DNO ASA — Interim / Quarterly Report 2017

Nov 9, 2017

Key figures

	Quarter			Year to date	Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Key financials
Revenues	73.0	48.8	231.3	159.6	201.8
Gross profit	-6.4	19.8	86.2	67.9	73.1
Profit/-loss from operating activities	468.8	9.1	495.4	33.3	6.1
Net profit/-loss	462.7	-3.2	464.5	-4.1	-35.3
EBITDA	563.3	26.9	674.4	80.0	95.4
Netback *	25.1	26.0	135.0	77.4	93.4
Acquisition and development costs	29.6	12.8	102.4	18.1	36.4
Exploration costs expensed	5.9	-0.6	8.9	19.0	20.3
Key performance indicators
Lifting costs (USD/boe)	6.6	2.1	3.8	2.2	2.7
Netback (USD/boe)	3.6	4.0	6.9	4.2	3.7

* See alternative performance measures for calculation of netback.

Corporate overview – Q3 2017 and year-to-date

• ⦁ DNO's operations and investment activity in Kurdistan region of Iraq continue uninterrupted
• ⦁ Company is most active driller in Kurdistan with three rigs deployed and 15 wells in 2017 across three operated fields in various stages of production, development and appraisal
• ⦁ Received Kurdistan export payments net to DNO totaling USD 297 million year-to-date 2017 (of which USD 264 million through Q3 2017), up from USD 210 million during fullyear 2016
• ⦁ With continuing export payments, will step up investments at Tawke and Peshkabir in 2018
• ⦁ Recent Kurdistan receivables settlement raises DNO's Tawke license stake to 75 percent
• ⦁ Strengthening balance sheet and increasing Company's equity ratio to 60 percent at end-Q3 2017

Q3 2017 operational highlights

• ⦁ Of operated production of 115,200 barrels of oil equivalent per day (boepd) in Q3 2017, Kurdistan represented 110,500 barrels of oil per day (bopd) and Oman 4,700 boepd
• ⦁ Company Working Interest (CWI) production averaged 74,800 boepd during Q3 2017
• ⦁ Completed drilling of Peshkabir-3 well, now undergoing extended production testing
• ⦁ Hawler-1A multilateral well appraising Benenan heavy oil field in Kurdistan's Erbil license
• ⦁ In Tunisia, exploration well at Sfax Offshore Exploration Permit scheduled in first half of 2018
• ⦁ Val d'Isere prospect on UK Continental Shelf to be spud by operator Apache by end-2017

Q3 2017 financial highlights

• ⦁ Revenues of USD 73 million in Q3 2017
• ⦁ USD 556 million recognized as other income in Q3 2017 following Kurdistan receivables settlement
• ⦁ Resulting in operating profit of USD 469 million in Q3 2017
• ⦁ Exited Q3 2017 with cash balance of USD 399 million (USD 261 million at year-end 2016) and USD 68 million in treasury shares and marketable securities (USD 22 million at year-end 2016)
• ⦁ Forecast 2017 capex of USD 130 million, of which USD 102 million spent through Q3 2017

Operational review

Production

Quarterly production (boepd)

Company Working Interest (CWI) production during the third quarter averaged 74,830 boepd, compared to 69,121 boepd during the previous quarter.

In Kurdistan, CWI production averaged 72,467 boepd during the third quarter, compared to 67,229 boepd in the previous quarter.

In Oman, CWI production averaged 2,363 boepd during the third quarter, compared to 1,891 boepd in the previous quarter.

Net entitlement production averaged 29,294 boepd during the second quarter, compared to 25,784 boepd in the previous quarter.

Gross production

		Quarter Year to date			Full year
boepd	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Kurdistan	110,470	109,159	109,960	105,979	107,299
Oman	4,726	5,307	4,474	5,493	5,325
Total	115,196	114,466	114,434	111,472	112,624

The table above reflects gross production from the company's fields. Kurdistan figures include both local sales and exported volumes.

Company Working Interest (CWI) production

		Quarter Year to date			Full year
boepd	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Kurdistan	72,467	67,678	69,515	65,707	66,525
Oman	2,363	2,652	2,237	2,746	2,663
Total	74,830	70,330	71,752	68,453	69,188

The table above reflects the company's total working interest production. Kurdistan figures include both local sales and exported volumes.

Net entitlement production

	Quarter		Year to date	Full year
boepd	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Kurdistan	27,657	24,615	24,668	26,974	25,746
Oman	1,637	1,380	1,650	1,474	1,630
Total	29,294	25,995	26,318	28,448	27,376

The table above reflects the company's net entitlement production.

Net entitlement from past exports from the Tawke field has been estimated based on the PSC. However, the company has not received payments for the full production.

Activity overview

Appraisal and field development

Kurdistan region of Iraq

Tawke license

Gross production from the Tawke license averaged 110,470 barrels of oil per day (bopd) during the third quarter, of which 109,755 bopd was delivered for pipeline export through Turkey and the balance was processed in the Tawke refinery.

The Peshkabir-3 well is currently undergoing extended production tests across a horizontal section of more than 1.2 kilometers of Cretaceous and Jurassic reservoir. The first oil zone at the toe of the well flowed more than 3,000 bopd on a 64 inch choke. Nine other oil zones and one gas zone have been identified for testing.

The company fast tracked the development of the Peshkabir field and an early production facility will be commissioned by yearend. The previously drilled Peshkabir-2 well has produced at a steady rate of 4,700 bopd since May and is comingled with over 100,000 bopd from the adjacent Tawke field for export.

Erbil license

The Hawler-1A multilateral well was spud in October to appraise the Benenan heavy oil field. Estimates of oil-in-place at Benenan stand at more than two billion barrels.

Oman

Offshore at Block 8, the Bukha and West Bukha fields produced an average of 4,726 boepd during the third quarter, up from 3,780 boepd during the second quarter.

Yemen

Production start-up at the Yaalen field at Block 47, currently under force majeure, remains on hold.

Exploration

Tunisia

The company's exploration and appraisal program is continuing in Tunisia, with plans to drill a well at the Sfax Offshore Exploration Permit during the first part of 2018.

Norway

The company applied for Norway's Awards in Predefined Areas (APA) 2017 licensing round in September. The company is targeting participation in five exploration wells per year.

United Kingdom

The Val d'Isere prospect on the UK Continental Shelf will be spud by the end of 2017 by operator Apache at a cost of USD 12 million net to DNO.

Somaliland

At Block SL 18 onshore Somaliland, a field geological survey and an environmental impact assessment have been conducted, in addition to a gravity-magnetic survey. The company plans to conduct 2D seismic across 1,000 kilometers within the license during the second half of 2018.

Financial review

Revenues, profits and cash flow

Revenues in the third quarter stood at USD 73.0 million, compared to USD 81.7 million in the previous quarter.

Kurdistan contributed revenues of USD 70.2 million, with Oman contributing USD 2.7 million. DNO reported an operating profit of USD 468.8 million during the third quarter, up from an operating loss of USD 1.2 million in the previous quarter. The increase in operating profit is mainly due to recognition of USD 556.0 million other income from past oil sales related to the Kurdistan receivable settlement (see Note 12).

The company ended the quarter with USD 399.0 million in cash and USD 67.6 million in market value of treasury shares and marketable securities. This was up from USD 261.1 million in cash and USD 21.2 million in market value of treasury shares and marketable securities at end-2016.

Cost of goods sold

In the third quarter, the cost of goods sold was USD 79.4 million, compared to USD 35.7 million in the previous quarter.

Lifting costs

Lifting costs stood at USD 45.6 million in the third quarter, up from USD 16.0 million in the previous quarter. In Kurdistan, the average lifting cost during the third quarter stood at USD 4.8 per barrel of oil equivalent (boe). The increase in lifting cost per boe is due to a provision for obsolete inventory in Kurdistan. In Oman, the average lifting cost during the third quarter stood at USD 61.0 per boe. The increase in lifting cost per boe is due to expensing of investments in the Block 8 license.

Lifting costs

	Quarter			Year to date	Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Kurdistan	32.3	10.0	56.5	34.4	59.1
Oman	13.3	2.8	18.1	6.0	8.6
Other	-	0.5	-	0.7	1.0
Total	45.6	13.4	74.6	41.1	68.6

		Quarter	Year to date	Full year
(USD/boe)	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Kurdistan	4.8	1.5	3.0	1.9	2.4
Oman	61.0	11.6	29.6	8.0	8.8
Other	-	-	-	-	-
Average	6.6	2.1	3.8	2.2	2.7

Depreciation, depletion and amortization (DD&A)

DD&A for assets in operation amounted to USD 32.9 million in the third quarter compared to USD 18.8 million in the previous quarter. Increase in DD&A is due to assignment of the 20 percent additional interest to DNO in the Tawke license.

DD&A

	Quarter		Year to date	Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Kurdistan	32.9	14.8	67.9	47.5	55.8
Oman	-	-	-	-	-
Total	32.9	14.8	67.9	47.5	55.8

	Quarter		Year to date				Full year
(USD/boe)	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Kurdistan	12.9	6.5	10.1	6.6	5.9
Oman	-	-	-	-	-
Average	12.6	5.4	9.8	6.2	5.7

Exploration costs expensed

Expensed exploration costs of USD 5.9 million in the third quarter were mainly related to activities in Norway.

Exploration costs expensed

	Quarter		Year to date		Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Kurdistan	-	-	-	-	-
Oman	-0.5	-2.4	-0.1	11.8	10.7
UAE	0.1	0.1	0.2	0.5	0.8
Tunisia	0.4	1.3	2.6	4.7	7.4
Norway	5.1	-	5.1	-	-
Other	0.8	0.4	1.1	2.0	1.4
Total	5.9	-0.6	8.9	19.0	20.3

Acquisition and development costs

(including intangible assets)

Capital expenditures through end-Q3 2017 stood at USD 102.4 million, of which USD 29.6 million was spent in the third quarter. This is up from USD 36.3 million spent during the full-year 2016.

Acquisition and development costs

	Quarter		Year to date Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Kurdistan	28.1	12.4	59.2	17.5	33.3
Oman	-	-	41.8	-	2.4
Other	1.5	0.4	1.4	0.6	0.8
Total	29.6	12.8	102.4	18.1	36.4

Condensed consolidated statements of comprehensive income

		Quarter		Year to date		Full year
(unaudited, in USD million)	Note	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Revenues	2,3	73.0	48.8	231.3	159.6	201.8
Cost of goods sold	4	-79.4	-29.1	-145.1	-91.8	-128.7
Gross profit		-6.4	19.8	86.2	67.9	73.1
Other operating income		-	-	1.5	5.4	18.9
Other income past oil sales	12	556.0	-	556.0	-	-
Administrative expenses		-12.0	-6.9	-23.9	-21.6	-31.0
Other operating expenses		-2.3	-2.3	-7.1	-3.3	-5.4
Impairment oil and gas assets	7	-60.6	-2.0	-108.4	4.0	-29.2
Exploration costs expensed	5	-5.9	0.6	-8.9	-19.0	-20.3
Profit/-loss from operating activities		468.8	9.1	495.4	33.3	6.1
Financial income		3.4	0.4	9.5	1.6	17.4
Financial expenses		-14.6	-11.9	-44.8	-36.5	-56.8
Profit/-loss before income tax		457.6	-2.4	460.2	-1.6	-33.3
Income tax expenses	6	5.0	-0.8	4.3	-2.5	-2.1
Net profit/-loss		462.7	-3.2	464.5	-4.1	-35.3
Other comprehensive income
Currency conversion differences		0.5	-	0.5	-	-
Revaluation/Reversal of impairment in available-for-sale financial assets	8	6.4	-1.8	5.6	3.9	3.2
Other comprehensive income that may be reclassified to profit or loss in subsequent periods		6.9	-1.8	6.1	3.9	3.2
Other comprehensive income that will not be reclassified to profit or loss in
subsequent periods		-	-	-	-	-
Total other comprehensive income, net of tax	8	6.9	-1.8	6.1	3.9	3.2
Total comprehensive income, net of tax		469.6	-5.0	470.6	-0.3	-32.1
Net profit/-loss attributable to:
Equity holders of the parent		462.7	-3.2	464.5	-4.1	-35.3
Total comprehensive income attributable to:
Equity holders of the parent		469.6	-5.0	470.6	-0.3	-32.1
Earnings per share, basic		0.43	0.00	0.43	0.00	-0.03
Earnings per share, diluted		0.43	0.00	0.43	0.00	-0.03

Condensed consolidated statements of financial position

ASSETS			At 30 Sept	At 31 Dec
(unaudited, USD million)	Note	2017	2016	2016
Non-current assets
Deferred tax asset	6	4.1	-	-
Other intangible assets	7	33.7	82.9	86.5
Property, plant and equipment	7	843.5	410.1	403.1
Available-for-sale investments	8	19.6	14.7	14.0
Other non-current assets	9	-	-	30.3
Long-term tax receivables	6	17.4	-	-
Total non-current assets		918.3	507.6	533.9
Current assets
Inventories	4	28.3	69.5	57.3
Trade and other receivables	9	40.1	156.5	117.4
Tax receivables	6	33.9	-	-
Cash and cash equivalents		399.0	266.3	261.1
Total current assets		501.3	492.3	435.9
TOTAL ASSETS		1,419.6	999.9	969.8
EQUITY AND LIABILITIES		At 30 Sept		At 31 Dec
(unaudited, USD million)	Note	2017	2016	2016
Equity
Share capital		35.0	35.8	35.8
Other reserves		263.2	286.5	286.4
Retained earnings		550.3	111.6	79.8
Total equity		848.5	433.9	401.9
Non-current liabilities
Interest-bearing liabilities	10	384.1	359.0	361.7
Deferred income tax liabilities	6	-	-	-
Provisions for other liabilities and charges	11	35.7	98.1	167.3
Total non-current liabilities		419.8	457.1	529.0
Current liabilities
Trade and other payables		107.1	28.7	33.1
Income taxes payable		0.4	3.0	0.4
Current interest-bearing liabilities	10	32.2	-	-
Provisions for other liabilities and charges	11	11.5	77.2	5.3
Total current liabilities		151.3	108.9	38.8
TOTAL EQUITY AND LIABILITIES		1,419.6	999.9	969.8

Condensed consolidated cash flow statements

(unaudited, in USD million) Note Q3 2017 Q3 2016 Q3 2017 Q3 2016 2016 Operating activities Profit/-loss before income tax 457.6 -2.4 460.2 -1.6 -33.3 Adjustments to add (deduct) non-cash items: - +/- Net interest expense (-income) - - - - - Previously capitalized exploration and evaluation expenses 5 - - - - - Depreciation of PP&E and Other intangible assets 4 33.8 15.7 70.5 50.7 60.1 Impairment loss on oil and gas assets 7 60.6 2.0 108.4 -4.0 29.2 Non-cash KRG receivable settlement 12 -556.0 - -556.0 - - Other 29.7 11.4 50.4 27.7 24.5 Changes in working capital: - - Inventories 3.9 1.0 5.6 0.6 10.1 - Trade and other receivables 8.6 1.8 54.3 11.5 13.6 - Trade and other payables -9.4 -1.8 61.6 -23.8 -19.4 - Provisions for other liabilities and charges 10.5 2.5 14.5 7.4 13.9 Cash generated from operations 39.3 30.2 269.5 68.5 98.7 Income taxes paid -1.2 -0.1 -2.4 -2.5 -2.1 Interest paid - -0.1 -17.5 -17.6 -35.4 Net cash from/- used in operating activities 38.1 30.0 249.6 48.4 61.2 Investing activities Purchases of intangible assets 7 -1.3 -0.8 -1.3 - -9.4 Purchases of tangible assets 7 -28.3 -12.1 -101.1 -18.1 -27.0 Acquistion of Origo net of cash acquired - - 2.6 - - Interest received - - - 0.4 0.8 Net cash from/- used in investing activities -29.6 -12.8 -99.8 -17.7 -35.6 Financing activities Proceeds from borrowing 10 12.2 - 12.2 - - Repayment of borrowings - - - - - Purchase of treasury shares, including options -2.2 - -24.1 -2.1 -2.1 Proceeds from sale of treasury shares - - - - - Proceeds from issuance of shares, net - - - - - Net cash from/- used in financing activities 10.0 - -11.9 -2.1 -2.1 Net increase/-decrease in cash and cash equivalents 18.5 17.2 137.9 28.6 23.5 Cash and cash equivalents at beginning of the period 380.5 249.1 261.1 237.6 237.6 Exchange gain/-losses on cash and cash equivalents - - - 0.1 - Cash and cash equivalents at the end of the period 399.0 266.3 399.0 266.3 261.1 Of which restricted cash 3.8 3.0 3.8 3.0 2.9		Quarter		Year to date		Full year

*Net interest expense (-income) is from 1 January 2017 included in the line "Other" under cash generated from operations. "Other" includes also provision for obsolescence on inventory.

Condensed consolidated statement of changes in equity

(unaudited, in USD million)	Share capital	Other reserves	Retained earnings
Balance at 1 January 2016	35.9	288.4	111.8	436.2
Fair value gains, net of tax:
- available-for-sale financial assets	-	-	3.9	3.9
Currency translation differences	-	-	-	-
Other comprehensive income/-loss	-	-	3.9	3.9
Profit/-Loss for the period	-	-	-4.1	-4.1
Total comprehensive income	-	-	-0.2	-0.2
Issue of share capital	-	-	-	-
Purchase of treasury shares	-0.1	-2.0	-	-2.1
Sale of treasury shares	-	-	-	-
	-0.1	-2.0	-	-2.1
Balance at 30 September 2016	35.8	286.4	111.7	433.9

(unaudited, in USD million)	Share capital	Other reserves	Retained earnings	Total equity
Balance at 1 January 2017	35.8	286.4	79.8	401.9
Fair value gains, net of tax:
- available-for-sale financial assets	-	-	5.6	5.6
Currency translation differences	-	0.5	-	0.5
Other comprehensive income/-loss	-	0.5	5.6	6.1
Profit/-Loss for the period	-	-	464.5	464.5
Total comprehensive income	-	0.5	470.1	470.6
Issue of share capital	-	-	-	-
Purchase of treasury shares	-0.8	-23.3	-	-24.1
Sale of treasury shares	-	-	-	-
	-0.8	-23.3	-	-24.1
Balance at 30 September 2017	35.0	263.2	550.3	848.5

During the third quarter of 2017, DNO ASA purchased 2,400,000 own shares at an average price of NOK 7.8066 per share. Following the transactions in the third quarter, DNO ASA held 35,000,000 own shares at 30 September 2017.

The purchases are part of the share buyback program approved at the AGM in 2016 and 2017. For further details, refer to Note 14 in the 2016 Annual Report.

Notes to the interim condensed consolidated financial accounts

Note 1 | Basis of preparation and accounting policies

The condensed consolidated financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting and IFRS standards issued and effective at date of reporting as adopted by the EU. The interim report has also been prepared in accordance with Oslo Stock Exchange regulations.

The interim condensed consolidated financial statements do not include all of the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements as of 31 December 2016. The interim financial information for 2017 and 2016 is unaudited.

The condensed consolidated financial statements have been prepared on a historical cost basis, with the following exception:

All financial assets and liabilities held for trading, all liabilities related to share-based payments and all financial assets classified as available-for-sale are recognized at fair value.

A detailed description of the accounting policies applied is included in the DNO annual financial statements for 2016. The accounting policies adopted in the preparation of the interim consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ending on 31 December 2016.

For accounting treatment of Kurdistan receivable settlement, see Note 12.

Note 2 | Segment information

From the second quarter of 2017 DNO is reporting six operating segments: Kurdistan (KUR), Oman (OMAN), Yemen (YEM), Ras Al Khaimah (UAE), Tunisia (TUN) and Norway (NOR). The operating segments are the same as the reportable segments.

Three months ending 30 September 2017 USD million	Note	KUR	OMAN	YEM	UAE	TUN	NOR	Other	Total reporting segment	Un allocated/ eliminated	GROUP
Income statement information
External sales	3	70.2	2.7	-	-	-	-	-	73.8	0.2	73.0
Inter-segment sales		-	-0.3	-	-	-	-0.2	-	-0.1	0.1	-
Cost of goods sold	4	-65.2	-13.3	-	-	-0.1	-0.1	-	-78.6	-0.7	-79.4
Gross profit		5.0	-10.8	-	-	-0.1	-0.2	-	-4.9	-0.4	-6.4
Segment operating result*		500.7	-9.9	-1.5	-	-2.0	-7.1	-1.9	477.1	-9.0	468.8
Financial - net											-11.2
Income tax expense		-	-1.0	-	-	-	6.0	-	5.0	-	5.0
Net profit/-loss											462.7
Segment assets		921.9	22.3	2.7	0.0	10.7	61.9	60.9	1,080.4	339.2	1,419.6

Note 2 | Segment information (continued)

Three months ending 30 September 2016 USD million	Note	KUR	OMAN	YEM	UAE	TUN	NOR	Other	Total reporting segment	Un allocated/ eliminated	GROUP
Income statement information
External sales Inter-segment sales	3	45.4 -	3.4 -	- -	- -	- -	- -	- -	48.8 -	- -	48.8 -
Cost of goods sold	4	-24.8	-2.8	0.0	-0.5	-0.1	-	-	-28.2	-0.8	-29.1
Gross profit		20.6	0.6	0.0	-0.5	-0.1	-	-	20.6	-0.8	19.8
Segment operating result		20.2	-3.1	-1.8	-2.7	-1.4	-	-0.4	10.8	-1.6	9.1
Financial - net											-11.5
Income tax expense		-	-0.8	-	-	-	-	-	-0.8	-	-0.8
Net profit/-loss											-3.2
Segment assets		665.1	23.3	2.0	0.3	19.9	-	0.7	711.3	288.6	999.9
Nine months ending 30 September 2017 USD million	Note	KUR	OMAN	YEM	UAE	TUN	NOR	Other	Total reporting segment	Un allocated/ eliminated	GROUP
Income statement information
External sales	3	219.0	12.3	-	-	-	-	-	231.3	-	231.3
Inter-segment sales		-	-	-	-	-	-0.2	-	0.2	-	-
Cost of goods sold	4	-124.4	-18.2	-	-	-0.2	-0.1	-	-142.8	-2.3	-145.1
Gross profit		94.7	-5.9	-	-	-0.2	-0.2	-	88.8	-2.3	86.2
Segment operating result*		588.4	-55.4	-2.9	-0.2	-4.0	-5.6	-0.8	514.9	-19.3	495.4
Financial - net											-35.3
Income tax expense		-	-1.5	-	-	-	6.0	-	4.5	-0.2	4.3
Net profit/-loss											464.5
Segment assets		921.9	22.3	2.7	0.0	10.7	61.9	60.9	1,080.4	339.2	1,419.6
Nine months ending 30 September 2016 USD million	Note	KUR	OMAN	YEM	UAE	TUN	NOR	Other	Total reporting segment	Un allocated/ eliminated	GROUP
Income statement information
External sales	3	148.0	11.6	-	-	-	-	-	159.6	-	159.6
Inter-segment sales		-	-	-	-	-	-	-	-	-	-
Cost of goods sold	4	-82.0	-6.1	-	-0.7	-0.2	-	-	-88.9	-2.9	-91.8
Gross profit		66.1	5.6	-	-0.7	-0.2	-	-	70.8	-2.9	67.9
Segment operating result		71.8	-8.4	-3.0	-1.3	-5.0	-	-2.1	52.0	-16.9	33.3
Financial - net											-34.8
Income tax expense		-	-2.5	-	-	-	-	-	-2.5	-	-2.5
Net profit/-loss											-4.1
Segment assets		665.1	23.3	2.0	0.3	19.9	-	0.7	711.3	288.6	999.9

For the segment operating result in 2017, see note 12.

Note 3 | Revenues

DNO presents its operations governed by PSCs according to the net entitlement method when there are observable market prices and the risk related to sale and distribution is minimal. To the extent that the entitlement method cannot be applied, revenue is recognized when the sale criteria in IAS 18 are fulfilled. Kurdistan export sales and local sales are recognized as revenue upon cash receipt.

	Quarter		Year to date	Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Sale of petroleum products	73.0	48.8	231.3	159.6	201.8
Total revenues	73.0	48.8	231.3	159.6	201.8

During the third quarter of 2017, DNO received three payments from the Kurdistan Regional Government for Tawke deliveries totalling USD 120.6 million, of which USD 83.1 million was net to DNO. Of the net, USD 70.2 million is recognized as revenue and USD 12.8 million as a reduction in the booked underlift receivable.

For other income past oil sales refer to Note 12.

Note 4 | Cost of goods sold/ inventory

	Quarter		Year to date	Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Lifting costs*	-45.6	-13.4	-74.6	-41.1	-68.6
Depreciation, depletion and amortization	-33.8	-15.7	-70.5	-50.8	-60.1
Total cost of goods sold	-79.4	-29.1	-145.1	-91.8	-128.7

* Lifting costs consist of expenses related to the production of oil and gas, including operation and maintenance of installations, well intervention workover activities and insurances. During the quarter a provision for obsolete inventory of USD 19.0 million is charged to lifting costs in Kurdistan.

	At 30 Sept		At 31 Dec
USD million	2017	2016	2016
Spare parts	28.3	64.8	54.8
Other inventory	-	4.7	2.5
Total inventory	28.3	69.5	57.3

Of the total inventory of USD 28.3 million, USD 26.8 million is related to Kurdistan and USD 1.5 million is related to Tunisia.

Note 5 | Exploration expenses

	Quarter		Year to date		Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Exploration expenses (G&G and field surveys)	-0.9	0.2	-1.8	-4.6	-5.5
Seismic costs	-2.5	-	-2.5	-	-
Exploration costs capitalized this year carried to cost	-	2.1	-	-9.7	-7.6
Other exploration cost expensed	-2.4	-1.6	-4.6	-4.7	-7.3
Total exploration cost expensed*	-5.9	0.6	-8.9	-19.0	-20.3

*For details on geographic spread of exploration costs expensed, see the Financial review section.

Note 6 | Income taxes

	Quarter		Year to date	Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Income tax expenses
Change deferred taxes	0.5	-	0.5	-	-
Income tax expense	4.5	-0.8	3.8	-2.5	-2.1
Total income tax expense	5.0	-0.8	4.3	-2.5	-2.1
Income tax receivable/ payable
Exploration tax refund NCS (non-current asset)	17.4	-	17.4	-	-
Exploration tax refund NCS (current asset)	33.9	-	33.9	-	-
Income taxes payable (current liability)	-0.4	-3.0	-0.4	-0.4	-
Total tax receivable(+)/ Income taxes payable (-)	50.9	-3.0	50.9	-0.4	-
Deferred tax liability/ asset
Deferred tax asset on losses carried forward NCS	4.1	-	4.1	-	-
Total deferred tax liability / asset	4.1	-	4.1	-	-

The income tax expense, tax receivable and deferred tax asset mainly relate to activity on the Norwegian Continental Shelf (NCS) subject to Norwegian Petroleum Tax System. DNO Norge AS is subject to the provisions of the Norwegian Petroleum Taxation Act with additional special tax at a rate of 54 percent. As the Company is not yet in a tax payable position, it can claim a 78 percent refund of the exploration costs limited to taxable losses for the year. The refund is usually paid out in November-December in the subsequent year.

According to the net entitlement method, income taxes payable related to PSCs consist of the corporate tax rate applicable under the agreements. No tax is applicable to the operations in the Kurdistan region of Iraq as there is currently no established tax regime.

There are no tax consequences attached to items recorded in other comprehensive income.

Note 7 | Property, plant and equipment/ Other intangible assets

	Quarter		Year to date		Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Acquisitions of PP&E *	485.7	11.9	559.0	17.3	44.8
Acquisitions of Intangible assets **	1.3	0.9	1.3	0.8	9.2
Net book amount PP&E at end of reporting date	843.5	410.1	843.5	410.1	403.1
Net book amount Intangible assets at end of reporting date	33.7	82.9	33.7	82.9	86.5
Impairment of PP&E and inventory (YTD)	-60.6	-2.0	-108.4	4.0	-29.2

*Acquisitions related to development assets, assets in operation and other PP&E. For acquisitions in 2017, see also Note 12. **Acquisitions related to capitalized exploration costs and license interests.

In the third quarter of 2017, the book value of USD 49.0 million related to Peshkabir, previously classified as exploration asset (intangible asset), was reclassified to assets in production.

In 2017, the total impairment charge of USD 108.4 million was related to operations in Oman (Block 8 license USD 47.8 million), Kurdistan (Erbil license USD 59.1 million) and Tunisia (Sfax Offshore Exploration Permit license USD 1.6 million).

In 2016, the total impairment charge of USD 29.2 million was related to operations in Kurdistan (USD 26.7 million), Oman (USD 5.8 million) and the United Arab Emirates (USD 2.8 million). A reversal of impairment (USD 6.0 million) recognized in the same year was related to equipment and spare parts booked under the Dohuk license in Kurdistan.

Note 7 | Property, plant and equipment/ Other intangible assets (continued)

Impairments

Impairment tests of individual cash-generating units are performed when impairment triggers are identified. During the first and second quarters of 2017, a total impairment loss of USD 47.8 million was recognized for the Oman Block 8 asset due to negative development in the production profile. During the third quarter, a negative revision of oil price discount in the Erbil license triggered an impairment test. Updated impairment test calculations showed a lower recoverable amount than the carrying amount and an impairment loss of USD 59.1 million was recognized.

USD million	Year to date Q3 2017 Impairment/ reversal	At 30 Sept 2017 Recoverable/ carrying amount	Full year 2016 Impairment/ reversal	At 31 Dec 2016 Recoverable/ carrying amount
Erbil, Kurdistan	-59.1	15.7	-26.7	74.7
Dohuk, Kurdistan	-	-	6.0	-
Block 8, Oman	-47.8	-	-	4.9
Oman Ltd, Oman	-	0.1	-1.2	0.1
Block 36, Oman	-	-	-4.4	-
Block, 47 Oman	-	-	-0.2	-
Sfax Offshore Exploaration Permit, Tunisia	-1.6	1.5	-	3.6
Assets in United Arab Emirates	-	-	-2.8	-
Total	-108.4	17.3	-29.2	83.3

The table shows the recoverable/carrying amount for the cash generating units which have been impaired in 2016 and 2017. Of the total impairment charge of USD 108.4 million in 2017, USD 102.1 million was recognized on PP&E and USD 6.3 million was recognized on inventories.

Note 8 | Available-for-sale financial assets

Available-for-sale financial assets are recorded at fair value (market price, where available) at the end of each period. Changes in fair value are included in other comprehensive income and are presented as valuation reserve under equity. Impairments will be charged to profit or loss, while reversal of impairments will be taken through other comprehensive income.

	Quarter		Year to date		Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Beginning of the period	13.2	16.4	14.0	10.8	10.8
Revaluation transferred to other comprehensive income	-	-1.7	-	-	-
Reversal/- impairment of available-for-sale assets	6.4	-	5.6	3.9	3.2
End of the period 1)	19.6	14.7	19.6	14.7	14.0
Non-current portion	19.6	14.7	19.6	14.7	14.0
Current portion	-	-	-	-	-

1) Available-for-sale financial assets include the following:

	At 30 Sept		At 31 Dec
USD million	2017	2016	2016
Listed securities:
- RAK Petroleum plc	19.6	14.7	14.0
Total available-for-sale financial assets	19.6	14.7	14.0

DNO has a total of 15,849,737 shares in RAK Petroleum plc. All shares have been acquired in open market transactions. RAK Petroleum plc is listed on the Oslo Stock Exchange.

Note 9 | Trade and other short-term receivables

USD million	At 30 Sept 2017	At 31 Dec 2016
		2016
Underlift, entitlement method	3.7	112.0	66.5
Other short-term receivables	36.4	44.5	50.9
Total trade and other short-term receivables	40.1	156.5	117.4

During 2017, DNO received USD 49.0 million from the Kurdistan Regional Government toward the booked underlift receivable. The remaining underlift receivable was settled through the Kurdistan receivables settlement in August 2017 (see Note 12).

The outstanding underlift receivable as per 30 September is related to Block 8 in Oman.

Other short-term receivables include mainly working capital balances in oil and gas licenses.

Note 10 | Interest-bearing liabilities

USD million	At 30 Sept 2017 2016		At 31 Dec 2016
Non-current
Bonds	400.0	400.0	400.0
Capitalized borrowing issue costs (bonds)	-30.0	-41.0	-38.3
Exploration financing facility (long term portion)	14.0	-	-
Total non-current interest-bearing liabilities	384.1	359.0	361.7
Current
Exploration financing facility (current portion)	32.2	-	-
Total current interest-bearing liabilities	32.2		-
Total interest-bearing liabilities	416.3	359.0	361.7

Interest-bearing liabilities:

USD million	Facility currency	Facility amount	Interest	Maturity	At 30 Sept 2017	2016	At 31 Dec 2016
Non-current
Bond loan (ISIN NO0010606197)	USD	400.0	8.75%	18.06.20	400.0	400.0	400.0
Borrowing issue costs related to bonds					-30.0	-41.0	-38.3
Exploration financing facility*	NOK	500.0	see below	see below	46.3
Total interest-bearing liabilities					416.3	359.0	361.7

Note 10 | Interest-bearing liabilities (continued)

Security and pledges

		At 30 Sept
USD million	2017	2016	2016
Exploration tax refund	51.3	-	-
Restricted cash	0.7	-	-
Total book value of assets pledged	52.0	-	-

*The newly acquired subsidiary DNO Norge AS has available a revolving exploration facility in an aggregate amount of NOK 500 million (facility amount). Utilisation requests need to be delivered for each proposed loan. The aggregate of the proposed loan shall not exceed 95 percent of the tax value of eligible costs which have not already been refunded by the tax authorities. The company shall repay each loan when the tax refunds have been received. The interest rate equals 3 months NIBOR plus a 1.2 percent margin. The current portion of the exploration financing facility USD 32.2 million as of 30 September 2017 is scheduled to be repaid by the end of 2017 when the exploration tax refund is received.

Note 11 | Provisions for other liabilities and charges

USD million		At 30 Sept 2016	At 31 Dec 2016
Non-current
Asset retirement obligations	22.4	4.8	23.2
Other long-term provisions and charges	13.4	93.4	144.1
Total non-current provisions for other liabilities and charges	35.7	98.1	167.3
Current
Other provisions and charges	11.5	77.2	5.3
Total current provisions for other liabilities and charges	11.5	77.2	5.3
Total provisions for other liabilities and charges	47.2	175.3	172.6

Provisions for a water purification project in the Kurdistan region of Iraq and provision for production bonuses for the Tawke license previously included in other long-term and charges are derecognised as part of the Kurdistan receivables settlement (see Note 12).

Note 12 | Kurdistan receivables settlement

On 24 August 2017, DNO and the Kurdistan Regional Government completed a settlement of outstanding receivables owed to the Company for past crude oil deliveries. The settlement has an effective date of 1 August 2017. Under the settlement agreement, DNO was assigned the 20 percent interest in the Tawke license previously held by the Government, bringing DNO's operated stake to 75 percent. In addition to the 20 percent interest, the Company will receive three percent of gross license revenues each month from the Government over a five-year period. The Government has also discharged DNO from certain payment obligations, including those for production bonuses, license fees and a water purification project. In addition, the Government has exercised its Tawke license audit rights to its satisfaction for the period up to the effective date and has no adjustment claims.

Payments toward crude oil deliveries from the Tawke license during June and July 2017, together amounting to USD 74.25 million, were paid in September and October, respectively.

In addition to internal assessments, DNO has engaged an external valuation advisor to prepare a fair value assessment of the 20 percent assigned interest and the three percent of gross license revenue it received under the settlement agreement. This was used as the basis for the accounting of the settlement in the financial statements. The relevant discount rate (WACC) used in the valuation was 17.1 percent. The settlement results in a recognition of an asset (PP&E) equal to the estimated fair value of the 20 percent assigned interest and the three percent of gross license revenue. DNO is of the opinion that the value of the settlement can be reliably measured and as such a corresponding revenue has been recognized as other income in the statement of comprehensive income in the third quarter of 2017.

The removal of the liabilities results in a recognition of revenue equal to the book value of the liability as recognized in the financial statement per effective date. The remaining book value of the underlift receivable (see Note 9) is considered settled. The accounting effects for settlement of Kurdistan receivables are shown below:

USD million
Property, plant and equipment	457.5
Trade and other receivables	-46.5
TOTAL ASSETS	411.0
Retained earnings	556.0
Provisions for other liabilities and charges	-145.0
TOTAL EQUITY AND LIABILITIES	411.0
Other income past oil sales	556.0
Net profit/-loss	556.0

Assuming for comparison purposes that the agreements had been completed in the beginning of 2017, it is estimated the revenues would have been USD 62 million higher and gross profit USD 10 million higher in the first nine months of this year. The estimated effects are based on internal calculations and assumes cash payments from the KRG in accordance with the terms of the above mentioned agreements.

Note 13 | Events after the reporting period

Export payments from Kurdistan

The company reported on 11 October 2017 receipt of USD 39.50 million from the Kurdistan Regional Government as payment towards July 2017 crude oil deliveries to the export market from the Tawke license. The funds were shared pro-rata by DNO and partner Genel Energy plc.

The company reported on 16 October 2017 the first payment of USD 4.02 million from the Kurdistan Regional Government under the recently concluded agreement covering outstanding receivables for past crude oil deliveries. The payment represents three percent of gross Tawke license revenues during August. An entitlement invoice for that month's export deliveries has been issued separately and will be shared pro-rata with Genel Energy plc upon receipt.

DNO completes drilling of third Peshkabir well in Kurdistan

The drilling of the Peshkabir-3 well was completed in October 2017 and the well is currently undergoing extended production testing.

Alternative performance measures

DNO ASA discloses alternative performance measures as a supplement to the financial statements prepared in accordance with IFRS. Such performance measures are frequently used by securities analysts, investors and other interested parties and are meant to provide insight into the operation, financing and future prospects of the company.

EBITDA

	Quarter		Year to date		Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Revenues	73.0	48.8	231.3	159.6	201.8
Lifting costs	-45.6	-13.4	-74.6	-41.1	-68.6
Exploration expenses	-5.9	0.6	-8.9	-19.0	-20.3
Administrative expenses	-12.0	-6.9	-23.9	-21.6	-31.0
Other income past oil sales (Note 12)	556.0	-	556.0	-	-
Other operating income/expenses	-2.3	-2.3	-5.6	2.1	13.6
EBITDA	563.3	26.9	674.4	80.0	95.4
Netback
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
EBITDA	563.3	26.9	674.4	80.0	95.4
Provision for obsolete inventory (Note 4)	19.0	-	19.0	-	-
Other income past oil sales (Note 12)	-556.0	-	-556.0	-	-
Paid taxes	-1.2	-0.9	-2.4	-2.5	-2.1
Netback	25.1	26.0	135.0	77.4	93.4
	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Netback (USD million)	25.1	26.0	135.0	77.4	93.4
Company Working Interest production (MMboe)	6.9	6.5	19.6	18.8	25.3
Netback (USD/boe)	3.6	4.0	6.9	4.2	3.7
Lifting costs	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Lifting costs (USD million)	-45.6	-13.4	-74.6	-41.1	-68.6
Company Working Interest production (MMboe)	6.9	6.5	19.6	18.8	25.3
Lifting costs (USD/boe)	6.6	2.1	3.8	2.2	2.7
Operational spend
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Lifting costs	-45.6	-13.4	-74.6	-41.1	-68.6
Exploration expenses	-5.9	0.6	-8.9	-19.0	-20.3
Capital expenditures	-29.6	-12.8	-102.4	-18.1	-36.4
Operational spend	-81.0	-25.6	-185.8	-78.2	-125.4
Equity ratio USD	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016

Equity	848.5	433.9	848.5	433.9	401.9
Total assets	1,419.6	999.9	1,419.6	999.9	969.8
Equity ratio	59.8%	43.4%	59.8%	43.4%	41.4%

Free cash flow

Quarter			Year to date		Full year
USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Cash generated from operations	39.3	30.2	269.5	68.5	98.7
Purchases of intangible assets	-1.3	-0.8	-1.3	-	-9.4
Purchases of tangible assets	-28.3	-12.1	-101.1	-18.1	-27.0
Free cash flow	9.7	17.3	167.1	50.4	62.3

Net debt

USD million	Q3 2017	Q3 2016	Q3 2017	Q3 2016	2016
Cash and cash equivalents	399.0	266.3	399.0	266.3	261.1
Bond loan	400.0	400.0	400.0	400.0	400.0
Net debt*	-1.0	-133.7	-1.0	-133.7	-138.9

*Exploration financing facility has been excluded as it is covered by the exploration tax refund booked as an asset in the balance sheet. See Note 6 and Note 10.

NOTES

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