Monday 22 April 2019

All's well again after the Tullow turnaround

Higher oil prices and a cleaned up balance sheet have helped push the one-time market darling back into the black, writes Dan White

The price of Brent crude fell from $113 a barrel in June 2014 to just $26 by January 2016. Since then oil prices have been gradually recovering with Brent trading at $70 last week. Stock image
The price of Brent crude fell from $113 a barrel in June 2014 to just $26 by January 2016. Since then oil prices have been gradually recovering with Brent trading at $70 last week. Stock image

Dan White

Tullow's gross revenues grew by 30pc in 2017 while its net debt fell by $1.3bn to $3.5bn (the company reports its results in dollars), according to the 2017 trading statement released last Wednesday. Both figures were ahead of analysts' forecasts. After almost $1.2bn of write-offs and an operating (pre-interest) loss of $755m in 2016, Tullow returned to profitability in 2017 with the group forecasting a gross profit of $800m and free cash flow of $500m. It's been a turbulent couple of years for Tullow. After peaking at almost £13 (its shares mostly traded in sterling in London) in February 2012, falling oil prices and mounting debts spooked investors and the price had fallen to less than £1 by January 2016.

Paul McDade took over as chief executive from Tullow founder Aidan Heavey in early 2017. He was barely in the job when the company sprung a massive 25-for-49 rights issue which raised a gross £607m (then worth $750m) at just £1.30 a share - a 36pc discount on the price the shares had been trading before the rights issue announcement.

However, after bottoming out at just £1.45 in June, the Tullow share price has gradually recovered, hitting £2.27p after last week's trading statement announcement. Having been clobbered by oil prices on the way down, Tullow is now set to benefit as they creep back up again. The price of Brent crude fell from $113 a barrel in June 2014 to just $26 by January 2016. Since then oil prices have been gradually recovering with Brent trading at $70 last week.

This is good news for Tullow. "Higher oil prices are creating higher margins," says McDade.

Despite being named after a village in Co Carlow, most of Tullow's assets are now in Africa, particularly Ghana where it is the main shareholder in two offshore fields, Jubilee and TEN, which between them averaged 89,000 barrels of oil per day in 2017. Both Jubilee and TEN have had their problems in the past. Jubilee has never reached its full production potential due to problems with the floating production, storage and offloading (FPSO) vessel that collects the crude oil from the well. TEN has been hampered by a dispute between Ghana and neighbouring Cote d'Ivoire over the two countries' maritime boundary.

Tullow is confident that Jubilee's problems will be sorted out in 2018, though the work could see the field shut down for up to nine weeks, while the maritime boundary with Cote d'Ivoire was demarcated by a September 2017 International Law of the Sea ruling that went largely in Ghana's favour.

In 2006 Tullow discovered a world-class oil field in Uganda. It now has proven reserves of 1.7 billion barrels. However, Tullow sold most of its stake to its partners China National Offshore Oil Corporation and French company Total in January 2017 in a $900m deal which saw it receive up to $200m in cash and a $700m contribution towards its share of the field's development costs. For Tullow the advantage of the deal was that, at a time when it was under financial pressure, it received cash up front and laid off the huge cost of developing the Ugandan field to its partners. The downside is that its shareholding in a huge discovery was cut from 33.3pc to 11.76pc - a stake that could fall to 10pc if the Ugandan government exercises its right to take up a shareholding.

Elsewhere in east Africa, Tullow has discovered a 750-million-barrel field in Kenya. Tullow is hopeful that production will start in Uganda in the early 2020s while it will provide an update on reserves and development plans for the Kenyan field when it publishes its full-year results on February 7.

While the rights issue and the Ugandan deal have massively reduced the financial pressure on Tullow, there has been speculation that it might also seek to sell some of its 47pc shareholding in the TEN field.

In a note on Tullow published just before the release of the trading statement, Exane BNP Paribas analyst Alwyn Thomas wrote that: "TEN asset sale no longer a necessity, but could be the icing on the cake." He estimates that the sale of a 20pc TEN stake could worth up to $1bn to Tullow.

In the presentation accompanying the trading statement, Tullow spoke of "effective portfolio management". Is this code for a possible TEN sale? Not according to McDade.

"The reason there was speculation in 2011 and 2012 that we would sell TEN is that the major project risk was ahead of us. The project came in ahead of schedule and under budget. We are now at the other end of the cycle. We are now seeing all of the benefits of having 50pc. There is no requirement to sell the asset. We can do it all from cash flow".

As oil prices collapsed Tullow ruthlessly cut costs. It is now far more efficient than five years ago. One of the oil industry's problems is that, while it has been good at cutting costs when prices fall it has not been so good at stopping those costs from rising when prices rose once again. McDade is adamant that it will be different this time. "We will maintain cost discipline so that we get the full benefit of higher oil prices. We are very focused on maintaining low costs."

Tullow also has a number of promising exploration plays including Cote d'Ivoire, Mauretania, Zambia and Namibia in Africa and Jamaica, Peru, Guyana and Suriname in South America. McDade expects that at last some of these prospects will deliver in 2019, 2020 and 2021.

The rapid reduction in its borrowings means that Tullow can afford to allocate more for capital expenditure, both on developing existing fields and exploring for new ones. It is planning to double capital expenditure to $500m in 2018 and plans to spend between $200m and $600m a year for the next three years depending on oil prices.

Despite higher capital expenditure, Exane's Thomas is expecting Tullow's net debt to fall to $3bn by the end of 2018.

With Bank of America Merrill Lynch's Rafal Gutaj estimating that Tullow's net asset value could be as high as £3.55, the shares could have further to go.

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