Dear Friends and Investors,
Some of you may recall the old sayings “no gain without pain” and “no guts, no glory”. As we have come out of the third quarter and entered the fourth quarter 2020 both these sayings say quite a bit about Tethys today. And for that matter also about you, our faithful and tested shareholders.
The valuation of oil companies in general and the overall market sentiment versus the oil industry is at its lowest point in decades. The impact from the, anything but contained, COVID pandemic adds pain, not only to oil companies but to industries and people around the world. While our first priority remains staying healthy and doing what we can to alleviate that pain, our second priority is to stay focused and continue to build the business, (even when prospects look pitch black) because the oil age is far from over. It may be in decline, and for the long-term health of our planet that may not be a bad thing, but oil as a commodity will be needed for the foreseeable future – as an absolutely necessary part of providing energy to the world.
That is why, during the recent months, there has been more forward-looking investment from Tethys in new projects than anything we have done since embarking upon the development of Blocks 3&4 onshore Oman more than ten years ago.
The most notable examples of this has been our entry into Block 58, announced in July, and our increased interest in Block 56, announced only last week. These investments are made from a position of strength. The continuing production from Blocks 3&4 remains a solid foundation to build on providing income both to help fund our growth strategy but also to underpin our position as a dividend paying company. And on top of it all our balance sheet remains very strong with no financial debt and almost MUSD 50 in cash.
Turning now to looking at the third quarter in more detail let me first report that happily all programs to limit the impact of COVID-19 have been successful. The few cases detected within our operations have all been found early thanks to extensive testing and all infected persons have recovered. We are very grateful to all Omani authorities, CCED, the operator of Block 3&4, and all Tethys co-workers and partners for all efforts to manage the situation.
On the financial front the reduced work program and cost savings have resulted in a decrease of the per unit operating expenditures down to USD 9.5 per barrel, down from USD 10.8 per barrel in the second quarter and USD 11.6 per barrel in the first quarter 2020. The reduction comes from lower overall costs of supplies but also from the shut-in of higher cost wells.
The lower oil price has hit our top line revenues hard, but as we did not sell any oil in July, at very low prices, our achieved selling price in the quarter was 42.8 USD per barrel. This is 25 percent higher than in the second quarter. Timing effects relating to oil sales have, however, had an adverse effect on our free cash flow in the quarter, which amounted to MUSD -11.7 and was impacted by a negative working capital effect of MUSD -12.3. Given that it is just a matter of timing, we expect the free cash flow in the fourth quarter to be back at healthy levels as the working capital normalises. So, by paring back the work programme and deferring investments, we are on track to beat our target of cash flow neutrality from Block 3&4 on a full year basis.
Production of 10,651 barrels of oil per day in the third quarter was in line with the production in the second quarter 2020. We happily note that production remained above our indicated quotas at 9,300 barrels of oil per day, something we are hopeful will continue also in the fourth quarter. An important milestone was also reached in the beginning of the quarter, when the total aggregated gross production from Blocks 3&4 exceeded 100 million barrels. This milestone underscores the hydrocarbon potential of Blocks 3&4.
On Block 49 we are closing in on our first operated exploration well for a long time. We have identified a rig and are in the final stages of negotiating the rig contract. Construction at the drill site is well underway where roads, drill pad, camp and similar facilities are rapidly emerging and the date for spud of the Thameen-1 well is planned for mid-December. We have also received a one-year extension of the license, allowing us to both complete the drilling operations and also evaluate the results from the well in good time ahead of the new deadline of December 2021.
After the reporting period, we entered into an agreement, subject to government approval, to acquire an additional 45 percent interest in the exploration and production license covering Block 56. Upon completing this transaction, we increase our interest in the Block from 20 to 65 percent and we also assume the operatorship. That Tethys will then be operating three blocks onshore the Sultanate of Oman is a great honour and one that comes with a lot of responsibility. But being operator also offers some great opportunities. The strong technical team we have built in Oman over our ten years in the Sultanate will now have a chance to really prove its mettle in leading the partner group in the work of bringing oil out of Block 56. The work we have done during the quarter of reviewing the well data and the existing seismic has confirmed our enthusiasm for the block. We are excited to enter into the second exploration phase and to be in the driver’s seat in preparing the upcoming work program.
And last but not least on our new Block, 58, desktop G&G work has included merging of legacy seismic 3D data and planning of 2021 work program.
So stay with us – the oil business has always been full of booms and busts and it is our firm belief that you create value by being countercyclical!
Stockholm, November 2020