DNO ASA (DNO) Earnings Call Transcript & Summary

Good morning, and welcome to DNO's Second Quarter 2026 Earnings Call. My name is Jostein Løvås, and I'm the Communications Manager here at DNO. Present with me today in Oslo are Executive Chairman, Bijan Mossavar-Rahmani; Managing Director, Chris Spencer; and CFO, Birgitte Wendelbo Johansen, who will take you through the presentation slides. But before we begin, I would like to draw your attention to a slide in today's presentation summarizing DNO's possible offer for Genel Energy, which was announced on the 7th of August. Due to strict limitations under the U.K. Takeover Code, we will not take any questions regarding Genel or the potential offer during today's call. Instead, we will refer you to the slide and to the full statement, which has been published on our website through the news messaging service and via RNS. With that, let's move to the presentation. Afterwards, we will have a Q&A session. But first, let me hand over to Bijan.

Good morning. Welcome to the Q2 2026 interim results presentation by DNO. I'm joined by my colleagues who usually attend and present at these quarterly reports, presentations. I will just say welcome and say a couple of introductory words before we proceed to discuss the slides. This quarter has been a very strong one for DNO, among the strongest in our history, and our history is a long one. We celebrate this year the 55th anniversary of the formation of DNO. And that's quite a number of -- more than half a century. We are still around. Many of the oil companies in the international industry who were operating and active in 1971 when we were formed, are no longer in the industry for different reasons. So this makes us one of the oldest of the international oil companies in the world, and we're very proud of that history and of that record. This quarter was the strongest ever for the company in certain financial metrics, but we're very proud of our performance. And our strong performance has taken place, notwithstanding the fact that one of our most important legs, operating legs of the company, our operations in Kurdistan, were shut in for most of the quarter. During that time, and of course, all of you who follow the company and follow the region and the industry know that we've had security events and threats to our operations, as have other companies in the Middle East and in Kurdistan, in particular. But we used that period -- while we were not producing for safety and security reasons, we used the period to -- especially the second part of the quarter to initiate workovers on our wells and even to start drilling new wells to position the company to start operations and production, in particular, when the conditions are permitted and to have the ability to recover production at a rate that brought us back to where we had been preshutdowns. We have restarted production and my colleague Chris will discuss the operations in Kurdistan, but we hope to have -- to sustain the production at the levels that we had before the shutdown over the course of the remaining quarters, but obviously, with one eye, always 2 eyes or 4 eyes on the security conditions and situation because paramount for us is the safety and security of our people on the ground, of course, of our facilities as well. But we hope that we continue to produce in Kurdistan and have a safe and secure operation in the coming weeks and months. I would also like to make a quick reference to what Jostein said about the possible offer that we might make for Genel Energy, our partner in Kurdistan. And we hope that the board of Genel Energy will engage with us as we pursue this opportunity. But I can't -- as Jostein said, because of our 2.4 announcement, of a possible offer and the conditions set by the panel that governs these matters in London we can't say any more about that other than to say we hope to engage with the board of Genel and see how best to proceed on this matter. With that, I'll ask Chris to present the operating portion of the presentation today.

Thank you, Bijan, and good morning from me. As Bijan has already touched on, another great quarter for DNO. And it really shows what a strong, diversified company we are now. We're just over 1 year on from the Sval acquisition. And yet again, the merits of that acquisition are coming through extremely powerfully in our results. I've talked a lot over the last year about the operational synergies that, that combination has unleashed, and you'll see more examples of that in this presentation. But I think the highlight in this quarter is the diversification. Obviously, as Bijan has described, we've had a difficult quarter in our Middle Eastern business in Kurdistan with almost no production. But by having the very healthy North Sea business, combined with the high oil and gas prices has meant that we've still hit record revenues for the quarter. So the strong, diversified, growth-oriented DNO that we mentioned in our press release today is very clearly evidenced by last quarter. So the statistics are in front of you on this slide. Another very good quarter of production in the North Sea, a bit above what we were expecting. And with the prices we achieved, more than compensating for almost 0 production in Kurdistan in that quarter. West Africa, our Côte d'Ivoire business, as normal, around the 3,000 barrels of oil equivalent, all of which is gas, of course, and a nice cash positive contribution. But of course, it's the North Sea that is dominating the picture. On the back of that, we saw this record revenue of $760 million. We say largely unhedged. It's maybe 1% of the revenue was hedged, so effectively unhedged in our North Sea, and that traditionally has been the DNO approach. And with the great volatility that we've seen this year, that position has been rewarded by not capping the upside from these commodity prices. On the back of a high revenue, of course, you see that flowing through the operating profit and the net profit. But particularly gratifying for a simple engineer such as myself is the free cash flow, which is my most important performance indicator. And with this very high cash flow, we have actually paid down $220 million of debt in a quarter with 0 production from Kurdistan. Who would have thought that 3 years ago for DNO? And of course, the Board were comfortable to approve the quarterly dividend once again. And so a few years ago, we pivoted towards our shareholders. We are maintaining that pivot, if that makes any sense, as an English expression. But in any event, we continue to provide an attractive dividend yield, in addition to the upside potential we see in our equity story. Moving on to the North Sea. Very strong quarterly production, as I've already mentioned. And we had expected things to go slightly worse in the second half than the first half. So we were expecting a stronger, but it has exceeded even our estimates. What you see, and in the last quarter, we had a deep dive into the tieback projects that we have ongoing and coming up on the North Sea. My colleague, Morten Grini, for those who are watching, gave you a good run-through of those projects. And once again, last Q2, you see that portfolio delivering with 2 new developments coming on stream. And this is, as we explained last quarter, very much the model. And you see that with the developments that were approved in the fifth bullet point on this slide. The fourth bullet point points to yet another value-adding transaction. And as I've mentioned in the last few quarters, that's another element to our business model in the North Sea, very definitely. Here, it's a great step that we've been looking to do for some time, because we have multiple projects either already tied back to the Gjøa hub. And we have several, including Ofelia, Cerisa and Gjøa Nord in the next bullet point that are being tied back to that hub. We did not have an ownership position there, and we have -- the team have managed to get us in with a 5% interest, which is extremely helpful, obviously, when you're tied by so many of these satellites. So we're very pleased with that transaction and comes on the back of a string of similar North Sea either swaps or small acquisitions, small divestments. So with the majority of --returning to production -- with the majority of the maintenance shutdowns behind us now and still ahead of our estimates, we are increasing our guidance for 2026 production, and we're now estimating we should get about 85,000 barrels of oil equivalent, on average, through the year. Next slide, please. Turning to the growth side of the business. And we are, as we've said many times, very growth oriented, not only here in the North Sea, but looking for growth in other areas also. And the latest in that regard was our Carmen appraisal, which came in, in June. You see the results there. And that, of course, is right next to the Atlantis discovery, which is moving forward to development and which we entered through another one of those North Sea deals that we've been delivering. We announced that in March. So we discussed that also in the last quarter. But Carmen is within, I think, about 20 kilometers. And in the same area is the Afrodite discovery, where we picked up a 10% interest. We're hoping for the best on that appraisal, but that is a deep sort of tight gas opportunity. So we'll see what comes with that, but we're operating on the well at the moment. And 4 more wells to be drilled in our exploration appraisal portfolio this year. Thank you. Over to Kurdistan. And unfortunately, again, the quarter dominated by the war and the knock-on effects of the war in the Middle East. We had to shut down for the safety of our people and remained so for most of the quarter in terms of production. But when the ceasefire was signed, we started to cautiously ramp up activities. And really, the slide describes that cautious ramp-up that took place. We have -- as Bijan said, the priority, of course, is the safety of our staff. We have put in place extensive passive protection in both for the accommodation blocks, but also around our process facilities in the form of big concrete walls, which we are advised is the best way to minimize the impact of the greatest risk we have, which unfortunately is drone attacks. With that in mind, we felt sufficiently comfortable to restart production. But as anyone who reads the news knows, it's a very uncertain environment. And we are, not quite daily, I guess, but we're driven by events. We're reviewing security frequently. And I would say we've been close to shutting down again recently, but we're still going. And if the security condition allows, we do expect to be able to get the PSC back to around the same level of production which we had preshutdown and we are drilling. But really, you can't get away from the security situation at the moment. And I hope in 3 months' time, we'll be able to say -- to give -- to look forward with more confidence and give better estimates. But at the moment, really, it's anyone's guess. We are, of course, producing though, and we are, as we have done for the last few years, selling the oil to local traders. And at the moment, we're getting in the mid- to upper 30s. But as we always do, we've been insisting on being paid internationally before we deliver the oil. So at least we have a complete payment surety for oil. Thank you. Then, as obviously, many of you joining the call, or if not all, are aware, and Bijan mentioned, on 7th of August, we publicly announced our possible offer to acquire Genel Energy plc. As already been mentioned a couple of times, we have strict guidelines from the takeover panel that we have to stay within the -- what we've stated in that announcement. And I think that's fine because I think it speaks for itself. The indicative offer we made is 69p per share which is a premium of 38% to the price of Genel share the day before we made the announcement. We believe that if they were to accept this offer, the shareholders of Genel would see certainty of value. And that's irrespective of what happens with their offer for Capricorn on the terms that they've announced. We note that if they don't succeed in taking Capricorn, then Genel won't have the diversification that has been working on for some time and a significant G&A cost burden that we consider to be disproportionate to the company's scale. The proposed offer that we've made is not conditional on completion or lapse of Genel's announced offer for Capricorn. So it won't matter what happens in that process to our offer. Genel shareholders have had -- Genel shares have had a relatively poor trading liquidity in recent history. So we consider that our offer represents a liquidity event for those Genel shareholders, should they wish to take it. And for those who elect to take the possible offer of DNO shares, then as you've seen once again this quarter, that would allow them immediate participation in a strong, diversified and growth-oriented business, with not least an established track record of dividend payments. So with that backdrop, we have to decide by the 4th of December -- 4th of September, sorry, most likely, although there are certain circumstances in which that date can be extended, but we'll have to decide whether to announce either a firm intention to make an offer or that we are not going to make our own the famously dubbed put up or shut up deadline for us. And as Bijan mentioned, our hope, as we stated in the 2.4 announcement is that we could get into some constructive discussions with the Genel board on this offer. That concludes my part of the presentation, and I just hand over to Birgitte to tell us more about the record revenues. Thank you, Birgitte.

Thank you very much, Chris, and thank you, Bijan. Good morning, everyone. As you said, Chris, at the start of this call, we present another very strong quarter for DNO. Revenue in the second quarter was $761 million, up 21% from the last quarter. The increase from Q1 is driven by higher realized oil and gas prices, partly offset by lower sales volumes in the North Sea, explained by underlift as well as seasonal maintenance. As production in Kurdistan restarted very late in the quarter, we recorded no sales or revenue here. Comparing with the second quarter 2025, we must, of course, take into consideration that Sval was included in our figures as of June, which explains most of the large movements of almost 200% revenue increase. Year-to-date, revenue was almost $1.4 billion, tripling the revenue from the first half 2025. Operational profit ended at $439 million, also a substantial increase of 55% compared to $284 million in the first quarter. Our tax expense in the quarter was $340 million, an increase mainly due to higher taxable income, which is a good thing. Net profit in the quarter was $83 million, representing a 65% increase compared to the first quarter. And year-to-date, the net profit is $134.1 million, up from negative $10.9 million in the first half of 2025. Next slide, please. So let's move to the cash flow. Our cash position moved from $531 million at the end of the first quarter to $550 million at the end of June '26. The operational cash flow was $639 million, supported by robust earnings and working capital movements. We had the 3 tax installments in Norway in Q2, totaling $98 million. And as these installments were the final ones related to the 2025 results, the cash tax in the coming quarters will be higher. We expect the total tax installment on the NCS in the second half of around USD 320 million, though this will also, of course, depend on the exchange rate at the time of the payments. The strong free cash flow in the second quarter should be seen in context, of course, then of the higher tax payments starting from Q3. Net investing activities was $228 million, with the main effects coming from $202 million in asset investments and $26 million in decommissioning. We had a material reduction in drawn amount under our offtake financing, as Chris mentioned, of $221 million and other financing of $73 million covers dividend and interest on our debt. So we had a cash at quarter end of $550 million, as mentioned. And as you can see, this is a similar level as the last quarter, reflecting that we have mostly used the strong free cash flow this quarter to repay debt and not build a cash position. Next slide, please. Our total balance sheet as per quarter end is around $6.2 billion, of which PP&E represents around 50%, $3.2 billion at the end of the quarter, a slight increase from last quarter. Our net debt ended at $553 million, down $238 million or 30% from the last quarter, mostly driven by the previously mentioned reduction of the offtake financings during the quarter. Our equity share is as of quarter end, 21.8% and with a total equity of $1.36 billion, we are well within -- also within the bond covenants. On the back of the strong balance sheet and cash generation, the Board has decided to distribute NOK 0.375 per share, as Chris mentioned. And following this payment, DNO will have paid dividend to our shareholders for 17 consecutive quarters, totaling $491 million, in addition to $62 million in share buyback. All in all, a very strong quarter for DNO. And by that, I think we'll move over to the Q&A session.

Thank you, Birgitte and Bijan and Chris for an excellent presentation. And before we move on to the Q&A, I guess it's timely to remind you all that we will not take any questions about Genel and the possible offer due to the U.K. takeover code limitations.

And so with that, I think we can take the first question. And Teodor Sveen-Nilsen, analyst, you may unmute yourself.

A few questions. First on the Tawke production and the current production in Kurdistan. You mentioned that you have restarted, but it's a little bit on and off. Could you comment on at what level has the quarter-to-date production been in Kurdistan? So that's the first question. Second question is also on Kurdistan. That's on local prices. I know you get like pricing authorities, which also I think that you highlighted in your presentation. That's the same as previous periods. Why hasn't the local price increased when global oil prices has increased substantially lately? And then third question, that is on NCS and 2027 production outlook. You definitely have several fields coming on stream into next year. I'll also assume some underlying decline on the current production. But should we should we expect like double-digit percentage production growth on NCS next year? Or is that too aggressive to assume that kind of growth?

Let me start with the Kurdistan question, and I'll turn it to Chris and ask you to respond to the NCS question. With respect to our production level, that's a hard one to respond because as I mentioned, as Chris mentioned, we look at the safety and security situation in Kurdistan, in Iraq, in the region and importantly, in our areas of operation on a very regular basis, almost a daily basis. And it's possible that we will have to shut down production very quickly. And Chris may refer to that as well. And because of the uncertainties and the shut-in, we prefer not to give a figure because today's production may not be tomorrow's production. And I think it would give a false projection and raise expectations or lower expectations if we report our production on a weekly basis, a daily basis, on an ongoing basis, it's not really helpful to our investors. It's not helpful in other respects either. So we will obviously, in our next quarterly presentation, present the numbers for this quarter. I hope they will be strong numbers, but I can't give numbers that represent 1 day's production, high or low or not at all, because, again, this would not really give a good guidance to the market as to what to expect in terms of Kurdistan production. We're producing currently. We've said that our expectation is that we will reach -- if all goes well, our reach and sustain on an ongoing basis, our preshutdown production levels. And what we have said about drilling and workovers would be -- would help offset normal decline in some of the wells and hopefully give incrementally higher numbers. But we just can't say this is a very unique situation. And we have one foot on the accelerator in terms of operations, in terms of drilling and one foot always on the brake. So I think the best numbers we can give you will be the numbers we present next quarter, which should be backward looking rather than forward looking. Having said that, you asked about pricing. Obviously, pricing in local markets sometimes are related to external markets, sometimes they are not. In this instance, there is a disconnect between prices for fuels and diesel, gasoline, other products in larger Iraq and the global markets, oil-producing countries typically sell products into the local market at well below international prices. This is true of Iraq and also true of Kurdistan. So there is this disconnect. If the oil is moved into international markets, that changes. But at the current time, our sales reflect, again, other conditions, other considerations than those in terms of our North Sea pricing for our oil, in particular, that tracks the global supply and demand in global markets very closely. We have said that the price that we are currently selling to local traders and where that oil moves, we don't know. But our sales price is in the mid- to high $30 a barrel range. Before the shutdown, we were at a very, very low $30 range. So that's already about a 20% increase over our preshutdown levels, which is great. But our pricing does not -- the net pricing to us does not reflect international prices. That's unfortunate. And anyway, we were shut down and production-wise, the periods, the weeks in which oil -- international prices were extremely high because of the war in the Persian Gulf and in Iran, which has now spread to other parts of the Middle East as well, as you know, in terms of strikes. We missed that opportunity in Kurdistan to capture those prices, but we did not miss that opportunity in the North Sea. And again, you've seen our performance, our financial performance, that's been terrific. So while we were not able to capture it in Kurdistan, we did in the North Sea, where the North Sea operations were hitting on all 12 cylinders. We're very pleased with that. And so the North Sea carried the quarter for us. And when we first started going to the North Sea, it was Kurdistan that was carrying the quarters, multiple quarters for us and allowed us to move into Kurdistan revenues. Kurdistan operations allowed us to go into the North Sea. And now the shoe is on the foot of the other sister and the North Sea is carrying Kurdistan. And hopefully, in the third quarter and the fourth quarter, both will be -- will have their dancing shoes on, but we just don't know and we can't offer you that guidance. I wish the situation were different, but it is what it is, and we try to make the best of it. But again, the safety of our people on the ground in Kurdistan is uppermost on our mind. That's not to say we don't -- we're not concerned about safety and security in the North Sea or the Ivory Coast or any other part of the company. Safety and security and the well-being and welfare of our team is uppermost in our list of concerns and considerations and therefore, our corporate policies. Chris?

Thank you, Bijan. And I'll turn to Teodor's third question about North Sea production. And yes, you're right that, Teodor, we are growing in the North Sea. It's a very exciting part of our business. It takes a huge amount of energy from the team, primarily in Stavanger, a few over here in our corporate headquarters as well. So we like to get involved, too. The growth trajectory that we are pushing for, we first set out in the pack we published at the time that we bought Sval. And at that point in time, I think we set out our ambition for 100,000 barrels of oil equivalent a day DNO share by 2030. And we put a graph in the slide pack showing the sort of trajectory towards 2030. We updated that in the February presentation, I believe. And I can't remember, unfortunately, Teodor, off the top of my head what the number was for next year. But if you refer to that, that will give you a sense of where we're going. We're not putting out official guidance for 2027 yet. So that's the best I can do to help you with that. But we're standing by our ambition for 100,000 barrels of oil equivalent per day by 2030. And I personally am confident that we will achieve that target.

That's clear. And then just to clarify on Tawke. Bijan, you said that you expect production to come back to preshutdown levels whenever the war ends. So then we're still talking about 100,000 barrels gross from Tawke expectation, right?

Teodor, I don't want to give, again, any projections or any guidance. We had said, I think at the start of the year that with the 8-well drilling program that we had planned that we thought we could reach 100,000 barrels a day in -- by the end of this year. Circumstances changed. We shut in production. When you shut in production, performance of some of the wells will be affected. We have to go in and do workovers and they get pumps that perhaps because we were shut in, burned out and replace those and make other repairs. And that's been something that we've initiated, and it's an ongoing process. The wells we thought we would be drilling at the first part of this past quarter, we didn't drill, we couldn't drill. We started drilling in the latter part of the quarter as conditions seemed to have improved security-wise for some period of time. So we are behind the schedule that we had anticipated early in the year and behind in terms of the ability to reach targets that have been set back. And again, if security conditions deteriorate, we will stop drilling the new wells again. I hope that won't happen, but we're mindful of that. So, Teodor, I think you should assume based on what has been happening on the ground in other regions that our goals are -- will not be met, that these will be suspended. By how much and for how long? I just don't know. I wish I did. If we had the crystal ball and knew what was going to happen security-wise, we would stop operations or expand operations. But we don't have that crystal ball. And we just have to watch this day by day. But as we've said repeatedly with onshore wells and onshore fields, it's easy to hit the brakes and easy to hit the accelerator. But when you hit the brakes in a fast-moving car, and then you start again, you lose some time in terms of your performance. I should also note that I talked about our North Sea and Kurdistan as sisters. Again, this is a relic of the period in which DNO was formed in the '70s -- '60s, '70s. The big oil companies were called the Seven Sisters. Why sisters, I don't know. But the sisters or Seven Sisters are now, I think, maybe 4 are the super majors, and we were always the small sister. But the feminine term is used when it comes to the oil industry, maybe to show the softer side of companies. We have a soft side of our operations. But we work in a very difficult masculine geopolitical environment, and that's okay, too.

Next question comes from an analyst Nikolas Stefanou.

Congratulations on a very strong quarter and it's really good to see these numbers coming through. I want to ask you a couple of questions on the North Sea and then one in Kurdistan. I understand the reluctance from giving an outlook for 2027, but you have increased this year's production in the North Sea. So would you be able to give maybe an exit rate for this year? And then the other question, could you please remind me the number of FIDs planned for this year and what else is left in the North Sea?

Certainly. I can dissect the one on the production side. You asked for an exit rate for the year. I don't have that number in front of me. But obviously, we have this morning reported the actual production for the first 2 quarters. And we have upped our guidance for the year to 85,000 barrels of oil equivalent a day. So I think that you should be able to quite easily calculate what to expect in the second half, if that helps answer that question, unless any of my analysts here are coming up with a number for you. In the meantime, what was the second question, sorry?

Yes, it was the number of projects sanctioned and to be sanctioned in 2026? And where are we at there? Just an update, basically.

So we updated this quarter that we sanctioned 3 more of the subsea tiebacks in Q2, Cerisa, Ofelia and Gjøa Nord. And we are still projecting that the [indiscernible] Kjøttkake project will be sanctioned later in the year, which I think is consistent with the presentation we made 3 months ago where we did a bit of a deep dive into that satellite portfolio. So if anyone is interested to get a bit more information on our near and medium-term satellite tieback project portfolio, if you click on the slides from last quarter, you'll get a bit better overview. And I think the dates there are still valid.

Okay. Okay. So it's just one more FID planned for 2026 then?