Letter to shareholders

Dear Friends and Investors,

The third quarter 2021 saw improvement in almost all financial metrics, as should be expected given the very strong recovery in oil price we have witnessed as societies open up and economies return to normal activity (at least for now). We achieved an average oil price of USD 66.7 per barrel on our oil sales in the quarter and with the two month lag we have in our selling price, we can look forward to seeing the impact of the current higher oil price in the months to come. Production from Blocks 3&4 remains slightly below expectations however, and for various reasons – both operational and organizational – we expect there will be greater fluctuations in the last months of the year. On average we expect production for 2021 to come in around 11 100 BOPD. For next year we would expect increased capex which should result in increased production in 2022. But this is of course something we will speak more about early next year.

Financially the third quarter 2021 was the strongest since before the Pandemic set in. It is the fifth consecutive quarter with increasing Revenue and other income and as well as EBITDA, MUSD 29.4 and MUSD 16.5 respectively. And most notably in the quarter, we have generated MUSD 13.1 of free cash bringing the total to over MUSD 20 year-to-date. Entitlement (our share of production after government take) remained in line with the previous quarter at 41 percent. Our netback per barrel for the third quarter amounted to USD 17.2, compared to USD 15.2 in the second quarter 2021, an increase by 13 percent. Consequently, our balance sheet strengthened even further and our net cash position MUSD 58.5 is now higher than at the start of the year.

Before turning to our exploration blocks let me just remind us all of the robustness of Blocks 3&4. We remained cash flow positive on an annual basis throughout the oil price down turn. At current oil prices, even with the slightly lower than expected production, the Blocks generate considerable amount of free cash. And don’t forget that our agreement with the Government, the Exploration and Production Sharing Agreement (EPSA), is structured exactly as a ‘sharing’ agreement, where we get a share of all the oil produced in a month (our “net entitlement”) and the Sultanate of Oman gets the rest (the “Governments take”).

Our share, or out entitlement, is calculated in barrels and consists of a number of barrels as repayment for our costs of producing and finding the oil (cost oil barrels) and a number of barrels which is our profit (profit oil barrels). Our profit increases as our costs drop but the number of entitlement barrels also drop (fewer cost oil barrels) so, and this can be a bit counterintuitive, we actually make more money (profit oil) from fewer entitlement barrels than from more entitlement barrels. So a down trending entitlement number is actually a sign of a healthy and profitable project.

(Note also that our costs are recorded in dollars but we are repaid in barrels. If we spend USD 100 and the oil price is USD 100 per barrel, we get one barrel as cost repayment. But if the oil price is USD 50 per barrel we get two barrels. Our number of entitlement barrels are actually fewer in a high oil price environment than in a low oil price environment, but the dollar value is the same.)

Blocks 3&4 have been the engine behind our distribution to shareholders, now in its seventh year!, and the source of funds for our ongoing exploration efforts. Judging from the strong performance in the challenging pandemic period we have every reason to believe that this state of affairs will continue for several years to come.

So on that note let us turn to our efforts to find oil in our other Blocks. As we have learned in our more than 10 years in Oman, good quality 3D seismic is the key to unlocking the abundant resources under its surface, and with significant seismic acquisition programmes about to begin in both Blocks 56 and 58 we are confident that we are departing on a journey to future discoveries.

Also on Block 56, a rig is about to be signed to allow us to embark on a three well exploration and appraisal programme of three prospects in the Al Jumd trend. Operations are expected to start by the end of this year with results early next year. If all goes well, we will be able to prove the commerciality of the Al Jumd trend while targeting more than seven million barrels of gross prospective resources at the same time. On Block 49 we continue to work closely with our 50 percent partner EOG to decide the best way forward for the Block as well as for the Thameen discovery.
As the world emerges from under the shadow of the corona pandemic, and we with it, we keep our fingers crossed that the new normality will provide ample opportunity for the continued improvement of the world’s energy balance – where Tethys, with your support, aims to play a maybe modest but responsible and value generating part. So stay with us – energy is arguably the most exiting arena in business today!

Stockholm, November 2021

Magnus Nordin,

Managing Director