was there anything outstanding?

[Teodor Nilsen, analyst]

No, that's clear.

[Operator]

[Operator Instructions] And the next question comes from the line of Knut Martin Karlsen from Commandeer Capital.

[Knut Martin Karlsen, analyst]

Magnus and Petter, thank you for being good stewards of capital for shareholders. And it's nice to see a potential [ Spindletop ] 2.0 developing at Block 58. I have 3 questions. I have 3 questions. The first one is regarding share buybacks. And as -- as you, Magnus alluded to at the start of the call, the share price is at least not overpriced, but the share buybacks have been perhaps a bit moderate in 2022. Is tender offers a part of the toolbox that you would consider when buying back or is that sort of out of the picture for you? That's the first one.

[Magnus Nordin, executive]

No, I think that's certainly something we could consider on. And historically, I mean, we have been using buybacks as one tool and cash distribution as another tool. And certainly, with a slightly lower cash distribution, we have more ammunition to deploy in buybacks. So depending on how things evolve, it would certainly be something that could be considered, yes.

[Knut Martin Karlsen, analyst]

Yes. Okay. And the second question is regarding the CapEx. In Q3, Petter commented that the back-of-the-envelope, it was roughly split 50-50 between maintenance and growth, even though it's hard to know the exact number. Would you say that the same is true for 2023 with the back-of-the-envelope approach?

[Petter Hjertstedt, executive]

No, I think we're tilting a bit more towards growth this year than we did in the previous year.

[Magnus Nordin, executive]

Yes. Yes. Say 60-40-ish on growth versus maintenance with a not insignificant element of potential one-offs as bottlenecks, et cetera, continue to be removed.

[Petter Hjertstedt, executive]

But bear in mind, I mean, the range does also signal that there is an element of flexibility in the spending to react and spend where it makes the most difference. So that split is quite -- yes, it's a moving target, so to speak. And, yes, and as a reminder, the difference between growth and maintenance can sometimes be a bit blurry. But yes, I certainly think we have a more growth-oriented tilt this year.

[Knut Martin Karlsen, analyst]

All right. And the final question is regarding the drilling campaign on Block 58. In Q3, I think you mentioned that there were going to be a minimum of 2 wells, but it seems that there's only one well planned for this year. Is it being pushed into 2024 or has it been canceled or?

[Magnus Nordin, executive]

The -- I mean, we will try and be as cost efficient as we can. So we would plan to do well -- drill wells both on Block 58 and Block 56. And we are keeping a slot for a potential appraisal well on Block 58, if that's warranted. So the building program is certainly not set in stone. We will maintain flexibility. But clearly, there will be a strong focus on getting the most interesting prospect in the Fahd area as well this year.

[Operator]

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

[Stephane Guy Foucaud, analyst]

Yes. So, Stephane Foucaud. So moving to exploration. On Block 58, are the 3 prospects you have identified in any way correlated or are they independent? And then what do you think would be driving your selection process on whether to drill among the 3 that you've got one versus the other?

[Magnus Nordin, executive]

Okay. They are separate structures, but they, of course, rely on the same charge, and reservoir properties should be similar. So as far as the risking for charge and reservoir goes a successful well into one of them would derisk the others also. Two, on selection, I mean, we will try to go for the biggest target with the highest chance of success. And just looking at the prospective resource table would give an idea of where that would point us. But there will be fine-tuning, there will also be -- I mean, drilling considerations, appraisal well, continued appraisal well planning, all sorts of other things going into that. But I'd certainly say that the main criteria will be sites and chance of success.

[Stephane Guy Foucaud, analyst]

Okay. And among the 3 risks that you highlighted, so the reservoir quality, the charge and then maybe trap, what do you think is the main risk or main area of concern?

[Magnus Nordin, executive]

The -- shall we say, given the rather limited well data we have, there is certainly uncertainty on reservoir. I won't necessarily say that it's negative, but there is certainly uncertainty on it. And the advantage, of course, is as you do notice that it's both the Khufai and the Buah that are our reservoir targets. And those are, of course, rocks that we know quite well from Blocks 3&4. So we should be in a good position, provided the oil saturation that's over now, we should be in a good position to flow hydrocarbons out of those reservoirs.

The trap integrity is -- I mean seismic coverage is good, and I think we will have a good idea of trap integrity and then how -- and how risky that the trap is. And clearly, I mean, for a first well, we would certainly want to go for something with a pretty high trap integrity as we would naturally like to have a discovery. But that will be part of the geological risking and will be completed there.

[Operator]

[Operator Instructions] Dear speakers, there are no further questions at this time. I would now like to hand the conference over to our speakers for closing remarks.

[Magnus Nordin, executive]

Thank you very much for listening. Do stay tuned. And if not before, looking forward to addressing you again on the 9th of May. Thank you.

[Petter Hjertstedt, executive]

Thank you.

[Operator]

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

[Petter Hjertstedt, executive]

Thank you.