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Tullow Oil is an independent oil and gas, exploration and production group, quoted on the London and Ghana stock exchanges. The company is a constituent of the FTSE250 and has a market capitalisation of approximately £420 million.
2022 Full Year Results were published on 8 March and we were delighted to have Rahul Dhir, Chief Executive Officer and Richard Miller, Chief Financial Officer report on performance and look ahead to the prospects for 2023. A recording of the webinar is available here.
Rahul started the presentation by stating that when he joined the company in 2020 he had conviction in the assets and the belief that with focus and discipline they could be turned around and unlock the underlying value. Roll forward three years and the company is creating value, generating free cash flow and has a much stronger balance sheet. Operationally they have delivered a top quartile safety performance for the second consecutive year, they are delivering economic prosperity to their host nations and they have an energised organisation. 2023 should be an exciting year for Tullow as the results of the strategy become more visible. The Jubilee field is expected to exceed 100kboepd and free cash generation should accelerate in the second half of the year which will result in debt being paid down further and additional equity value accretion.
In addition, there are some very important catalysts which will create further value for the company including: Long term gas sales agreement in Ghana; submission of a revised plan of development for TEN, the approval of the field development plan for Kenya, as well as the monetisation of the very large prospective resource base.
Tullow reported strong operational and financial performance in 2022 with progress on many metrics including high uptime. Production rose 6% on a LFL basis to 61.1 kboepd and these were sold at an average price of $88/bbl. Revenues rose 39% to $1,783m, after a $319m pay out under the hedge program. The continued focus on costs has enabled the company to keep operating costs flat and further reduce G&A. The company reported a profit of $49m and free cash flow improved by 9% to $267m. The company continued to invest in the asset base increasing capex by almost $100m to $354m. The majority of capex is allocated to near term producing opportunities. The company also invested $126m in the Ghana pre-emption option and this investment was paid back within 9 months. Net debt fell to $1.9bn and cash gearing came in at 1.3x which means the company has achieved its gearing target of <1.5x, 3 years ahead of the original schedule.
Looking towards 2023 the company is guiding for the following: Production 58-64 kboepd; Capex of c.$400m; Decommissioning costs of c.$90m; Free cash flow of c.$200m at $100/bbl (c.$100m at $80/bbl) and cash gearing of 1x by YE 2023 (1x by YE 24 at $80).
The Jubilee South East project was highlighted as it transforms the cash generation capacity of the business. In the first half of 2023 over $100m will be spent completing the infrastructure and commissioning the project. First oil should be seen in the middle of the year and this will translate to a material uplift in free cash flow in the second half of the year. Looking at the hedge programme there is 65% protection in the first half of the year falling to 40% in the second half.
The cost base has been transformed over the last 5 years at Tullow. Operating costs at Jubilee and TEN will rise minimally in 2023, but still remain c.30% below 2019 levels and general and administrative costs are forecast to fall for a fourth straight year, delivering a 60% fall over the last 5 years.
Looking at the core 2P assets, approximately $1.1bn will be invested in the next 3 years and this will generate $800m to $1500m of free cash flow at $80-$100/bl. There are also potential upside from additional contingent payments linked to previous divestments too. NPV10 of the 2P assets stands at $3.9bn and net debt at year end was $1.9bn. With the strong free cash flow and the next debt maturity not falling until 2025 the company is in a good financial position with many opportunities to improve financial flexibility.
Management then highlighted the better future they are building through responsible oil and gas development. Tullow has had a number of positive impacts on local communities and with its internal decarbonisation plan. 6,000 Students have been supported in host countries, $173m has been spent with local suppliers and $468m has been paid to host governments. On the environmental front the company has committed to Net Zero on scope 1 and 2 by 2030 and they are on track to achieve this. The company is also on track to achieve zero routine flaring by 2025 and they are very excited about a nature-based carbon offset program in Ghana.
Tullow has material reserves and resources which underpin future growth plans. Reserves stood at 229mmboe at the end of 2022, giving the company over 10 years of reserve life based on 2023 production. Resources at the end of 2022 stood at 605mmboe, with c.85% in Jubilee, TEN and Kenya. There are opportunities to organically increase the reserves and resources in the near term from gas commercialisation in Ghana, further development in Jubilee South East and in Gabon.
As an operations-led company the focus on safety is integral to everything they do and they achieved an excellent safety record in 2022 with zero lost time injuries and zero recordable injuries. This is a top quartile safety performance and one which the company is justifiably proud of.
Over the last three years there has been a steady improvement in operational excellence and uptime. Operational excellence underpins the “every barrel matters” culture. During 2022 Tullow took over operatorship of the Jubilee field and delivered a number of operational improvements. Uptime of the FPSO improved to 99% in the second half of 2022 and there was a 20% reduction in the maintenance and inspection backlog, supporting the vision of Tullow as a low cost operator.
At the Jubilee field, the investment program was restarted in 2021 and 7 new wells have been brought onstream, which has increased gross production from c.75 kbopd in 2021 to an expected c.95 kbopd in 2023. Following the completion of the Jubilee South East subsea infrastructure, four Jubilee South East wells will be brought onstream in the second half of the year and gross production from the field is expected to exceed 100 kbopd. A further seven further wells are planned over the next couple of years.
At TEN the focus in 2022 was on reservoir management to reduce the annual decline rates. No new wells are planned in 2023 and instead it will be important to maximise uptime and sustain the strong operating performance. There is a significant undeveloped resource base across the various accumulations in TEN. The company plans to monetise these through infill drilling, phased development of new areas near existing infrastructure and the development of the significant gas resources. A plan of development will be submitted to the government of Ghana later in 2023.
In Gabon there is a portfolio of opportunities that are infrastructure linked, namely infill drilling and near field developments which have rapid pay back times. In Cote d’Ivoire the focus is on the blocks next to Ghana, which are similar to the plays which are producing in the adjacent Jubilee and TEN fields. An exploration well is also being planned in 2024.
The management believe there are material near term catalysts to unlock value. In Kenya the strategy is to realise value in the material discovered resource and to this end a field development plan has been submitted to the Government for approval and in parallel they are progressing a farm down with a strategic partner. In Ghana the company is working to achieve a long-term gas sales agreement. There is focussed exploration around the existing producing assets in Gabon and Cote d’Ivoire. In addition, there are prospective resources in Guyana and Argentina which are being evaluated. Together the assets, capabilities and free cash flow generation will enable significant deleveraging of the balance sheet.
In conclusion, Tullow delivered a strong financial and operational performance in 2022 and is expecting to deliver material free cash flow improvements in the second half of 2023 on the back of delivery of the Jubilee South East project. The company is well ahead of plans set out in 2020. Equity holders should benefit as debt is paid down and further opportunities have been identified which will have material upside potential in the medium term. Management believe the business is undervalued on all metrics. There have been some concerns about debt, but as investors get more comfortable with the lower gearing and the strong free cash flow generation that could lead to a revaluation of the equity story.
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