Tullow Oil plc (TLW) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Tullow Oil January Trading Update. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, the 15th of January, 2020. I would now like to hand the conference over to your speaker today, Nicola Rogers. Please go ahead.

Thank you, everyone, for joining today's call. I'm joined by Dorothy Thompson, our Executive Chair; Les Wood, our CFO; and Mark MacFarlane, our COO. We thought it was important to do a call today, but it will be fairly short of about 30 minutes. And as we've just said, there'll be opportunity for questions at the end. And I'll now hand over to Dorothy.

Good morning, everyone. Thank you again for joining today's call. We thought it's important to speak to the market today, even though today's statement is short and fully in line with expectations. The Board and I are fully aware of the need to rebuild trust and update you on our progress. I'll hand over to Les and Mark shortly. But in summary, today's statement reflects solid 29 (sic) [ 2019 ] financials ahead of results, production so far is in line with expectation in 2020 and our guidance for 2020 remains unchanged. Our recent reserves and resources orders continue to underpin quality of our assets. Our business review is well underway and covering all areas of the business. We have a very good capable team in place to start this review. And along with the Board, we are acting with pace to take appropriate decisive actions. I will provide more details on the review at the end of the call, but Les will first run through the financial details of the statement.

Thanks, Dorothy. I'll probably just run through some of the key numbers. We expect to report 2019 free cash flow of around $350 million. This leaves us with net debt of around $2.8 billion and gearing of around 2x. CapEx in 2019 ended up at around $490 million. This was not in the forecast due to a combination of 4 things. One was deferral of planned quantities, and general reduction in expenditure, release of accruals and impact of TRP insurance recoveries in Ghana, which has not been expected. And moving to the P&L, we do expect to report revenue of around $1.7 billion and a gross profit of around $0.7 billion. Gross outline in the statement that we expect to report significant impairments and exploration write-offs. Impairments of around $700 million are driven primarily by 2 things: the reduction in TEN 2P reserves, driven by the reduction in Enyenra; but also $10 per barrel reduction in the group's long-term accounting oil price assumption of $65 per barrel, which is much more in line with the current market. We've also written off exploration costs of around $800 million, which are also predominantly due to the reduction in the long-term accounting oil price assumptions impacting the volume of the Kenya and Uganda assets. The remainder of the write-offs include the recent Guyana wells as a result of drilling results with the balance due to the change of lab. So the levels of planned future activity of licensed exits in Kenya Block 12A, Mauritania, Namibia and Jamaica. While these impairments are being driven by the fact as I've outlined, it's important that we believe that the constant announcement there reflects our more prudent approach to the accounting treatment of these assets without reflecting a shift in our view of the underlying quality of these assets. Whilst we've chosen not to keep the exposure about the recent Guyana wells in our boots, we continue to believe it could be a very important area for us. Mark will outline in more detail the steps for Guyana just shortly. The impact of these important impairments will obviously have an impact on our reporting, also that of operating and post-tax profits. And we will report on these at our full year results. Moving ahead to 2020, our guidance remains unchanged of what we laid out in December. Capital expenditure is expected to be around $350 million, with an additional $100 million expected to be spent on decommissioning. We expect to generate underlying free cash flow of at least $150 million from 75,000 barrels a day at $60 dollars per barrel. We also announced this morning that we have made the decision to move our full year results to March, really just matching -- aligns with us with the FTSE 250 E&P peers. It gives us more time to report on the changes required by the business review. And our timetable in previous years has been extremely tight, and I'm certainly pleased to give my finance teams a bit more time to be able to prepare. With that, I'll now hand over to Mark.

Thanks, Les. In 2019, we delivered an average full year production of 86,700 barrels of oil per day. In fact, 2020, I'm very pleased to say that our operations are performing in line with our expectations, and our production guidance for 2020 remains unchanged at between 70,000 and 80,000 barrels of oil per day as our -- the out years at around 70,000 barrels per day. The detail we have added in our statement is a summary of our auditors' year-end 2019 reserves. After reviewing over 95% of our assets, our auditors have confirmed the quality and scale of our reserve and resource base. Our auditors' year-end '19 reserve is 245 million barrels of oil equivalent. And while these auditors' reserves in both Jubilee and our non-operated assets have increased, it has not been sufficient to offset the 31 million barrels of 2019's production and the reserves production in Enyenra. And we'll publish our fully audited reserve and resource details with our results. Also in the portfolio, in Kenya, you may recall that in late November 2019, we had to shut down the early oil pilot scheme due to the significant rain and floods in Kenya. The Kenya highways authority are actively repairing the road network, and trucking will resume once the roads are repaired to a safe condition for our trucks to drive in. The various work things for project oil Kenya continue, and we'll be meeting with the government in the next few weeks to discuss that progress on the various items that fall under their control. In Uganda, multiple conversations continue between the government and our joint venture partners, and we remain committed to farming down our stake. In exploration, we recently announced the Carapa well results, the third well in our Guyana campaign. As a reminder, our preliminary review -- or view, I should say, is that Carapa encountered around 4 meters of net pay in the upper Cretaceous. Based on the rig side measurements, we have a 27-degree API oil with less than 1% sulfur, and those oil samples are on their way to the laboratory for detailed analysis. However, the result was below our expectations. But importantly, the well proved 2 things for us. Firstly, the extension of the Stabroek Block's prolific Cretaceous play into our acreage. And secondly, that our predrilled expectation of light oil at Carapa was validated, and that defines further confidence in the petroleum system modeling for the Kanuku block. Our next steps are to integrate these well results with our seismic geological models and our petroleum system models to high grade our Cretaceous portfolio across both the Kanuku and Orinduik blocks. After we completed this, we will then be able to define our future drilling campaign in Guyana. And finally, as you're all likely aware, we'll shortly be drilling our exciting Marina exploration well in Block Z-38 in Peru, prospecting about 350 meters of water in the Tumbes Basin, adjacent to the prolific onshore Talara basin, and the well is targeting Tertiary age turbidites with a prospect size of around about 160 million barrels of oil. The rig has arrived in country and Peru. Our operator should start drilling this 40- to 50-day well by the end of the month. So a steady start to the year. I look forward to discussing this all with you at our results.

Thank you, Mark. I'll finish by talking a little more the progress of our business review. As I've said in today's statement, Tullow's senior team has been working hard since our announcement in December. While it's still at an early stage, I've been really impressed since working more closely with the interim executive team and other members of staff at Tullow at their level of confidence and dedication. I am confident that we have the right team in place, and it is clear that they have a firm grip on the business and are committed to taking sensible, but decisive action. Our most recent work is focused on simplifying the structure of the organization, and these changes will be implemented in the coming months. This is a very -- this is very sensitive as it involves our people. So understandably, there is limited detail I can provide at this stage. The next phase of the review will focus on the plans for each of the group's major assets, looking at further elements of our cost base, our investment plans and ultimately, our strategy, including monetization options across the portfolio, consistently asking ourselves how best to operate within our means and deliver value to our shareholders. Overall, I believe we will be able to make meaningful improvements to operational performance in order to deliver sustainable free cash flow and reduce our debt. Looking further ahead, the recruitment of the new Chief Executive Officer is well underway with the assistance of a very good executive search firm. We have made a very start good start, too, and I look forward to providing an update on the business review in March. Thank you again for joining us today, and we will now move on to questions and answers.

[Operator Instructions] Your first question comes from the line of Michael Alsford from Citi.

I just got a couple around Ghana, if I could, please. Could you just confirm what are the current production levels at both Jubilee and TEN, whether you assume major sort of downtime or maintenance activity in 2020? And then just a little bit more color on what the money is being spent on, the $140 million of CapEx, just to understand here what can that be in terms of impact on production into 2021.

No problem. It's Mark here. Certainly, the -- if I -- if you'll excuse me, let me turn and talk in gross terms. So the gross oil production from Jubilee at the moment is in the order of about 84,000 barrels of oil per day and about 52,000, 53,000 barrels of oil per day from the TEN field. We -- as a part of our 2020 production forecast, we do have planned shutdown activities that are occurring in January. One is on the gas system, which will be a 9-day slowdown and there'll also be a 4-day total oil outage, oil to oil, as we undertake some maintenance taking advantage of the fact that we'll be shutting the gas system down. Important to state, all of that is explicitly included in our production guidance for 2020. In terms of where the CapEx is being spent, we are drilling wells in Jubilee and TEN, water injectors in Jubilee. We'll be drilling oil producer in the well location called [ Ntomme-9 ], which is currently underway. And we also have CapEx invested for long lead items for Jubilee to bring additional reserve onto production in the Jubilee field over the course of 2021, '22 and 2023.

Thanks, Mike. And then just a follow-up, just related on -- to Les on the -- given the large impairment. I'm just wondering to confirm that none of your debt facilities have a debt-to-equity covenant, please?

No, that's correct.

Your next question comes from the line of Sasikanth Chilukuru from Morgan Stanley.

I had 2 questions, please. One on the 2019 guidance itself. There's been a reduction in CapEx, but not a change in free cash flow. So I was just wondering if there's anything offsetting this. On the second one, essentially, for the -- on the details of the -- that you have provided on the 2020 CapEx, it seems like Uganda is at $50 million. Essentially, it kind of implies there's not much activity going in or whether you'll be farming down -- bombing down if there is more activity coming in. So I was just wondering if there was any pickup in activity in that context, would that mean an increase in the CapEx levels there? And also, the -- taking a look at the Kenyan spend, are you still confident for having an FID by the end of this year or -- I just wanted an update on that.

Yes. On your -- the first part of your question, I mean I think the -- it's safe to say, I meant it's quite straightforward really, so we did see some reductions at year-end items that will have moved into 2020, but we always have, as you expect, working capital movements at the year-end. And when you kind of net outfall our positions, we ended up, give or take, around about the same position. So it's as simple as that.

In terms of Uganda, we do have CapEx allocated to Uganda in 2020. And we also confirmed that we will be reducing our equity before we sanction the project, and that's probably where we should leave Uganda. In terms of Kenya and your question on FID, we are still targeting FID around the end of the year. It certainly will be a challenging task to achieve that, and it might infer with the floods, for example, like [indiscernible] activities in the field. It's quite challenging. So that's our target, but it will be challenging.

Your next question comes from the line of Duncan Milligan from Goldman Sachs.

I wonder if I could just ask about the movements of 2P reserves at Jubilee. And given the reduction in production at the scene, how you and how your [ reservoir-sters ] are thinking about that increase? And then also just a little bit of color on the 2C increase that we're seeing and where that comes from and how we should think about that in the medium term.

Sure. So you might remember my comments on Jubilee last year that even with the high water cut that we forecasted, the reserves are unchanged. Our auditors have reviewed all of that data and to come to the same conclusion that our reserves in Jubilee are robust. And we in fact did see a small increase in Jubilee. In terms of our contingent resources, the main changes that drive the increase to our continued resources are there's volumes of oil in Jubilee that are outside of our licensed period that contributes to some of the increase. Some of the reserve reduction that I mentioned last year that the auditors have confirmed, they have been transferred into contingent resource. There is an opportunity in Ntomme field, there's a new opportunity that we will develop, which could increase reserves in the future. That has been added to our contingent resource base. And then there's been some increases in our contingent resources, obviously, with the Guyana volumes that we discovered last year, coupled with some small changes in increases in Equatorial Guinea and Gabon.

And just on that Jubilee point because I think there's been a lot of concerns from investors about the -- that kind of Jubilee reserve figure. What is it that's driving it? Is it an extension to the field relative to expectations? Is it thicker oil columns or something like that? Do you have any color just in terms of why that's increased so much relative to the increased water that was announced back in December?

It fundamentally gets down to the size of the field and the geometry that allows us to change the placement of future wells to allow us to continue to deliver the reserve that we currently forecast. To give you some color, the year-end '18 reserve in Jubilee was about 123 million barrels. Our year-end '19 reserves is about 120.5 million barrels despite the fact we had 11 million barrels of production from Jubilee. So that's why we believe that -- and the auditors also believed that our reserves in Jubilee are robust and unchanged.

Your next question comes from the line of James Thompson from JPMorgan.

I just had one, please. I just wanted to get an update really on where you are with Uganda in terms of the farm-down negotiations, potential of bringing them back on the table or just currently how things stands there because, clearly, that's pretty important cashless balance sheet for the near term. So just an update on Uganda would be very helpful.

So I'm sorry, I don't think we can say anything more than we have said in the announcement and what Mark just said and confirmed. We think the shutdown is -- will much happen before we're willing to support a final investment decision.

Next question comes from the line of Colin Smith from Panmure Gordon.

Two for me. First of all, in the review, I just wondered if -- that you're undertaking, I wondered if you could provide a bit more color about the operational and longer-term issues that might allow you to improve the guidance you gave for 2021 to 2023. And secondly, on the exploration program, I just wondered if you could provide a little bit more color on the number of wells you expect to drill this year. At the moment, I think you've got firm wells in Peru, which you've discussed, but also one in Suriname. And I wondered if you're -- in particular, if you were expecting to drill in Guyana this year or whether that is likely to be into 2021.

No problem. In terms of the operational improvement, one of the key areas you might remember me talking about last year was the need to ensure we injected sufficient water into Jubilee. So there is a dedicated task force looking at how we improve the reliability of our sea water injection systems. There's a dedicated piece of work that should support future production growth or delivery. Similarly, with the overall uptime of the FPSO, some of the shutdown work I just mentioned is to increase the ability to handle gas on the FPSO as well as improve the reliability of that gas production system. So there's a couple of specific examples and there are many others to what we're doing to improve the reliability of the overall FPSO. In terms of exploration, you are correct. We do have the Peru well that I mentioned in Block Z-38. There was a potential that the Suriname well will be late this year or early next year, that is yet to be optimized. And in terms of further Guyana drilling this year, we really do need to integrate that real-world data that we've got from our 3 wells into our various models. So it will be unlikely that we would be drilling any Guyana wells this year, but we need to let that technical work run its course before we decide what will be our next well and when would be that next well.

Your next question comes from the line of Al Stanton from RBC.

Can I ask a couple of questions with respect to the write-downs? I think the $75 to $65 oil price reduction was anticipated. But if it hadn't happen, would there still have been write-downs? I suppose the questions are: are the production profiles in Ghana now lower for longer and resulting as you perhaps have indicated some reserves to ferment into resources? And is that lower valuation? In a related point, is Uganda still an asset held for sale? And if that to come back, is there some sort of write-down associated with that? And then finally, if I may, the $75 million exploration spend, is that assuming current equity stakes? Or is there some farm-downs anticipated perhaps in Suriname or anywhere else?

Yes. So I'll talk to the first couple of questions. So the impairment is really made up of what is primarily tenants, made up of 2 things. One is the price that you pointed to. But actually, the most substantial part is actually driven by the reserves adjustment in Enyenra. If you then look at the exploration write-offs, there would have been exploration write-offs absent the move that we've made on oil price. Those, of course, would be across the wells that we've drilled in Guyana, but there will be a flavor of things like Jamaica, Namibia and a lot of teaming with the other examples, which would have written off in any event, absent the move that we've made on the oil price. So there'll be a bit of both in practice.

And can I just comment on your comment about Jubilee contingent resource? My comment about the 37 million barrels-or-so oil that we've added to Jubilee contingent resource out of license is not to do with us reducing reserves outside the license period. It is purely because we had not previously recognized those volumes as contingent resources. In terms of the Suriname well, certainly that's an option that's on the table as to whether we farm down that particular well and how much we farm down that particular well. And that's work that we will progress over the course of 2020.

Right. Okay. And I appreciate -- it's just semantics. But is Uganda still an asset held for sale? Or does it come back to the portfolio?

Sorry, I was looking at my list of -- any questions that we have...

Sorry...

Yes. Moving on, we will move it from that category. And as in line with the impacts on Kenya as a result of adjusting the long-term price, we do see an impact in Uganda as a result on adjusting the long-term accounting price.

We will now take our final question. Your final question comes from the line of James Hosie from Barclays.

I guess just wondering if you can give us a breakdown by geography of the contingent resource number you've published today. And then also just to provide some sort of update on when you think the time frame for the new CEO being appointed?

In terms of contingent resource, look, I'll be very happy to provide that at the full year results, all that detailed breakdown.

In terms of the new CEO, all I can say is the search is well and truly underway. We'll be looking at both internal and external candidates, but it's too early to give a firm timetable on that.

Thank you, everyone, for joining the call. We'll now bring it to a close. If you do have any further follow-up questions, do please get in touch with Investor Relations via [email protected] or contact myself, Matt Evans or Chris Perry directly. Thank you very much.

Thank you.

Thank you.

Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect. Speakers, please standby.