Despite challenges East Africa holds key to Tullow’s future – Analysts
KAMPALA, JULY 1 – Despite continuing uncertainty over how the numbers will finally play out in its Kenyan exploration programme and a rumour of an impending exit from the region that refuses to go away, East Africa remains the draw-card for Anglo-Irish oil explorer Tullow, say analysts.
According to a trading statement and operational update Tullow released yesterday, the upstream operator’s investments in West African continue to perform below initial projects and exploration and appraisal activities in Kenya are scheduled to resume in the fourth quarter of calendar 2016.
Just hours before the update went public; a rumour that has been around for the past four years gained currency again, with reports indicating the company was on the verge of selling its assets in Kenya and Uganda. No reason was assigned for the decision nor possible buyers named.
Commenting on the reports however, independent experts who are not associated with the company dismissed the reports arguing that besides being the wrong timing for such a decision, it was unlikely Tullow would relinquish some of the most promising assets in its portfolio.
“It is just unfortunate that this potentially damaging rumour refuses to go away but in the current configuration of circumstances, I would not pay much attention to such reports,” commented an industry expert who pointed to the low appetite for risk in the oil industry right now and the confirmed reserves in Uganda as some of the factors that would not support a decision to sell right now.
“First of all who would be willing to buy right now or more importantly who would be willing to sell such assets as Tullow holds in East Africa at a time when oil prices are below the critical threshold for key investment decisions,” another commentator asked.
As has happened in the past, Tullow was unwilling to comment on the reports which it considers not worthy of lending credence by a response. But the numbers appear to support the analysts view. In Uganda where it is a 33 percent equity partners in a farm-down with Total EP and the China National Offshore Oil Company CNOOC, 6.5 billion barrels of crude in place have been confirmed with a quarter of that number considered recoverable. That would give Tullow a share equal to just over 500 million barrels. Combined with Kenya where estimates now point to 800 million barrels in place, East Africa is a promising play for the company that is currently bogged down by debt and less than par performance from its West African operation.
In what sounds like a profit warning ahead of half-year results scheduled for release on July 27, Tullow says in its operational update that gross annual production from its Jubilee field in Ghana will average 74,000 bopd with a net of 26,300 bopd for the company. Production at the Jubilee field continues to be hobbled by technical problems that the company expects to have a found a permanent solution for by the end of the year. In Europe, gas production for the first half of 2016 was above expectations averaging 6,800 boepd. Full year guidance has been revised to 6-7,000 boepd.
The company also advises that the Ten Project, its second platform in the Jubilee field is on course to start pumping in the next “three to six weeks,” while exploration and appraisal in Kenya “will recommence in the fourth quarter of 2016.” A long-term solution to the turret issue had also been established, Tullow CEO Aidan Heavey said in the statement.
“In East Africa, the Governments’ agreement that there will be separate pipelines to develop resources in Uganda and Kenya brings greater clarity to both projects. In addition in Kenya, a new programme of exploration wells focusing on growing resources is due to start in the fourth quarter. The New Ventures team remains focused on high grading and replenishing the exploration portfolio with a new licence signed in Zambia and ongoing portfolio management and seismic survey activity in South America,” he added.
“During the first half of 2016, production in the company’s West Africa working interest averaged 51,900 bopd. “This is below previous guidance due to lower production from the Jubilee field in Ghana, following issues with the FPSO turret identified in February. This resulted in an extended shut down period in April while new offtake procedures were implemented to enable the Jubilee field to restart in early May. Production has gradually been ramped up since then, with gross production in June averaging around 90,000 bopd.
“The Group expects to continue producing from Jubilee at similar levels through the remainder of 2016 with the exception of short periods of reduced production to commence work on the long-term turret solution. As a result, Jubilee gross average production in the second half of 2016 is expected to be around 85,000 bopd (net: 30,200 bopd). Tullow therefore expects average gross production for the Jubilee field in 2016 to be around 74,000 bopd (net: 26,300 bopd). As a consequence, Tullow’s West Africa oil production guidance range is revised to 62-68,000 bopd net. Tullow however has a comprehensive package of insurances in place which includes Business Interruption insurance which covers consequent loss of production and revenue from Jubilee,” Heavey explains in the update.
The company is also seeking approval from the Ghanaian government to spend $100-150 million on a programme to resolve the technical issues at Jubilee during 2017.
Further exploration activities in Ghana have also been put on hold pending resolution of a border dispute between the Côte d’Ivoire and Ghana.
The reports of an impending exit from East Africa were explained by some sources as based on the company’s tight financial position that would make it unable to meet new capital calls for investment in Uganda’s upstream development and the crude export pipeline. Tullow’s debt is now estimated at $4.7 billion including $1 billion in available credit.
People familiar with the company’s operations however dismiss this talk arguing that Tullow would not need a big stake in the export pipeline beyond the minimal equity required to secure a seat on the board. This could be anywhere in the range of 3-5 percent.
“Although Total is leading the investment, the pipeline is a separate mid-stream investment and none of the three companies in the farm down has an obligation to invest in it,” said one commentator explaining that because they would have a keen interest in its successful execution however, the upstream partners may take a minimal stake to ensure board representation.
Typically, such ventures are financed on a30/70 equity to debt ratio meaning that even if they were to carry the full burden of financing the export pipeline, the upstream partners would need to raise only about $1.2 billion of the estimated $4billion cost of the project. Even without third-party participants, Total and CNOOC on their own have the capacity to raise finance for the project on the debt markets. Still Tullow can opt out without prejudice to its stake in the farm-down.
There could be challenges for the company however should it fail to back its share of investment in the upstream development plans that are expected to go into high gear next year after Ugandan production licenses’ are issued between now and December. Even then, the worst case scenario for Tullow would be a dilution of its stake rather than an outright sale.
With no pipeline company in place and the project yet to reach pre-feasibility studies and investment plan milestones that would generate estimated costs for the engineering design, the export pipeline is still far from a capital call.
Despite that, the rumours’ of an impending exit refuse to go away and Tullow will not comment on the reports.
TULLOW OIL OPERATIONAL SUMMARY
East Africa development
On 23 April 2016, the Presidents of Kenya and Uganda agreed to pursue two separate crude oil export pipelines for the development of Kenya’s South Lokichar oil fields and Uganda’s Lake Albert oil fields. The Uganda pipeline route will be through Tanzania from the Ugandan town of Hoima to the Tanzanian port of Tanga. The pipeline development is being led by Total and the Government of Uganda. In Kenya, Tullow and its upstream partners Africa Oil and Maersk Oil, along with the Government of Kenya, are currently negotiating a Joint Development Agreement to implement the Kenya crude oil pipeline which will run from South Lokichar to the port of Lamu. It is anticipated that for both the Kenya and Uganda pipelines, technical, environmental and social studies and tenders required to proceed to FEED will commence in the second half of 2016 with the objective of commencing FEED in 2017.
In addition to progressing the full field development work in Kenya, an Early Oil Pilot Scheme (EOPS) transporting oil from South Lokichar to Mombasa, utilising road or a combination of road and rail, is being assessed to provide reservoir management information to assist in full field development planning. The EOPS would utilise existing upstream wells and oil storage tanks to initially produce approximately 2,000 bopd gross around mid-2017, subject to agreement with National and County Governments.
Kenya Exploration and Appraisal
In the first half of the year, Tullow concluded its first phase of exploration and appraisal in the South Lokichar Basin. The success of this programme and ongoing analysis of the discoveries has led to an upgrade of the South Lokichar resource estimate up to 750 mmbo. Significant upside remains across the South Lokichar Basin with the potential to increase the resource estimate to around 1 billion barrels of oil. The Kenya Joint Venture Partners therefore plan to recommence drilling activities in the fourth quarter of 2016 with an initial programme of four wells in the South Lokichar basin and the potential to extend this by a further four wells. In addition, Tullow is planning an extensive water injection test programme in the fourth quarter of 2016 to collect data to optimise the field development plans.
Exploration activity continued outside of the South Lokichar basin in the first half of 2016, and the Cheptuket-1 well in the Kerio Valley Basin was successfully completed in March 2016. The well encountered good oil shows, seen in cuttings and rotary sidewall cores, across an interval of over 700 metres. Further exploration activities in this basin and Tullow’s remaining unexplored Kenyan acreage, continue to be evaluated.
Tullow has continued to actively manage its New Ventures portfolio in the first half of 2016 through both licence acquisitions and farm downs of existing acreage to manage exposure to exploration costs.
In June, Tullow extended its East African rift play acreage through the award of Petroleum Exploration Licence 28, onshore Zambia. The 55,000 sq km block builds on Tullow’s existing low-cost, core East African Tertiary rift basins, giving the Group access to three further unexplored basins. Within the first two years of the licence, Tullow plans to complete initial geological studies, acquire an FTG survey and collect passive seismic data. If the results are positive the Group will then carry out the acquisition of 2D Seismic over the block.
The Group’s 2016 capital expenditure guidance remains at $1.0 billion with further savings being offset by additional capex associated with the Jubilee turret issue ahead of potential insurance payments and the start of a new drilling campaign in Kenya.
At the end of June 2016, net debt is estimated at $4.7 billion and unutilised debt capacity and free cash at approximately $1.0 billion. The Group’s hedging strategy remains unchanged; ensuring a percentage of production entitlement volumes are hedged on a three-year look forward basis. Having temporarily suspended the execution of this strategy in the fourth quarter 2015, it was resumed in April 2016.
In April, Tullow successfully completed its routine six-monthly Reserve Based Lending (RBL) redetermination process, securing available debt capacity of $3.5 billion. The first amortisation of the RBL is scheduled in October 2016, when commitments will reduce to $3.25 billion. The Company currently plans to refinance the RBL before any further amortisation in 2017.
The Group also agreed a twelve month extension to the maturity of the Corporate Facility to April 2018. The Corporate Facility commitments remain at $1 billion until April 2017, when commitments reduce to $800 million with an accordion feature for an additional amount of $200 million. Tullow’s lending banks also agreed a further amendment to the financial leverage covenant of the RBL and the Corporate Facility. This demonstrates the continued support of the Group’s lending banks during this period of low oil prices and the high quality of Tullow’s asset portfolio. Strengthening the balance sheet and debt reduction continue to be key priorities for Tullow this year. Options available include further rationalisation of our cost base, further cuts to discretionary capital expenditure, portfolio management and other funding options.