Tullow keeps its eye on the prize despite setbacks

Will the wildcatter’s run of drilling disappointments weaken its balance sheet in the future?

Between 2009 and 2012, Tullow had drilling successes in Africa, opening up new basins in Uganda (above), Ghana and Kenya

Between 2009 and 2012, Tullow had drilling successes in Africa, opening up new basins in Uganda (above), Ghana and Kenya

Fri, Jul 25, 2014, 01:20

Another week, another dry well for Tullow Oil, which on Monday announced it is abandoning its Lupus-1 prospect off the coast of Norway. For two years, the company has had rotten luck with the drill bit, encountering a succession of duds stretching from the north Atlantic across to Africa.

There was a time, mainly between 2009 and 2012, when Tullow appeared to be striking oil for fun in its preferred playground of Africa, opening up vast new basins in Uganda, Ghana and Kenya. Fun rarely lasts for long, however, and the company’s share price has since halved.

Tullow is preparing to next week unveil interim revenues of about $1.3 billion (€965 million) and gross profits of $650 million. With a financial performance like that, does its recent run of poor drilling results actually matter?

Not really, says George Cazenove, Tullow’s director of corporate affairs. The company says it is confident it has found enough oil to produce sufficient cash to fund its wildcatting activities for years to come.

Discoveries

“The big developments that will see production increase over the next three to five years all come from oil that Tullow discovered itself in Uganda, Ghana and Kenya. The best oil to monetise is oil that you have found yourself,” says Cazenove.

The company met investors and analysts in London last month for its annual capital markets day. It laid out its strategy for the next few years and addressed head-on questions over whether its recent exploration travails will weaken it in the future.

Put simply: production at its west African cluster of production wells, where the linchpin is Ghana, will pay the bills as it trawls the east of the continent for new basins, with a heavy focus on Ethiopia and Kenya.

David Lawrie, who runs Tullow’s north and west African operations, told investors that its operations “have the potential to generate $2.5 billion of operating cash flow”. That’s enough to pay for its entire 2014 capital programme.

The sheer magnitude of the success Tullow encountered during its purple patch from 2009 meant a later “dry” run was almost inevitable, according to analysts.

“Just because it was extraordinarily successful a few years ago, it doesn’t mean it is extraordinarily unsuccessful now because it isn’t striking oil at the same rate,”says Job Langbroek of Davy. “It has just reverted to average.”

Gerry Hennigan of Goodbody says its hit rate was so strong at that time because Tullow was almost exclusively focused on areas where it had already had success.

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