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Tullow: Good progress in a short period but more to come

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, has just entered the FTSE250 and has a market capitalisation of £780 million.

Full year results to December 2020 were published on 10th March 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 stating that the changes made in 2020 had left Tullow a stronger and more focussed company. The strategy to improve cash generation is working and delivering improved results although there is more to come. The operational turnaround benefits are clearly materialising. Self-help measures, including the disposal of assets, has delivered c.$1 billion and they reiterated plans made at the capital markets day to deliver $4bn of pre-financing cash flow at $55/bl oil prices over the next 10 years. Not surprisingly, they are geared to a rising oil price and another $10/bl would add $1.5bn to cash flow over that same period.

As part of the 10-year delivery plan, a lot of attention has been focussed on improving costs and sweating existing assets to improve reserve replacement. Looking specifically at 2021, the priorities are to hit production of 60,000-66,000 bopd and start the drilling campaign in Ghana which will contribute to growth in 2022. Further progress is expected in reducing costs which they hope can fall 20% putting them on the journey towards becoming a performance focussed company. Tullow’s slogan of “every barrel matters & every dollar counts” clearly reflects the change in mind set at the company.

This may sound slightly strange for an Oil company, but they also talked about their commitment to Net Zero by 2030. What this means in practice is cleaning the pipes and process modifications to eliminate the flaring of gas at the Jubilee and TEN fields – this will contribute 50% of the improvement. The rest will come from nature-based carbon reduction initiative such as afforestation and reforestation.

Les picked up on the financials in more detail and in particular the overall level of debt and the current ongoing negotiations. 2020 was a year of strong free cash flow with $432m of cash generated and the $4bn pre-financing cash flow target over the next 10 years was also reiterated. This will obviously help to pay down the debt. The Reserves Base Lending facility has just been redetermined giving debt capacity of $1.7bn and $0.9bn of headroom. Discussions are ongoing with banks and bondholders on the refinancing of the convertible bond due in July and an agreement is expected in the first half of 2021. Management reiterated statements set out in the Capital Markets Day that their plans do not envisage the issue of any equity. They also repeated that their plans are based on $45/bl in 2021 and $55/bl from 2022 onwards. Looking at oil price charts the forward curve is above $60 and Tullow achieved $62/bl in February.

Looking at the key Jubilee and TEN assets it was highlighted that these are low-cost fields with operating costs/bl of $6 and $10, respectively. Over $5.7bn has been invested historically and the plan is to invest $2.1bn into them over the next 10 years. The chart on slide 10 showed very high IRR’s from this investment.

Guidance for 2021 was stated as production of 60-66kbopd and c.$12/boe of operating costs, $50/bl oil prices which would generate underlying operating cash flow of $0.5bn. The leverage to oil prices was reiterated with +$10/bl adding $100m to 2021 cash flows. Les stated that 2021 had started well and that they were well placed to take advantage of a rising oil price.

No results presentation at this time is complete without a reference to the impact of Covid-19 and Tullow was no exception. The summary is that Covid added some operational complexity but overall did not impact production. A report on the safety performance indicated a rise in the number of recordable injuries and the lost time injury rate and management said there was a real focus to improve this in the current year. It is worth noting that although there has been a rise overall rates are low.

A slide on the resource base indicated that 2P reserves grew to 260million boe and that due principally to the sale of Ugandan assets the 2C resource base fell to 640million boe. At the Jubilee field they have recovered 17% of the oil in place and at the TEN field about 9% of has been recovered so far. The drilling program at Jubilee has not been consistent in recent years but the plan is to change this with >15 producing wells and >10 water injectors identified over the next 10 years. There is a similar drilling program at TEN with the addition of two gas injection wells. In 2021, Tullow plans to drill two Jubilee producers, one Jubilee water injector and one TEN gas injector. The indicative first year incremental production from these four wells could be 29,000 bopd (gross).

Tullow also owns stakes in assets in the Ivory Coast, Equatorial Guinea and Gabon which are operated by other companies. These have a relatively stable production profile and are relatively low risk. Tullow announced in February that it had agreed to sell all of its assets in Equatorial Guinea and the Dussafu asset in Gabon, in a transaction that further strengthens the balance sheet.

The presentation finished by running through the numbers the company intends to deliver by executing on the business plan. The key one is delivering $4-$5.5bn of pre-financing cash flow. This is cash flow from operating activities less capital investments and decommissioning expenditure. If they can achieve this the concerns about debt, which was $2.4bn at the year end, and how this will be refinanced that were raised during questions are likely to decrease over time.

Rahul Dhir and his team have made good progress in a relatively short period of time, but it sounds like there is a lot more to come.

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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