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Edited Transcript of TETY.ST earnings conference call or presentation 5-Nov-19 9:00am GMT

Q3 2019 Tethys Oil AB Earnings Call

Stockholm Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Tethys Oil AB earnings conference call or presentation Tuesday, November 5, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Magnus Nordin

Tethys Oil AB (publ) - Founder, CEO, MD & Director

* William Peter Holland

Tethys Oil AB (publ) - CFO

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Conference Call Participants

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* Johan G. Spetz

Pareto Securities, Research Division - Analyst

* Karl Fredrik Schjøtt-Pedersen

ABG Sundal Collier Introduce - Research Analyst

* Teodor Sveen-Nilsen

Sparebank 1 Markets AS, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello and welcome to the Tethys Oil Q3 earnings report 2019.

(Operator Instructions) Today, I'm pleased to present Managing Director Magnus Nordin and CFO William Holland.

Please go ahead with your meeting.

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Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [2]

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Thank you very much. And good morning, ladies and gentlemen. We address you from a sunny and rather cold Stockholm. Temperature is just a little bit above freezing and glowing sunlight, and I think we have a report that deserves a bit of spotlight also.

The summary for the third quarter is actually, maybe a nicely done in 3 sets of digits, 13,053, 49 and 56. And this translates to a lot of activity from Oman. 13,053 is the record production we achieved from the quarter from our producing Blocks 3&4 asset. 49 is the previously orphaned block in the western part of Oman which has proven to be quite prospective. And 56 is a new addition, a new block in Oman 20 kilometers south of the border of Block 4, an appraisal opportunity holding some very interesting geology.

The record production stems from the successful implementation and also response from the various production-enhancing activities that have been carried out from Blocks 3&4; the fine-tuning of the Ulfa facility that came fully onstream the early second quarter this year; including of additional production wells, particularly in the Shahd field; and continued successful maintenance program of the older fields.

Block 49, we have interpreted the new seismic that we collected last year. And we are very happy to say that we found one drillable prospect, a number of leads. And we are still looking at the part of the 3D area where we are not done yet. But we reached our most important milestone. We have a prospect and we hope to drill it during the first half of 2020.

And Block 56, as I said, is a new addition, is still subject to government approval. It's a farm-in into an existing joint venture, an appraisal opportunity where we hope to participate in the testing of 3 already drilled wells in the recent near future. And we do see some very interesting geology that shows good promise for the future. But of course, we also have growth opportunities in Blocks 3&4. 2 exploration wells are currently in progress. One is done drilling and not without complications and testing is still ongoing, whereas the other one, the Maather-1 has spudded and is drilling as we speak.

Translating this into financials, of course, a -- as you could expect from record production, strong financials with revenue in excess of $40 million, a very healthy EBITDA of $26.6 million, with an operating result of $14.5 million achieved through a selling price of $65.40 per barrel, which of course is down a little bit compared to the second quarter and down considerably compared to the equivalent quarter last year, but still a good price and yielding us very good results.

OpEx $10 per barrel. It's a number we are quite happy with. And the production, of course, we are extremely happy with, 13,053 barrels of oil per day on average for the quarter.

We end the quarter with a net cash position of $71.9 million. And that is more than enough money that we need to continue what we are doing, including new projects. And of course, we are paying SEK 1 per share to our shareholders. I think record date is on the 18th of November, so the cash should be with our shareholders in about 3 weeks from today.

Let me take this opportunity to remind you that this SEK 1 is just the final part of the distribution of SEK 8 that we have done in total in 2019, which is the highest distribution we've had so far. It compares to SEK 6 per share that we distributed in 2018. And with a strong cash position and with excellent cash flow generation, we of course are confident that we will continue to distribute cash to shareholders.

Our main asset base is Oman, and that's the -- is even clearer today with the addition of Block 56. Our acreage position in Oman is further strengthened. And although we haven't done the full numbers, I dare say that, for investors that want to have exposure to the Sultanate of Oman, Tethys probably offers one of the best vehicles around. We are with a 30% share in Blocks 3&4, where of course we have the -- our production. We have Block 49, where of course we now have an interesting exploration prospect to drill next year. And we have our new block, 56, where we are looking at appraisal activities later in the recent near future.

With that, I would like to hand the floor over to our CFO, William Holland, who will give you a lot more detail on the numbers.

Will, please.

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William Peter Holland, Tethys Oil AB (publ) - CFO [3]

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Thank you, Magnus. And good morning, everybody.

First of all, let me talk about production on Blocks 3&4. As you can clearly see from the charts here, we're benefiting from the prior investments that we've made into production. And our quarterly production is over 13,000 barrels of oil per day, first time we've been over 13,000 barrels of oil per day, up 10% from this time last year, which is a very notable achievement. As you can see from the chart, there has been a step-up in our production. And this is a direct result of the investment we've made in infrastructure in the Ulfa facility and new wells and maintenance on older wells. So we're very happy with the way that that's resulted in the production levels that we're currently at.

If we then turn to the oil price which we have been receiving. And just as a reminder, we have a 2-month lag on oil price. We sell 2 months forward. And as you can see, for this year actually, we -- the oil price has maintained a level above $60 per barrel. And it's come off slightly from Q2. We're slightly down and we've achieved an average of $65.4 a barrel for this quarter, but it does seem like the oil price has stabilized above the $60 per barrel for this year, which is down from 2018 but still at a very reasonable level.

If -- what's that translate to for revenue. If we move on to Slide 9, you'll see there that our revenue and is -- for Q3 is actually very similar to revenue for Q2, marginally down just because that the oil price has come off a little bit from what we've achieved. But if you look at our -- what we've achieved for the year at 14 -- $114 million, $114.7 million, we're up on 2018. And we are demonstrating stable production and stable revenue as a result for the quarter. So that's very good.

Moving to expenses. Talking about stability, you'll see, you'll note again that the Q3 is very, very similar to Q2. And on an absolute basis, we're recording $12.1 million net to Tethys of expenses for the quarter, which is very much in line with what we had at Q2 as well.

So looking, what does that mean from an OpEx and a netback standpoint? We are -- we recorded an OpEx per barrel of $10.1, which again is stable. It's down slightly from the $10.2 that we recorded last quarter partly due to the higher production, but I think this is only $0.10 per barrel is definitely a number that has stabilized and we are pleased with that. We still expect that for the year that the OpEx per barrel will come in at the $11 or below mark.

What does that mean for EBITDA? Our EBITDA for the year -- for the quarter for Q3 is marginally off. That's due to the same price of the crude coming down a little bit, but I would draw your attention to our EBITDA margin at 65% for Q3. Although that's slightly off Q2, that's still a very, very respectable level to be at, and we're quite happy with that.

So what does that translate to from a cash position? As Magnus mentioned earlier on, we have a -- we've got a very healthy cash position. We're back over $70 million, $71.9 million, despite our significant distributions to shareholders. So we have a very healthy cash position and are very well equipped to continue with our operations and in fact do more than invest in our existing operations.

Investments in Blocks 3&4, the next slide, continues according to plan as well. And we see, for the quarter, we've invested $14.2 million in Blocks 3&4. And we remain within our guidance for the year of $50 million to $55 million of investments in 2019.

What are we spending that money on? If we look at Blocks 3&4, you see the wells that we're currently drilling. To date, we've drilled 24 wells. There are other wells ongoing. We maintain a very active program. And as I said, we retain that guidance of $50 million to $55 million for the year.

So with that, I'd like to turn back to our Managing Director, Mr. Magnus Nordin.

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Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [4]

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Thank you very much, Will.

So let's turn to the next slide that summarizes our operations for the third quarter 2019. And the -- during the third quarter, of course, we had Block 3&4 activity. You've seen some of the details. The basics are the same. We held 30%, and the block is operated by CCED with partner Mitsui. We've had it since 2007. And the license runs till 2040, so we have ample time both to produce the known assets but also to continue to look for more in that block.

And then Block 49, a block that we'll be talking a lot more about over the next -- over the coming months, hopefully, also the coming years. We have 100%. We are the operator. We signed it almost exactly 2 years ago, in November 2017, so we have 1 year and about a month to go on the first exploration period. Also reasonably large block, 15,439 square kilometers, still one of the larger ones in Oman. And I think we have used these 2 years fairly well.

And as you frequently do when you get a new exploration block in your portfolio, you look at what has happened before. You look at previous wells. You come up with an idea of what the geology looks like, what potential petroleum systems could there be, what have you learned from previous wells. And then following the textbook, you go out and do some seismic on top of the old seismic that's already there. That's exactly what we did.

We can see from previous wells that obviously oil have been generated. There were shows in several wells before us. And seismic coverage was a bit spotty, and in particular the quality wasn't the best. So we focused on 2 areas where we found the prospectivity both from a petroleum system point of view but also from what we could see from previous seismic, where we would have the biggest chance if we could find something drillable to also make it work from a trap and charge and resource potential.

And we completed the seismic during early this year. We've interpreted it, thus focused on the 2D area, where we felt we had enough or where we had more information from the early seismic. What we hope to find was confirmed. We have a drillable prospect in the 2D area. We also have a number of potential leads, which of course we will revisit in the course of time, but first we're now focusing on drilling this well. We are in the process of securing rigs and all the other stuff that's needed to drill a well. It will actually be the first well that Tethys will operate itself in Oman since 2008, when we operated Block 15. It will be a highlight for Block 49 next year, but we are also looking at the 3D area up to the very eastern part of the block where interpretation continues in parallel with preparing for drilling in the 2D area. So as we mentioned in our report, we have every reason to assume we can come back and say a lot more about Block 49 over the next couple of months, so do stay tuned.

Returning to 3 and 4, our nonoperated star performer. Just remind you that production was a bit lackluster here in the first quarter. And we explain that by delays in the startup of the Ulfa, the so-called Ulfa facility, which handles a lot of the oil from the 2017 exploration discoveries. And we guided that this will be rectified and that we expected to make up the shortfall and have stood by our guidance of between 12,000 and 13,000 barrels of oil per day for 2019. And we are, of course, very happy to see that everything we said was going to happen has happened. And we are now, as we approach the end of the year, firmly entrenched in the higher part of the production guidance for 2019.

Reminding you of reserves and resources. This is the opening balance for 2018. So far this year, we have produced about 3.2 million barrels. And at this rate, we are going to come in above the production for 2018, so we will, of course, look to maintain our excellent record on reserve replacement. And that is one of the focuses for the year, to find more oil in Blocks 3&4 and also mature continued resources into reserves. As we are approaching the end of the year, we will soon know how successful we have been in these 2 tasks.

And focusing a little bit on 3 and 4. This slide summarizes where we have our fields, where we have the seismic. And we are spending a fair amount of time and money on collecting more seismic this year in 2019. We are basically filling the gaps west of Farha South and north of Farha South. To have a fairly complete coverage by the end of the year, we have Block 3 to fully assess the potential in that block.

While at the same time doing our exploration wells, both the Yusr and Maather-1s are well flanking the Farha South field. They are within seismic that was collected in 2018. The results will bear on and will be helped by the seismic -- that we now collect in what is turning into a very systematic approach to unlock the potential surrounding the Farha field and also the potential between the Farha field and the Shahd fields in Block 4.

Yusr has been completed drilling. There were some issues during both drilling operations and testing operations. So the testing is not complete, and work with testing in the Yusr well will continue in the fourth quarter. And we have to have something here before the end of the fourth quarter.

Mahamid is drilling. It's a rather interesting well with several targets both in the Buah and Khufai and in the deeper Masirah Bay formation, including underlying informations in the pre-Cambian Cryogenian layers of geology. Well, it's quite interested -- interesting in that it -- by testing so many different objectives, we will get a lot of information about the remaining prospectivity, in particular in the area east of the Farha South field. So that's another well that we wish you to stay tuned to look in for more information about as such becomes available.

Brief touch on the appraisal development. Focus in the quarter has been, among others, on the Erfan discovery from '17, where 2 wells, appraisal wells were drilled. Both encountered oil as expected, and both have been connected to the Saiwan production facility, which is actually a result also that we are quite pleased with. And no negative surprises on this field.

And finally, turning to our new addition, Block 56, which we didn't know about until about a week ago. It was announced on the 30th of October. As you can see from the map, we are south of Block 4. Block 4 is in the upper corner of the slide. We have a number of blocks in-between, I should say, that recently there have been some additions. Block 72 that shows open is now operated by Occidental Petroleum. And Block 55, which also shows open, is now operated and owned by Shell. So if you believe that big companies know what they're doing, we are in very good company -- or I should say we have very good neighbors.

Block 56 is operated by Indonesian E&P company Medco, who also operates the Karim field adjacent to Block 56, which is within Block 6 that's run by PDO. And Karim is operated under the PDO small field operations, in production. And of course, that makes Medco an optimal operator for Block 56.

We see some very interesting potential from -- also from the Blocks 3&4 perspective. 56 straddles both the Central Omani plays but also -- and has similar geology to what we have in 3&4 and also offers opportunity further west in a much younger territory basin that is fairly under-explored at this stage.

Among the attractions of 56 is that 11 wells have been drilled, and all but 1 have encountered oil or oil shows. Compare this to Blocks 3&4 when we entered from 10 years ago, where just over 30 wells have been drilled. And half of those had encountered oil and oil shows. We do see similarities between 56 and 3&4 at that time.

The work program that Tethys will now become part of is focused on testing 3 of the legacy wells in the not-too-distant future. And of course, we hope to contribute with our ideas and expertise once we have the results from these wells. And from a Tethys perspective, it's an investment that is seriously off to a flying start, and we have high hopes for where Block 56 is going to take us.

So to summarize the quarter, I would actually say the future.

3&4, we are looking forward to the testing of the Yusr exploration well. We are looking forward to the results of the Maather exploration wells. And we are looking forward to details on the third exploration well, which is scheduled to be spudded sometime in the fourth quarter, while of course helping to maintain the excellent production levels that we have seen for the last couple of months.

49, the prospect is identified and now is full steam ahead to getting ready to drill that exploration well, which we hope to see drilled in the first half of 2020. And 56, we hope to see a flow test of those 3 wells in the not-too-distant future.

We continue the groundwork on all blocks, maturing leads and finding additional prospects and continually updating Tethys' geological models. And while we maintain our 2019 production guidance for 12,000 to 13,000 barrels of oil per day, we are now firmly entrenched in the higher part of that guidance. And of course, we hope to come as close to the top end, for the end of the year, as we can. And as we approach 2020, we will be happy to guide for 2020 in due course when we have work programs and budgets for our various licenses.

On that note, I would like to open the floor to questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of [Joseph Douglas] from Stifel.

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Unidentified Analyst, [2]

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A couple of questions from me, if I may. On Block 56, you're looking to test a few wells there. I just wonder if you could give some, provide some numbers of what you're expecting in terms of flow rate? This will be similar to what you saw initially at Block 3&4? And in terms of news flow, when would we be expecting these tests? Or is it too early to say? And second question, on your M&A strategy. So it looks like a really good start. As you say, it's an attractive enterprise. And I would agree with that. And just on further M&A going forward, what are you looking for? Would it be -- is your focus still in Oman? And it would be good to get sort of a flavor of what you're looking at in the future?

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Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [3]

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Okay. First to say, I don't think we can give any more details really on what we expect at Block 56 at this time. As I mentioned, we've actually only had the block for a week and owned, and formally -- and it is still subject to government approval. So as soon as we have more information, we'll be happy to share that with the market, but at the moment, I don't think we can really say any more than we already have. And for -- as far as our M&A activity, we are certainly -- we have the balance sheet to support traditional projects, and then I can say that we continue to look for different projects. And our strategy there hasn't really changed. I mean we are still looking at low-entry tickets. We are looking at -- for value creation to find things that actually will contribute serious value to us. And we like to have the risk-reward ratio on our side. So I suppose I can summarize that to say we will continue our strategy and hope for more of the same but different.

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Operator [4]

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And the next question comes from the line of [Ziggurt Franklin] from [Franklin Investment].

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Unidentified Analyst, [5]

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(inaudible) from Germany. It was a really good quarter. I have a question to Yusr-1. What problems or what challenges were there when you had some problems and some time lag? Is there oil flowing? And do you need Yusr-1 to maintain the production on fields 3 and 4?

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Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [6]

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Okay. Yusr has experienced a few technical issues both in connection with the drilling and the testing, nothing that is abnormal from an oil field perspective, but still it's caused time delays, nothing that is out of the ordinary and that can't be fixed. So the main drawback is that we lost some time run. And the well is an exploration well. And the -- it has got nothing to do -- all to do with the current production guidance.

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Operator [7]

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

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Teodor Sveen-Nilsen, Sparebank 1 Markets AS, Research Division - Research Analyst [8]

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Also congrats on a good quarter. My first question is on production going forward. I know that the current productions have been just somewhat impacted by the production restrictions in Oman. How should we think about that into 2020? Should we expect somewhat higher production in 2020? And also, second question is regarding your OpEx, which has been pretty low over the past 2 quarters, around $10 per barrel. Should we expect that to decline into 2020?

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Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [9]

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Thank you, Teodor. And the first question, production. As I mentioned, we are not in a position to guide anything for 2020 at this stage. It will be very much a function of where we end up with work programs and spending for next year, and we'll be happy to get back to address that question as soon as we can. And for the remainder of the year, we stand fully by our guidance. And as I mentioned, we happily note that we are moving in the higher end of the year's guidance. As for the OpEx, I'll be delighted to ask Will to expand a little bit on how we look upon OpEx yesterday, today and in the future.

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William Peter Holland, Tethys Oil AB (publ) - CFO [10]

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Thank you, Magnus and Teodor. And yes, so we -- as a nonoperator, we obviously receive joint billing statements from the -- from CCED on a monthly basis. And we do spend a lot of time analyzing that and making sure that we are happy with the numbers. And the guidance that we provided for the year of $11 per barrel, we think that we're going to reach that, but it's -- as we sort of saw it in -- at the beginning of this year, there were some carryover costs from the previous year. We don't expect that to happen this time, but you never really tell until we get the actual results. But we are comfortable with the way that the operator is operating and is accounting for their operations at the moment. So we hope that, that will continue throughout the year. I hope that answered the question.

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Teodor Sveen-Nilsen, Sparebank 1 Markets AS, Research Division - Research Analyst [11]

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Yes. And actually, I have a third one, question on Block 56 that also looks like a good deal. Could you shed some light on the split between the cash payment and carrier? And also whether there is any earnout or not in that deal?

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Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [12]

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Actually rather not, Teodor. Let's just say that, as we have stated, it's a mixture of cash and carry. And we expect to -- if the block turns into commercial production, we expect to retrieve a substantial amount of the outlays with that. And I, we are not really in a position to give more detail on that, I'm afraid, at this stage at least.

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Operator [13]

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And the next question comes from the line of Johan Spetz from Pareto Securities.

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Johan G. Spetz, Pareto Securities, Research Division - Analyst [14]

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Magnus and William, I had a couple of questions also on the topic of M&A, but some of them have been answered already, so I just had one follow-up question left, I guess, which regards to further corporate development or M&A in Oman. Of course, now you've entered into Block 49, Block 56 most recently. And you are now established, of course, in Oman in a very, very nice way. Do you see further similar opportunities in Oman, of opportunities to enter into additional blocks for a relatively minor and upfront payment and build the portfolio that way?

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Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [15]

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Let's put it this way. The -- we certainly consider Oman prospective. And obviously we believe we can make a genuine contribution to unlocking that prospectivity through the experience we have gained in country. And both opportunities may or may not present themselves. It's, of course, a function both of what's the bid rounds, what deals can be found outside of the bid rounds, but it's also of course a function of competition. And as I did mention, our neighbors today in blocks that were opened recently now are Occidental and Shell. So for as much as we appreciate our good neighbors, neighbors can also occasionally be competitors. So the -- we certainly look for opportunity both in Oman but also elsewhere, and we would be happy to add to our portfolio possibilities that we believe satisfy criteria of low-entry cost and risk-reward value creation equation.

And -- but it's difficult to assess what our chances will be. So we will certainly keep looking and keep trying. And do stay tuned for the result. I hope that what I said will be helpful, yes.

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Johan G. Spetz, Pareto Securities, Research Division - Analyst [16]

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Yes, yes. I guess the angle I was going for was what you touched upon briefly there, whether you see that your history in the country is a big competitive advantage compared to some of those much larger potential competitors in these bidding rounds. Or do you see that Omanis preferring size relative to an established presence in the country? Or have -- do you have any impression on that?

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Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [17]

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I think it's -- no. I must say I think it's difficult for us to form such an impression. We will continue to doing what we think we do best and hope that, that will take us as far as it can.

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Operator [18]

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(Operator Instructions) Our next question comes from the line of Karl Schjøtt-Pedersen from ABG.

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Karl Fredrik Schjøtt-Pedersen, ABG Sundal Collier Introduce - Research Analyst [19]

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Just wanted to follow up on your priorities between growing the company and also looking to the balance sheet given your substantial net cash position. So with these, call it, longer-term prospects, how do you now envisage your balance sheet going forward? Should we expect to see quite substantial distributions also for 2020? Or will you now have a more balanced view on CapEx versus distributions?

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Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [20]

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Let's put it this way. I mean we like to try and be everything for everyone. So we hope to be able to satisfy the yield-hungry investor as well as to satisfy the growth-hungry investor. And in line with our stated capital goal, we certainly with the balance sheet we have today believe that we can continue on that path. And what that will translate into for 2020 in detail, it's a bit early to say, but there's definitely been no change in the strategic outlook and the change in our long-term capital goals.

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Karl Fredrik Schjøtt-Pedersen, ABG Sundal Collier Introduce - Research Analyst [21]

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Okay. So the long-term target of 0 net debt, that...

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Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [22]

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That still stands.

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Karl Fredrik Schjøtt-Pedersen, ABG Sundal Collier Introduce - Research Analyst [23]

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Perfect.

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Operator [24]

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As there are no further questions, I'll hand it back to the speakers.

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Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [25]

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In that case, ladies and gentlemen, thank you so much for listening in, for asking some good questions. And I hope we can talk to you again in about 3 months' time and then with a lot of new information that follows from where we end today.

Thank you very much.

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Operator [26]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.