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Threat of Tullow collapse looms

The failure of multiple projects in Africa and depressed oil prices puts the company in ‘significant doubt’

Last year was harrowing for Irish independent Tullow Oil. Production downgrades, disappointing exploration results offshore Guyana and delays to key African projects triggered a share price collapse of more than 70pc.

The company’s full-year results show market concerns were fully justified. Tullow posted a $1.7bn after-tax loss in 2019, partly from reduced output at the Jubilee and TEN fields in Ghana. These problems were compounded by failure to make progress on crucial projects in Kenya and Uganda. Assets in both countries contributed towards a write-off charge of $1.25bn. 

Tullow looks unlikely to recover in 2020. The collapse of the Opec+ alliance and the growing threat of Covid-19 mean greater market volatility will likely push crude prices to new lows.

Tullow has even highlighted the risk to its own survival. “The Group may not be able to sufficiently progress any planned portfolio management activities,” it said in a statement. “There is a material uncertainty, that may cast significant doubt, that the Group will be able to operate as a going concern.”

Taking precautions  

For now, Tullow is maintaining its 2020 guidance level. The company is projecting output of c.75,000bl/d oe and has maintained its capex level at $350mn. To safeguard its finances, Tullow has also hedged around 60pc of its crude sales volumes this year at $57/bl and 30pc in 2021 at $52/bl.

The company faces the real risk of bankruptcy if conditions do not improve

“Tullow has quality assets, we have quality people and we are confident that through our plans we can deliver a robust, sustainable and attractive business that will have options for growth,” said Dorothy Thompson, executive chair at Tullow, on an investor call.  

But if crude persists at its current level—or drops even lower—the company’s finances face a significant threat. “If oil prices remain at or below their current levels for an extended period of time, this would adversely impact our future financial results,” Tullow said in a statement. The company’s free cashflow breakeven for 2020 stands at c.$45/bl oe, while Brent dipped below $33/bl on 12 March.

Tullow has enough liquidity to operate for 12 months under the worst-case scenario—in which it fails to meet production guidance and crude trades below $30/bl for a protracted period. Cost-cutting is the priority, to try and outlast the market low. The company has slashed the size of its workforce by 35pc and is closing all offices beyond its London base. Tullow has pledged net cash savings of $200mn into 2022.

Most significantly, the board says it will raise more than $1bn from portfolio management this year. West Africa holds the company’s most important producing assets, so East Africa is the most likely source for funds. The company has confirmed a formal sales agreement in Kenya, and the farm-down in Uganda is still ongoing. US bank Jefferies believes the assets are worth a combined $958mn at a long-term oil price of $62/bl.

Tullow has declined to say which assets will be included in the $1bn target but, whatever is put up for sale, finding a buyer may prove difficult, certainly more so than a month ago.

Keep drilling

Despite the low oil price threat, Tullow is still pursuing further E&P targets. In Ghana, start-up of phase one at Jubilee South East is projected to add 15,000bl/d oe in gross production. The company is also assessing further opportunities at the Enyenra and Ntomme fields. Both are on track to produce 50,000bl/d oe in gross production.

$1.7bn Tullow’s 2019 after-tax loss

Elsewhere in Africa, Tullow is targeting additional supply from Gabon, Equatorial Guinea and Cote D’Ivoire. Drilling is planned offshore Namibia this year after the company acquired a 56pc interest in an offshore licence from Australia’s Colima Energy. In the Comoros, drilling is planned for 2021 after the analysis of the seismic research.

Tullow’s other priority region is Latin America. The firm plans to spud a well at the Goliathberg-Voltzberg North prospect offshore Suriname in the fourth quarter of 2020 and undertake a seismic survey in Argentina. In February, a well drilled offshore Peru at the non-operated block z-38 failed to return oil. But Tullow remains positive about the possibility of further exploratory drilling in the region.


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