Tullow’s revival still faces production challenges
Tullow Oil is to pay a dividend once more. But can it find the barrels to sustain its improving balance sheet?
Tullow Oil has maintained stronger cash flow, reduced its debt and now reinstated its dividend. But the bellwether African explorer faces challenges in securing fresh production from East Africa as it seeks to realise production growth ambitions.
On 29 November, the company said it would pay dividends in 2019 for the first time since 2014. Tullow said it expected the ordinary dividend in any year would total no less than $100mn and that, in periods of "particularly strong free cash flow generation", the board would also consider making additional returns to shareholders.
The move underscores an improved financial situation at Tullow, whose business was hit hard by falling revenues and limited exploration returns during the post-2014 oil price slump. The company revamped its portfolio and embarked on a cost-cutting programme under Paul McDade, who replaced company founder Aiden Heavey as chief executive in 2017.
"We are now in a place where we have a balanced, self-funding E&P company," McDade told a media briefing ahead of an investor presentation in London.
Earlier in November, Tullow said it expected full-year free cash flow to be around $700mn, including $200mn of farm-down proceeds from its Uganda operations. It also forecast that debt and gearing would fall to around $2.8bn by the end of 2018, compared to $3.5bn at end-2017 and $4.8bn at end-2016.
Increased production from current operations in Ghana and additional output from projects planned for Kenya and Uganda will be key to sustaining the recovery. On announcing the dividend plans, Tullow's senior management said the company could grow net oil production from close to 90,000 bl/d to around 150,000 bl/d in the early 2020s.
Most production comes from the Tullow-operated Jubilee and TEN developments in Ghana, where prospects for the latter have been boosted by the settlement of a border dispute between Ghana and Cote d'Ivoire. The dispute had held up expansion of TEN, which lies close to the border. Tullow also recently acquired an adjoining block on Cote d'Ivoire side where it plans to explore.
The company expects total oil production from its two Ghanaian developments to average some 146,000 bl/d in 2018, rising to around 180,000 bl/d in early 2019, following expansion of drilling programmes. Tullow, which holds a 35.48pc stake in Jubilee and a 47.18pc stake in TEN, said this would work out at just under 60,000 bl/d net to the company before equivalent barrels related to production insurance payments were included.
But a large share of further production increases over the next three-to-five years are scheduled to come from East Africa. Tullow hopes to take a final investment decision (FID) on a production project in the South Lokichar basin near Lake Turkana in northern Kenya in 2019, and add barrels from its minority stakes in projects operated by Total and China's CNOOC in the Lake Albert region of Uganda.
Kenya FID challenge
The Kenyan project involves building an 80,000-100,000 bl/d heated pipeline stretching 821km to the coast at Lamu for export, scheduled to be operational by 2022. Tullow says the central processing facility design is being optimised and that port facilities at Lamu were advancing.
This is a flagship project for the Kenyan government, as well as Tullow. Kenya hopes it will help kickstart the LAPSSET corridor infrastructure project, intended to turn the Lamu area into a regional communications and industrial hub.
However, an early oil project to take small quantities to the coast by road has been disrupted by local communities seeking a greater share of potential revenues.
Other potential stumbling blocks have yet to be fully addressed, such as securing land rights agreements along the pipeline route, and issues surrounding the project's water use in the arid Turkana region, which is home to vulnerable pastoralist communities.
McDade said the Kenyan government had secured land rights for much of the route to South Lokichar, but not all of it. He acknowledged water supply was a "super sensitive topic" around Lake Turkana, but said he believed Tullow could demonstrate to local communities that Tullow could not only take water without having a negative impact on them, but also potentially add to supply, though he did not provide details.
Meanwhile, the structure of the pipeline partnership and financing for its construction have yet to be put in place. McDade said this was "undefined", but that Tullow was working with the government to get "the right set up" for "the commercial underpinning for the financing of the pipeline", but that he expected both the upstream companies and the government to be involved.
This list of unresolved factors suggests that 2019 will be busy for Tullow in Kenya, if it is to achieve FID by year-end.
Uganda hold ups
In Uganda, where Tullow made the first oil discoveries in 2006, the company sold stakes to Total and CNOOC and relinquished operatorship of its licences during the oil sector's downturn, as it sought to balance its books. The firm estimates the value of its Ugandan farm downs since 2012 at around $3.5bn.
Even with its reduced stakes, Tullow says it would still receive an estimated 23,000 bl/d net from the project, whose first phase is intended to produce over 230,000 bl/d mainly for export via a pipeline to the Tanzanian coast.
However, talks with the government over the extent of taxes to be paid on these transactions have slowed down the progress of these deals and of the oil project as a whole.
At present, Tullow holds one-third stakes in Ugandan production licences under development, but has agreed to a further farm down to Total, which will leave it with an 11.76pc stake in the licences operated by the French company, which account for the bulk of the project's planned production. CNOOC has exercised pre-emption rights to acquire 50pc of the amount being transferred to Total.
Tullow maintains that it expects the farm down to be completed by the end of 2018. FID has been moved back and is currently slated for the first half of 2019, with first oil due in 2022.
Of late, the company has been trying to shake off its former image as a high-risk frontier exploration specialist, stressing its efforts to balance up its portfolio of exploration and production assets. However, it is still likely to be reliant on exploration for future growth.
Tullow is eyeing prospects on its exploration acreage in Guyana with some relish, given it lies up dip from ExxonMobil's Liza discovery. Tullow's exploration director Angus McCoss said the company planned to drill two or three wells in the region in 2019.
It has also acquired blocks along the coast of Cote d'Ivoire and has just taken an offshore exploration licence in the waters off the Comoros, which lies to the east of Mozambique's gas-rich Rovuma basin. However, the geology of the Comoros acreage is separate from that of Rovuma, and may be more oil prone.