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Tullow: Delivering against targets

Tullow Oil is a well-established and recognised oil 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 £750 million.

Half year results to 30 June 2021 were published on 15th September and we were delighted to have Rahul Dhir, Chief Executive Officer and Les Wood, Chief Financial Officer walk through these results and talk about the company’s prospects. A recording of the webinar is available here.

Rahul started by commenting that Tullow has made a significant turn around over the last year. The cost base has been reset, a refinancing was completed to simplify the capital structure and there is a clear strategy to focus the majority of capex on the producing West African assets which generate a lot of cash flow. The company also has additional value creating optionality through their Kenya portfolio and exploration blocks. Throughout their portfolio they are committed to responsible and safe operations.

Looking specifically at what has been delivered over the last year against the commitments made at the capital markets day, Rahul is pleased with their progress. Key is the sustainable and self-funded production, improving the operational performance in Ghana, improvements in the drilling performance (cheaper and faster), delivered a revised development plan for Kenya and there is commitment to net zero by 2030. The 2021-2025 plan has been refined and they expect to deliver good organic growth from existing assets, generate strong cash flows and reduce gearing to 1.5x by 2025.

Taking a more reflective look at where Tullow fits into the energy debate, the view is that the world needs energy from fossil fuels and will continue to do so for many years to come. The sector needs responsible operators and Tullow can, and is, filling that role. Oil and Gas companies can be an engine for economic growth in areas where Tullow operates in Africa. These areas should not be prevented from growing sustainably and with minimal environmental impact. Africa makes minimal contributions to global emissions and there is a strong case for these geographies to develop their assets. Tullow believes they have an opportunity to be a leader in Africa, creating value for host nations and the communities where they operate. A net zero commitment is a key part of that and nature based carbon offsets will be a big contribution to this.

Looking at the 5 year business plan Rahul sees the potential to generate $4bn of operating cash flow over the next 5 years and after capex, decommissioning and finance costs expects to generate $1bn of free cash flow. Their hedging strategy is helping to underpin their confidence in this strategy based on $65/bl oil. This free cash flow will help deliver the reduction in gearing to 1.5x.

The operating cash flow will be delivered through strong and reliable performance of the producing assets and building operational excellence is fundamental to this success. The four well 2021 plan is progressing in line with expectations, and the wells have been delivered on time and on budget. The uptime performance has been improved and the Ghana FPSO is now average over 98% uptime. As part of the gas management programme, gas which is produced from their fields is sold to the Government of Ghana, used or flared. Gas sales are currently c110 mmscfd and the target is to increase this to beyond 130 mmscfd. Tullow is aiming to eliminate flaring completely by 2025. Finally, water injection is helping to keep pressure up, recover more oil and reduce the need for flaring.

Moving onto the key producing assets, we were reminded that the Jubilee field has 2bn barrels of oil in place and a recovery rate of 40% is expected. So far they have only produced 50% of what they expect to recover so there is a lot of oil still to go for. The key development areas are in the Eastern section at Jubilee North East and Jubilee South East. Both projects are sanctioned and underway. There is a lot of infrastructure already in place but more is being added to open up these Eastern fields.

The TEN fields contain 1bl barrels of oil and the expected recovery rate is 30% as these fields are more complex and consist of multiple fields. The focus historically has been on the Enyenra and Ntomme fields and the development going forward will be on the most cost efficient pools of oil. The TEN FPSO has lots of capacity to produce more oil and gas and the plan is to better utilise this capacity.

In the non-operating portfolio, which is principally Gabon, Tullow will look to use their expertise to help the operating partners. The Simba field is significantly exceeding the initial case and with development they are expecting to double production.

In the Emerging basins of Guyana and Argentina the objective is to minimise capital exposure whilst maintaining carried interest. In Guyana there is a well commitment next year, but they continue to work on potential farm out arrangements. The company is very clear that they will not invest more in frontier exploration blocks.

Then looking at the Kenya project which has had many false starts and a history of disappointment but this is now changing. The scale of the resource is large and the development plan has been revisited using data from initial production data. The oil in place estimates have increased to 2.85billion barrels and there has also been an increase in recoverable oil to 585m barrels. Initial investment will be in the most attractive parts of the field where the economics are most viable and this in turn will enable the other parts of the field to be developed later on. Tullow is now seeking strategic partners based on this revised plan.

In summarising the progress that has been made Rahul feels they are now developing a credible track record priority in delivering targets and are cementing their position as a leading African Oil company. They will look to continue to deliver growth from the West African assets whilst maintaining a keen focus on costs, generating cash flow and repaying debt.

In the questions more details were given on the following.

Tullow is reviewing the Kosmos purchase of Occidental assets. It does have pre-emptive rights over part of the interest and is considering its position.

If anyone approaches the company with an attractive price for their assets they would consider them as they look to work in the best interests of shareholders. Having said that, now disposals have been done there is no imperative to sell anything else.

The Net Zero ambition is based on cutting out flaring of gas, improving the efficiency of their assets and nature based carbon offsets. The more gas they process and sell the less they will flare and over the next two years they will be making process in gas processing capacity which will help eliminate routine capital and this investment is part of the routine business plan.

The ongoing dispute with the Ghanaian tax authorities is being progressed and an update will be provided when appropriate.

Finishing off the webinar Rahul said that if they deliver against their plans they will create substantial value for shareholders. Tullow is a responsible developer of resources that can add value to host countries and communities. As the oil majors exit from the areas Tullow is active in, there will be more attractive opportunities for Tullow to leverage their skills and this is why he is optimistic about the future.

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

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