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Guyana oil discovery does little to bolster Tullow

An unwanted hat-trick of underwhelming oil finds fail to alleviate the whiff of crisis around troubled independent

Hopes of salvaging Anglo-Irish independent Tullow Oil’s turbulent 2019 and preventing further downward share price pressure in 2020 were heavily dependent on the company’s third and final Guyana offshore drill target of last year—the first well to test both the Kanuku block and the Cretaceous play. Numerous light oil discoveries already made by ExxonMobil within the Cretaceous of neighbouring block Stabroek only added to the expectancy.

But while Spain’s Repsol, the operator with a 37.5pc stake, alongside partners Tullow (37.5pc) and Total (25pc), announced an oil discovery at the Carapa-1 well—the third from three wells now drilled in Guyana by Tullow—the preliminary results raised doubts about the potential commerciality of the prospect.

“We are encouraged to find good quality oil which proves the extension of the prolific Cretaceous play into our acreage” MacFarlane, Tullow

Unlike the high-sulphur discoveries at Jethro and Joe, both in the Orinduik block, rig site testing from Carapa-1 well revealed sulphur content at less than 1pc and crude quality of 27° API. But despite the lighter crude, net oil pay was much lower than projected, at only 4m versus an average of c.50m from the 14 discoveries made by ExxonMobil in the Cretaceous play of Stabroek, according to research from US bank Jefferies.    

A Tullow statement also raised concerns about the quality of the sandstone reservoir. “While net pay and reservoir development at this location are below our pre-drill estimates, we are encouraged to find good quality oil which proves the extension of the prolific Cretaceous play into our acreage,” said Mark MacFarlane, chief operating officer at Tullow. The statement noticeably failed to describe its commercial potential.

Details of the oil discovery plunged the company’s share price by over 10pc in early trading on 2 January before stabilising at just below 60p/share by close of day, a level below which it remained by 10 January, having twice flirted with breaking below 55p/share earlier in the week. Tullow’s share price was routed in late 2019, falling by over 80pc between November and December from a peak of 217p/share.

Troubled waters

Tullow’s African portfolio—the company’s primary production base—suffered recurrent problems and project delays throughout 2019, compounding the significance of a successful drilling campaign in Guyana.

Reduced gas offtake from anchor customer Ghana National Gas Company, as well as increased water cut on some wells, saw Tullow reduce production guidance for its Jubilee field by 2,500bl/d oe across 2019. And this may be only the start of a Jubilee associated gas problem for Tullow.

Higher gas re-injection now will only mean a higher proportion of associated gas in the field’s output as it matures. Tullow is anticipating this—it plans to expand the gas export capacity of the Jubilee floating production storage and offloading vessel beyond its present 160mn ft³/d. But that does not solve the problem of who will buy this increased gas volume. No buyer could then start limiting even further Tullow’s ability to produce Jubilee oil.

$1.3bn – free cashflow 2017-19

At Enyenra, one of Ghana’s TEN fields, mechanical issues drove another production downgrade, while the field’s natural decline is also expected to be faster than previously thought. Overall TEN production was cut by 10,000bl/d oe across 2019.

Tullow had also aimed to finalise its Uganda project farm-down with partners Total and China’s Cnooc, but a tax dispute with the government prevented the deal and led the firm to postpone FID. The company’s South Lokichar project in Kenya is now also unlikely to take FID until into the second half of 2020.

Tullow ultimately lowered its 2019 full-year production guidance from 89,000-93,000bl/d oe to an expected 87,000bl/d oe—resulting in the swift departure of both CEO Paul McDade and exploration director Angus McCoss. Between 2017-19 the company averaged production of c.84,000bl/d at an oil price of around $63/bl, helping to generate $1.3bn in free cashflow. In 2020, the company is projecting production of 70,000-80,000bl/d oe, around half of what Jefferies predicted Tullow would be producing when it made its forecast five years ago.

In the immediate term, Jefferies identifies completing the Uganda farm-down and a high oil price as the most important factors in sustaining Tullow’s free cash flow (FCF). If the farm-down is concluded in 2020 and oil averages $50/bl then cumulative FCF would reach $693mn. Crude at $70/bl would lift this figure to c.$1.15bn.

A repeat of ExxonMobil’s Guyana drilling successes would have boosted Tullow’s future production and FCF outlooks. And the firm is unlikely to give up despite its initial underwhelming result. While the volumes may have disappointed, the well does prove that good quality, low sulphurous oil from the deepwater Stabroek block’s Cretaceous play does extend into shallower water acreage, thus encouraging further drilling. In September, then CEO McDade foresaw at least three new Guyana wells in 2020.

Canada-listed Eco Atlantic, a partner with Tullow in the Orinduik block, is also reviewing multiple prospects for a 2020 drilling campaign. “The newly learned results on Orinduik and the results from the Carapa well currently being drilled in shallow water on Repsol’s adjacent Kanuku Block, just south of the Orinduik, will greatly assist in our interpretation and selection of future drilling targets,” says Gil Holzman, CEO and co-founder of Eco Atlantic.

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