Tullow Oil expecting $900m revenue in busy first half

The FTSE 250 company said underlying free cash flow, before the 2018 final dividend payment, was forecast to be around $100m for the period, and around $450m for the full year.

That figure was expected to increase to around $650m following completion of the Uganda farm-down.

As it had previously disclosed, Tullow was expecting its revenue and free cash flow to be “heavily weighted” to the second half of the year, due to the group's liftings schedule and the phasing of both tax payments and rebates.

Net debt was expected to be around $3bn at 30 June, and the gearing ratio was forecast to be around 1.9x.

The group's liquidity headroom of unutilised debt capacity and free cash at 30 June was set to be around $1bn.

Tullow said its capital expenditure guidance for 2019 remained unchanged at $570m, excluding Uganda expenditure which would be repaid following completion of the Uganda farm-down.

On the operations front, in West Africa, group working interest production for the first half of 2019 was expected to average around 89,000 barrels of oil per day (bopd), including production-equivalent insurance payments.

As it had previously disclosed, production in Ghana was impacted by gas compression constraints on Jubilee during February, and a delay in completing a TEN production well.

Both issues were said to have been resolved successfully in the first quarter of the year.

Tullow said it was currently producing around 95,000 bopd net, and its net oil production was expected to rise towards 100,000 bopd in the second half of 2019 as further wells were brought on stream in Ghana.

The group's full year forecast remained unchanged at between 90,000 and 98,000 bopd, including production-equivalent insurance payments of 1,300 bopd.

The insured period associated with Tullow's successful corporate business interruption claim had now ended, three years after cover commenced, with the company continuing to insure against business interruption.

In Ghana, the board said the Stena Forth and Maersk Venturer drillships had been working in tandem on Ghana drilling and completion operations throughout the first half of the year, with four wells drilled and three wells completed.

The Stena Forth drillship had now left Ghana to begin drilling in Guyana.

Tullow said the Maersk Venturer would remain in Ghana, and would complete the ongoing Enyenra-14 production well, a Jubilee producer and an Enyenra water-injector, before switching to drilling operations for the remainder of the year.

“The completion of the Enyenra-14 production well is taking longer than anticipated and consequently will be onstream later than planned,” the Tullow board explained in its statement.

“This delay has been reflected in a small revision to full year guidance for TEN which has been adjusted to around 71,000 bopd gross, from 73,000 bopd.

“Following strong performance from Jubilee, production guidance for the year has been adjusted to around 95,000 bopd gross, up from 93,000 bopd.”

The board said reservoir performance in the first half from existing and new wells had been in line with expectations at both fields, and it expected to reach gross production from Ghana of around 180,000 bopd in the second half of 2019.

Looking at its non-operated portfolio, the company said production had been “strong”, especially in Gabon.

First half net production was expected to average around 25,500 bopd, with the portfolio expected to deliver around 25,000 bopd net for the full year.

In its East Africa geography, Tullow said “significant” progress had been made over the first six months of the year in Kenya on both the Early Oil Production Scheme (EOPS) and the Foundation Stage of Project Oil Kenya.

In May, EOPS production was increased to 2,000 bopd from 600 bopd, and the reservoirs, wells and associated facilities had been performing well.

More than 150,000 barrels of oil had been safely delivered to Mombasa so far, with the company saying it expected the first export cargo to be sold and lifted in the third quarter of 2019.

“The joint venture partners and the Government of Kenya have concluded negotiations around key fiscal and commercial principles for Project Oil Kenya with agreements between the parties documented in various heads of terms, which were signed by the joint venture partners and the Government of Kenya in Nairobi yesterday,” the board reported.

“This is a material and encouraging step forward which gives all parties confidence that the development project will be robust at low oil prices.

“In addition, the completion of the FEED studies for both the upstream and midstream, together with recent market soundings provide increased confidence in the project's capital expenditure estimate and construction timetable that is expected to see first oil three years after the final investment decision (FID).”

Tullow said the Government of Kenya continued to make “good progress”, both in acquiring the land for the upstream and pipeline and securing water rights for the upstream.

While those activities were progressing well, they were taking longer than originally forecast.

It said the National Environment Management Agency had requested that additional community consultation take place for the environmental and social impact assessments (ESIAs), which would now be submitted in the second half of 2019, which was later than anticipated.

Tullow said all parties were continuing to work well together across all development workstreams, with “significant” progress made so far this year.

However, despite that progress, the partners and the Government of Kenya were reviewing the most likely timeline to FID which Tullow now expects in 2020.

In Uganda, following meetings in January between the chief executive officers of both Tullow and Total and the president of Uganda, where principles for the tax treatment of the farm-down to CNOOC and Total were agreed, the joint venture partners had worked to finalise an agreement based on those principles.

Tullow and its joint venture partners had, so far, been unable to finalise the agreement with the Government of Uganda.

“We continue to work constructively with our joint venture partners and the Government of Uganda to agree a way forward and the consequent timing of FID.

“Nevertheless, although negotiations continue, Tullow is currently considering all options in pursuing the sale of its interests in Uganda.”

The board said the joint venture partners were continuing to work towards reaching FID for the development project in the second half of 2019, with the project's technical aspects now complete.

It said the Tilenga Project ESIA had been approved by the National Environment Management Agency, and the Kingfisher ESIA public hearing was ongoing.

Geotechnical and geophysical surveys for the East Africa pipeline (EACOP) had been completed for the entire route across both Uganda and Tanzania.

Tullow said there were ongoing EACOP discussions between the joint venture partners and the Governments of Uganda and Tanzania, regarding key commercial agreements which were required prior to FID.

Looking at its new ventures, In Guyana the company said it planned to drill two consecutive exploration wells in the second half of 2019 on the Orinduik licence with the Stena Forth drillship, which was currently in transit from Ghana.

“The first well will target the Lower Tertiary Jethro prospect and drilling is expected to commence at the end of June and take approximately 40 days.

“The rig will then move to drill the Upper Tertiary Joe prospect.

“The Rowan EXL II jack-up rig has also been contracted to drill the Cretaceous Carapa prospect in the non-operated Kanuku licence and is expected to commence operations in August.”

The group said it was also continuing to seek to access new acreage in both Africa and South America.

Earlier in the year, Tullow won three blocks in the Malvinas West Basin, offshore Argentina, in a competitive bidding round.

It said it won operated 40% interests in Blocks 114 and 119, and a 100% interest in Block 122, with formal award due later in the year.

The Government of Peru had approved Tullow's entry into two licences - Z-38 and Z-64 - with work continuing to secure other licences.

A non-operated exploration well was being planned for drilling in Z-38 in early 2020.

Following the interpretation of 3D seismic acquired over Block C-18 in Mauritania, Tullow said it had decided not to proceed into the next exploration phase, and had withdrawn from the licence.

Tullow had also decided to withdraw from Zambia Block 31 after the interpretation of the gravity survey.

Those decisions had been made as part of ongoing portfolio management to retain the highest-ranking exploration opportunities.

“Tullow has made steady progress overall across the business in the first half of the year,” said chief executive officer Paul McDade.

“Our balance sheet remains strong and we expect another year of solid free cash flow generation.”

MaDade said he was “particularly pleased” with the significant progress it had made in Kenya, with the agreement with the government over a number of key commercial principles set to “greatly assist” the firm in driving the project to FID.

“Our exciting and potentially material drilling campaign in Guyana will get underway later this month with the spud of the first of three wells planned for 2019.”