DNO has over the last years followed a strategy which has made the company prepared for a possible downturn in the oil & gas industry. Activities have been focused on low cost, high potential areas, avoiding long-term future capital commitments. The company is ready to increase production from substantial reserves at low cost, without further investments.
In line with this strategy, DNO has previously secured long-term bond financing mainly maturing in 2012.
In order to adjust to the recent oil price and the equity markets DNO will record certain non-cash impairments in its Q4 results.
INVESTMENT IN ASSOCIATE - DET NORSKE OLJESELSKAP ASA
In 2007, DNO reduced its ownership in Det norske oljeselskap ASA ("DETNOR") to 36.9%. Through several transactions, DNO received NOK 650 million in cash and increased its balance sheet equity by approximately NOK 1,5 billion. DETNOR shares has since been accounted for using the equity method, where DNO's share of profit or loss is reflected as financial income or expense with a corresponding adjustment of the carrying value in the balance sheet.
Assessing the book value of DETNOR shares at year-end 2008, DNO has applied the principle stated in IAS 39.61, whereby a prolonged or significant decline in the fair value of an investment in an equity instrument below its cost is objective evidence of non-cash impairment.
As reported to the market, the performance of DETNOR has not been according to DNO's expectations. The market share price for DETNOR at 31 December 2008 was significantly below DNO's book value. DNO will consequently have to record a non-cash net impairment loss (net after DNO's share of the Q4 profits) of approximately NOK 621 million in the fourth quarter. The non-cash impairment loss on the DETNOR investment may be reversed in subsequent periods based on share price recovery.
OIL AND GAS ASSETS
While IFRS requires impairment to be tested on each cash generating unit, the total estimated fair value of DNO's Yemen licenses is close to book values. However, on a field basis a non-cash impairment loss of approximately NOK 200 million is required for the assets in Block 43 in Yemen, based on the recent oil price.
AVAILABLE-FOR-SALE (AFS) SHARES
A non-cash impairment loss of NOK 31 million will be recorded for AFS shares in the fourth quarter based on the market share prices as at December 31, 2008.
DEFERRED TAX ASSET
DNO has available tax losses of approximately NOK 1 billion in the parent company which can be carried forward indefinitely under Norwegian tax rules. Based on an assessment of the deferred tax asset at year-end, DNO will write down the deferred tax asset to approximately NOK 250 million and consequently record an estimated non-cash write-down of approximately NOK 70 million in the fourth quarter.
EFFECTS ON DNO'S Q4 RESULTS
The above impairment assessments have been undertaken as required by IFRS accounting standards resulting in total non-cash impairment losses and write-downs of approximately NOK 920 million in the fourth quarter.