Tullow Oil: Oil and gas

THE COMPANY: Tullow Oil (Tullow) is an independent oil and gas exploration and production company. The company is engaged in oil and gas exploration, development and production and the sale of hydrocarbons and related activities.

The company operates in three geographical segments: Europe, South America and Asia and Africa. Tullow has exploration, development and production assets covering more than 100 licences across 22 countries, organised into three regions: West and North Africa, South and East Africa, and Europe, South America and Asia. Tullow’s two new oil basins are the Tano Basin and Lake Albert rift basin.

The company has key producing assets in six countries in Africa, including the Jubilee field in Ghana, where Tullow is an operator.

In July 2011, following an acquisition of the Ghanaian interests of EO Group, Tullow raised approximately $72.3m on the Ghana Stock Exchange (GSE). This was the largest primary share offer ever completed on the GSE and has more than doubled the market capitalisation of the GSE.

Throughout 2011 Tullow successfully appraised 10 discoveries in Ghana. In February 2012 this was supported by the flow testing of the Owo-1 well, which produced a combined flow rate of about 20,000 barrels per day, renewing confidence in the definitive commerciality of the field. The engineering design of this development will ensure that new infrastructure and equipment are installed. A plan of development is expected to be submitted in the third quarter of 2012, with first oil output expected 30 months after authorisation.

Tullow Ghana’s share price on the GSE has appreciated remarkably in 2012, with a year-to-date return of 28%. Tullow has consistently paid dividends over the past five years, with an average payout ratio of 71%. Profit before tax was up 499% to $1.1bn from $179m in 2010 due to a 111% increase in revenue to $2.3bn. On the other hand, operating costs rose to $160m, mainly because of its first year of production in Ghana. Oil production in Ghana generated approximately $930m in total.

In 2011 the company spent $1.4bn on capital expenditure with more than 80% invested in Africa. Cash flows from operations grew by 132% to $1.8bn and therefore based on modern projections and work programmes, management expects 2012 capital expenditure to reach $2bn.

Ghana continues to be Tullow’s biggest find on the West African transform margin, although production levels have remained under capacity (the current average production level is circa 70,000 barrels of oil equivalent, or boe, per day).

However, recent acid stimulations have generated positive results and management expects plateau production limits of 120,000 barrels of oil per day from the Jubilee field by the first quarter of 2013.

DEVELOPMENT STRATEGY: At the group level, the focus is to grow reserves and expand production. Tullow expects to make selective acquisitions and allocate capital wisely to its exploration activities. The subset of this strategy is that Tullow will offload depleted assets and sell non-core operations.

Tullow’s industry-leading exploration success has continued well into 2012, with major discoveries in Kenya’s Ngamia well (9bn-10bn boe potential) and high-impact drilling continuing in Jubilee.

Going forward, Tullow’s performance should not only be tied to resource potential, but also to the commerciality of its exploration activities in Kenya, Ethiopia, French Guiana and Uganda.

Tullow recently completed the sale of two-thirds of its stake in the Lake Albert rift basin, located in Uganda, to major multinationals. Completion and payment of the $2.9bn deal to Tullow leaves the Irish company completely debt-free, which in effect will give the company a robust balance sheet to further fund high-impact exploration and appraisal programmes in Uganda, Sierra Leone and Côte d’Ivoire.