Ghana: Some Possible Outcomes From Tullow’s Significant Comedown(Article)

By: Paa Kwasi Anamua Sakyi

A decade ago when Kosmos Energy discovered oil in commercial quantities west of Cape Three Points, offshore Republic of Ghana, Tullow Oil Plc became the Operator of the field (Jubilee field), and currently runs that alongside the Tweneboa-Enyenra-Ntomme (TEN) oil fields.

This is a company that started in a small town called Tullow, about 35 miles south of Dublin, Ireland in 1985, with 42 employees, a revenue of £1.7 million, and recording an operating profit of £250,000 in 1986.

Its first licensing agreement was signed in Senegal in 1986, with gas production and sales commencing in 1987. Between 1988 and 1999, Tullow acquired licenses in Europe, Asia and Africa to explore in the UK, Spain, Italy and South Yemen, Pakistan, Bangladesh, India, Côte d’Ivoire, Egypt and Romania — listing its shares on the London and Irish Stock Exchanges in the process.

In 2000, the Tullow Group bought producing gas fields and related infrastructure in the UK Southern North Sea from BP for £201 million; raising £42 million to help pay for the deal, and giving Tullow substantial production and cash flow for the first time to help it focus on offshore UK, West Africa and South Asia.

Between 2004 and 2007 Tullow took up a range of production and exploration assets in Uganda, Gabon, Equatorial Guinea, Suriname, Namibia, Mauritania and Congo Brazzaville, among others. In 2007, Tullow’s exploration success continued with its largest ever discovery which led directly to the development of the Jubilee field.

On the back of strong commodity prices and increased production following first oil at Jubilee, Tullow had a very strong year financially with an increase in profit after tax of 670 percent to US$689 million. Tullow also listed on the Ghana Stock Exchange (GSE) in July 2011, raising £46 million in the process. In 2012 the Group secured a US$3.5 billion debt refinancing towards the end of the year, and delivered US$2 billion of operating cash flow and established a flexible and strong balance sheet in 2013. Despite the lower price environment in 2014, Tullow maintained production at 73,400 barrels of oil equivalent per day (boepd), mitigating the impact of lower prices by prudent hedging strategy, which helped to underpin revenues of US$1,607 million. 

The clear highlight of 2016 was delivering Ghana’s second major oil and gas development, the TEN fields, on time and on budget. Production from TEN, alongside Tullow’s other West African oil production, has begun the generation of positive free cash flow and enabled the business to begin the important process of deleveraging the Group’s balance sheet. This was achieved despite the technical issues Tullow dealt with on Jubilee. 

In 2017, Paul McDade became Tullow’s new chief executive officer (CEO) as founder-CEO Aidan Heavey, stepped into the role of Chairman. Tullow moved into a much stronger financial position, generating US$543 million of free cash flow and reducing debt to US$3.5 billion. The group generated record production of 94,700 boepd, beating original guidance and boosted by strong performance at TEN and Jubilee.

Today, the Group has interests in 80 exploration and production licenses across 15 countries which are managed as three Business Teams: West Africa, East Africa and New Ventures. As at 2018, Tullow was operating in 18 countries, with 990 of employees, producing 90,000 boepd, and generating US$1.9 billion of sales revenue.

Changes

On Monday 9^th December 2019 Tullow Oil Plc announced that CEO Paul McDade and Angus McCoss, Exploration Director, have resigned from the Board of Tullow by mutual agreement and with immediate effect. Tullow also pronounced the scrapping of its dividends and cutting its production outlook, as it continues to face issues at its main producing assets, the TEN and Jubilee fields in Ghana.

According to the Group, whilst financial performance has been solid, production performance has been significantly below expectations. And following a review of the production performance issues in 2019 and its implications for the longer-term outlook of the fields, 2020 Group production is forecast to average between 70,000 and 80,000 boepd; down from the 87,000 boepd expected for this year 2019, while the production for the following three years will hover around the bottom of that range.

A number of factors have currently been identified as the cause to the reduction in production guidance. On the Jubilee field, these factors include significantly reduced offtake of gas by the Ghana National Gas Company (GNGC) which Tullow makes available at no cost, increased water cut on some wells, and lower facility uptime. At Enyenra (one of the TEN fields) mechanical issues on two new wells have limited the well stock available and there is faster than anticipated decline on this field.

Stock Dive

The cutting of its production outlook and the suspension of its dividend was according to Tullow intended to generate more cash to support future investment plans and current explorations. However this decision sent shares tumbling more than 62 percent, the biggest ever drop (since Tullow started trading some 30 years ago) after the forecast for 2020 production that analysts claim leaves dark clouds hanging over the company’s outlook.

It is the second plunge in less than a month for the shares, which dropped 27 percent on November 13th after the company said it was reassessing the commercial viability of discoveries in Guyana, South America. Cumulatively the stock has dropped more than 90 percent since 2012. And that Tullow Dollar notes due 2025 declined the most since they were issued in March 2018.

Aside Tullow’s unsuccessful forays into East Africa which is believed to be the main reason for the strain on Tullow Oil Plc’s fragile balance sheet, the nose dive in stocks can be attributed to the admission that a landmark oil find in Guyana was of questionable value. Samples collected so far revealed the oil present was “heavy” and “sour”, which renders it harder to transports and refine; causing investors to lose hope on Tullow.

The Chief Financial Officer (CFO) Les Wood of Tullow suggest that the group is in a ‘strong financial position” and that reducing its debt pile will continue to be a priority, though conceding that “in the short-term, the company will be going a little slower.” According to the company, the plan is to reduce capital expenditure, operating costs and corporate overheads. It sees the underlying free cash flow next year of at least US$150 million at US$60 per barrel after capital investment of about US$350 million.

In spite of the assurance given by the CFO, Tullow once a £14 billion company, saw its Net Asset Value (NAV) drop to a little over £560 million. When Tullow Oil Plc issued its initial public offering (IPO) less than 10 years ago, the value of its shares went north of US$20. Last Monday it fell below US$1.00, but has since bounced back up to US$1.50.   

Possible Outcomes

According to Bloomberg intelligence, the surprise resignation of the CEO, the suspension of dividend, and the revision of production forecast cast a dark shadow over Tullow’s outlook, while the start of a strategic review increase the likelihood of an eventual sale of the company. The evidence is that Tullow is now a sitting duck — a takeover target. The speculation is that the oil exploration firm is open to receiving bids from potential buyers to help bail it out from the recent challenges, but Tullow has rejected the reports, insisting that there is nothing on the table. Meanwhile, the Executive Chairman of the company, Dorothy Thompson, had earlier hinted that Tullow is open to buyers and would consider any offer at the “proper value”.

The next challenge Tullow faces is a possible no-confidence vote from its partners, especially Kosmos Energy, which has always been very critical of Tullow’s Operator ability ever since the FPSO Turret debacle in early 2016.  It appears these issues and challenges may not have been fully discussed and agreed with its partners, especially Kosmos, who should have released a statement as required by the US Securities and Exchange Commission (SEC) had they been aware.

According to a former Chief Executive of Ghana National Petroleum Corporation (GNPC) Alex Mould, Tullow’s transformation from an exploration to a mature producing company, will mean major restructuring and massive layoffs. Again, given Tullow Oil’s position as one of the foremost oil companies in the country, the change in leadership signals the dawn of a new beginning which could have a potential impact on jobs as the company, among other things, look to cost rationalization measures to remain profitable.

Ghana’s total petroleum revenues since the beginning of commercial production up to 2018 is in excess of US$4.9 billion, of which the contributions from the TEN and Jubilee fields, is in excess of US$4.5 billion. These revenues made up of Royalties, Surface Rentals, Carried and Participating Interest (CAPI), and Corporate Income Taxes (CIT) et cetera, remains an integral part of Ghana’s annual budget. The downgrading of Tullow’s production outlook would mean less of produced oil and invariably less oil revenue for the country, in this low oil price environment.

All is not gloomy, and there is always a possibility of a come-back.

The writer has over 22 years of experience in the technical and management areas of Oil and Gas Management, Banking and Finance, and Mechanical Engineering; working in both the Gold Mining and Oil sector. He is currently working as an Oil Trader, Consultant, and Policy Analyst in the global energy sector. He serves as a resource to many global energy research firms, including Argus Media and CNBC Africa.