Tullow Oil has reported revenues of $1.6bn for the year, down 27%, with an overall loss of $1.0bn after a series of write-offs and impairment charges caused by the lower oil price. Despite the loss, Tullow generated $1.0bn of operating cash flow and has $1.9m of remaining cash and debt facilities to fund its ongoing field developments through to first production.
Tullow Oil shares slipped around 5% in response to the results.
Net debt was $4.0bn at year end. Tullow will see its headroom re-determined by annual negotiations with lenders, currently underway. Last year, lenders gave Tullow an additional $450m of capacity in those negotiations. The company's oil price hedging policy has continued to pay off, with 64% of expected 2016 production hedged at $75/bbl, on a post-tax basis, and "material" hedges in place for 2017.
Costs have been cut hard, with a 37% headcount reduction, saving $0.5bn over three years. Capital expenditure of $1.7bn in 2015 is expected to fall to as little as $0.9bn this year and as low as $0.3bn thereafter if low oil prices persist.
The company expects to produce 73,000 - 80,000 bopd in 2016 from West Africa, with the TEN project commencing production in July or August. Operating expenditure of $10/bbl at the Jubilee field and $15.0/bbl at Tullow's non-operated West African assets last year is expected to move toward $8.0/bbl by 2018. With TEN producing from summer this year, Tullow expect that group production in 2017 will be around 100,000 bopd.
A successful appraisal programme in Kenya and Uganda has firmed up total net reserves and resources for Tullow of over 600 million barrels of oil equivalent. Tullow will work toward final investment decisions for these reserves during 2016.
Tullow has had extraordinary success with the drill bit in recent years, opening a series of new basins across Africa with major field discoveries. This has left it with big reserves, but also big bills to develop them. The current weak oil price damages the value of those fields and also reduces Tullow's cash flow.
That has left Tullow in a squeeze and the suspension of dividends is a consequence. We expect Tullow's stock to remain volatile whilst oil prices are depressed. With big field developments underway, offshore West Africa and onshore in the East of the continent, Tullow should end up with an attractive, rising production profile, which could even attract the attention of an oil major one day.
In the meantime, their cost control efforts and capex efficiency have impressed, and the company is in a stronger position as a result. Their ongoing oil hedging programme has been hugely valuable, insulating the company from some of the market weakness, by locking in higher oil prices for future production.
With $1.9bn of cash and borrowing facilities, Tullow can stay at the crease a while longer, developing its new fields. There are around 1.3bn barrels of reserves and resources in the company, and the current market value of its equity is around $2.1bn, with net debts of $4.0bn and the need to spend significant additional sums to develop fields.
We would not be surprised to see them try and raise funds at some point, but suspect they will hold out for a higher stock price before they try. The stock is essentially speculative, because both the forces that could lead to a significant gain; higher oil prices and/or M&A activity are unpredictable and outside of Tullow's control.
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