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Tullow: 2021 a transformational year

Tullow Oil is a well-established and recognised oil and gas explorer and producer, operating across Africa and South America. The company is listed on the premium segment of the London Stock Exchange, is a constituent of the FTSE250 and has a market capitalisation of approximately £750 million.


Full year results to 31 December 2021 were published on 9th March and we were delighted to have Rob Hellwig, Group Treasurer and Head of Investor Relations present and talk about the company’s prospects. A recording of the webinar is available here.


Rob started by highlighting that it was back in November 2020 when a new strategy and 10-year business plan was articulated and 2021 was the year they started to implement the plan. In terms of 2021 achievements, the balance sheet has been refinanced, operating costs and overheads have been reduced, strong production growth was delivered at Jubilee with production improving from 70k/bl to 90k/bl/day and Simba (Gabon).



For 2022 shareholders should expect investment in drilling and infrastructure in the producing areas and on high return opportunities across all the assets, a potential value realisation event in Kenya, a high impact exploration well in Guyana and near-field exploration upside. All told this should deliver approximately 6% CAGR production growth 2021-25 and at $75/bl oil the deleveraging of the balance sheet should continue such that Net Debt/EBITDA is less than 1.5x by the end of 2023. There are also a number of catalysts that will drive additional value including the exercise of the pre-emption rights over Occidental Petroleum’s assets in Ghana, which completed 2 weeks ago. It was pointed out the all the figures in the slides do not reflect the impact of the pre-emption which increases CAGR in production from 6% to 8% over the same period.


Tullow is mainly focused in Africa and Rob stated the company view that African oil and gas assets should be developed responsibly and efficiently. Tullow has a key role in this process and will help to deliver economic and social benefits in the countries where they operate. He also reiterated the commitment for Tullow to reach Net Zero (Scope 1 and 2) by 2030 and the importance of a strong health and safety culture.


Examining the financial strategy in more detail, a number of significant milestones were met in 2021 which was described as a truly transformational year. The balance sheet was refinanced through a $1.8bn bond issue, asset sales of more than $700m were completed (including the $575m Uganda sale in 2020) helping to reduce debt, the annual cost base was cut by more than $125m and costs to deliver a well were cut to $52m. This helped reduce gearing to 2.2x and strong liquidity was maintained at $0.9bn. At Tullow they follow the mantra that every barrel matters and every dollar counts.


The company has a prudent capital allocation policy and going forward plans to prioritise the reduction in gearing to less than 1.5x (considered a sustainable level), invest to deliver near term production growth, particularly those projects with higher returns and short pay-back times. As examples Rob highlighted that the 2021 Ghanaian investment had already paid back within 12 months and the 2022 investment in Ghana is expected to payback within 2 years. Investment is self-funded from internal cash flows. Inorganic opportunities are also considered as long as they are value accretive and demonstrably deleveraging – the Ghana pre-emption deal meets both criteria.


Rob then spent some time explaining the hedging policy which protects against commodity price downside whilst allowing some exposure to rising oil prices. Approximately 75% of sales volume has downside protection until May 2023 and then a further 50% of sales volumes until May 2024. Also 40% of volume has upside to a rising oil price (post the Ghana pre-emption this has risen to 45% of sales volumes). To see how this plays out in practice, already this year in January and February they have achieved an $89/bl average realised oil price vs an average market price of $96/bl over the same period.


Moving onto cash flow the company has guided to $100m of FCF at an oil price of $75/bl. Already in the current year they have achieved higher oil prices, have received $75m from Total for the final investment decision in Uganda and against this there was also a $76m impact from a Norwegian arbitration decision. Taking these factors into account Tullow is reiterating its $100m FCF guidance at an average oil price of $75 for the rest of the year. That said if the oil price averaged $95/bl for the year FCF is expected to improve by c.$100m. The consideration paid to complete the Ghana pre-emption was $118m and at the current oil prices that is almost fully repaid within a year. Over the following five years the investment should generate an incremental FCF of $300m.


On the operational side, health and safety is a key priority. In 2021 performance in this area improved despite increased activity levels and the company reported only 2 minor injuries and no spill incidents. In 2021 Covid was also a focus and they achieved high levels of vaccination in their Ghanaian workforce.


Rob also spent some time talking about Tullow’s focus on a sustainable future and the sustainable development of oil and gas in Africa being very much the right thing to do as it helps create prosperity in the countries where they operate. Over the last 5 years Tullow has spent $1.2bn with local suppliers and has educated thousands of students via their STEM radio lessons. They are on track to meet their Net Zero target by 2030 through some very defined activities. These include compressor upgrades at Jubilee which will eliminate routine flaring of gas by 2025 and they are also working with consultants to generate natural credits to offset a minimum of 600k tonnes of CO2 equivalent.


Operational performance also improved in 2021 with improved reliability and lower costs. Uptime on both FPOS’s in Ghana increased to 97%. The aim is to be a top quartile operator and they are taking over more direct control of the Jubilee FPSO to help achieve greater control, reliability and lower costs.


Looking at costs in a bit more detail Rob pointed out that $150m of gross operating costs had been saved across Jubilee and TEN since 2019 through the commissioning of a new oil offloading system, improved logistics and lower onshore costs. The cost of drilling wells has also been reduced and this is important as it accounts for 70% of planned capex spend over the next 4 years. Average cost of a well during 2018-20 was $75m and this was reduced to $52m in 2021, beating the $60m target. A second rig is being considered for the Jubilee and TEN fields in early 2023.


Rob then went through the resource potential of the Jubilee and TEN fields in Ghana. There are approximately 2bn bbls in place at Jubilee and to date only 17% has been recovered. They estimate that 35% can be recovered from 2P reserves, which is another 342m barrels and on top of that there is a further 245m barrels of 2C resources which they hope to recover. At TEN, only 7% of the approximate 1.5bn bbls have been recovered so far and they estimate that there are a further 99m of 2P reserves and a further 264m of 2C resources in the undeveloped areas of TEN.


At Jubilee, the core developed fields have an estimated recovery of 600m bbls of which they have produced about half. Tullow expect to invest a further $700m in capex between 2022 and 2025 in the core area and in the east of the core area which could add a further 170m bbls. On top of these numbers the pre-emption would add approximately $50m capex. This would enable production to rise from 87kbopd to over 100kbopd in 2025.


At the TEN fields, investment to date has been focussed on Enyenra and Ntomme, which contain half the oil in place. Production declines have been faster than expected and they are trying to address this with infill opportunities to improve recoveries. There is work ongoing to improve understanding of the broader TEN area and the significant remaining potential. The plan is to invest $550m in TEN between 2022 and 2025, mainly into defined new projects in the undeveloped reservoirs to raise production from 32kbopd to nearly 50kbopd by 2025. There is also going to be investment in new subsea infrastructure to support the new wells.

The non-operated part of the portfolio has a number of near field exploration opportunities. The plan is to invest $250m of capex between 2022 and 2025 which should maintain production net to Tullow at approximately 17kbopd.


Rob then talked about the catalysts that could create material value for Tullow going forward. As part of the original agreement with Ghana to develop the Jubilee field the company agreed to supply 200bcf of free gas to Ghana. This volume, which has an estimated value of c$2bn to Ghana, will have been supplied to Ghana later this year and the company is now in discussions to sell a further 500bcf to the country. The TEN fields also have material undeveloped gas potential and this can help the continued economic development of Ghana. In Kenya they have reworked the development plan to create a robust project and submitted the plan for approval in December. Farm down discussions are ongoing following engagement with potential strategic partners.


The exploration strategy has changed materially in recent years with a much tighter focus on a smaller footprint, next to producing fields. In Guyana, in their non operated block, Repsol is drilling an exploration well this year.


In summary, 2021 was transformational for Tullow. The balance sheet has been refinanced and there is strong liquidity headroom. They have delivered a strong operational performance with better uptime and delivered new wells faster and cheaper than before. The strategy going forward is to allocate 90% of the capital investment into the existing asset base with the aim to deliver production growth of approximately 6% CAGR 2021-25, excluding the impact of Ghana pre-emption, which will add approximately $300m FCF over the next five years and accelerate deleveraging. This will deliver $100m of FCF this year at $75/bl and if higher oil prices are maintained this could rise to $200m. If the strong performance continues the deleveraging target to 1.5x could occur as early as 2023.


A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact info@yellowstoneadvisory.com



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