Tullow Oil plc (TLW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Tullow Oil plc AGM. [Operator Instructions] I would now like to hand the conference over to your speaker today, Dorothy Thompson. Please go ahead.

Good afternoon, ladies and gentlemen. It is noon. A quorum is present, and so I'd like to welcome you all to the 2020 Annual General Meeting of Tullow Oil plc. Firstly, I would like to introduce myself. I am Dorothy Thompson, and I'm Executive Chair of Tullow Oil plc. With me on the call today are Les Wood, Chief Financial Officer and the Executive Director of the company; Jeremy Wilson, Senior Independent Nonexecutive Director and Chair of the Remuneration Committee; Mike Daly, Nonexecutive Director and Chair of the Environment, Health and Safety Committee; Steve Lucas, Nonexecutive Director and outgoing Chair of the Audit Committee, who retires at the conclusion of today's meeting; our 3 new nonexecutive directors, Sheila Khama; Genevieve Sangudi; and Martin Greenslade, our incoming Chair of the Audit Committee. Adam Holland, our Company Secretary; and representatives of our outgoing auditors, Deloitte; and our incoming auditors, Ernst & Young; and our solicitors, Dickson Minto, are also on the call. Thank you very much indeed for joining us today at Tullow Oil's AGM. This is our first virtual AGM and clearly reflects the times in which we find ourselves. Let me start by wishing you well and my sincere hope that you're keeping safe. We will do our utmost to make this worthwhile experience for our shareholders. Despite the alternative logistics of how we are hosting this meeting, I'm very glad to see that so many shareholders have been able to join us on the call, and I look forward to updating you on our progress over the past year and answering any questions you may have. The format for today's meeting is that I will give an introduction and update you on our progress. This will be followed by a question-and-answer session with the Board. We will then move to the formal part of the meeting as we vote on the various motions that we have put forward. As you know, due to the restrictions imposed on us by the current pandemic, we have encouraged all shareholders to vote by proxy. All proxy votes received by post or online of the deadline will be included in the results announced before the end of today. Even before the current pandemic, this has been an extraordinary year for your company. As I said in our annual report, the Board and I were disappointed by the operational and financial performance and the leadership of your company in 2019. Tullow performed poorly and particularly in Ghana, where operational issues led to significant downgrades in production forecast throughout the year. This led to a review of the Ghana business unit, which required a further substantial downgrade of 2020 production at the year-end of the year. Elsewhere across the business in 2019, we did make progress in West Africa, where the nonoperated portfolio continues to deliver strong production. In Kenya, we made progress towards our final investment decision, and despite the obvious challenges that the oil price presents, we continue to see substantial interest in the potential sale of part of this asset. We did not make the progress we had hoped for in our exploration business last year, however, we made 3 oil discoveries in Guyana and identified that there is a real potential in the Cretaceous. I am pleased that we retained interest in some of the most sought-after exploration licenses in the world in this region, which includes both Guyana and Suriname. Thirdly, despite some good progress in 2019, this was outweighed by the material setbacks. I've already mentioned regarding our production. As a result, Paul McDade, the former CEO; and Angus McCoss, the former Exploration Director, resigned by mutual agreement in December. Paul and Angus both worked loyally for the group for many years, and their achievements at Tullow, especially in Uganda, Ghana and Kenya, should not be overshadowed by recent events. I thank them, again, for all they did for Tullow throughout their careers. Following the departure of Paul and Angus, I stepped up as Executive Chair, and the Board and the executive took urgent steps to stabilize the business, which involved reducing our capital expenditure forecast for 2020 and reshaping and resizing the organization to be more efficient and effective. The priorities of the Board are clear. We must generate free cash flow to reduce our net debt, which remains too high, and it would be too high even if oil prices were substantially higher than they are today. We will create this cash flow through improving operational performance and reducing our cash flow breakeven but most -- also by selling assets to raise over $1 billion of proceeds, and we have made a good start today with our announcement with regards to Uganda, which I will speak more about later. Clearly, Tullow will be a different company once this process has completed, but it will be on a sound financial and operational footing and want to once again be able to focus on taking forward a strong Africa-focused exploration and production business. I will be handing over this reshaped Tullow to our new CEO, Rahul Dhir, in July 2020, as announced earlier this week. Rahul is an exceptional leader for Tullow. He brings extensive leadership experience in oil and gas. He is currently COO -- CEO of Delonex Energy, an Africa-focused oil and gas company that he founded in 2013. Under his leadership, Delonex has delivered low-cost drilling and seismic operations, along with leading social and environmental performance in sub-Sahara and Africa. Prior to establishing Delonex, Rahul served as Managing Director and CEO of Cairn India from its IPO in 2006 and 2012. During Rahul's tenure, Cairn India delivered operated production of over 200,000 barrels of oil per day with operating costs of less than GBP 5 (sic) [ $5 ] per barrel. Rahul will begin working at Tullow on the 1st of July, and after a short period of handover, I will move back to being Nonexecutive Chair again. While I can't speak for Rahul during the recruitment phases, it was clear what attracted him to Tullow. Like me, he was drawn to the group by its quality assets and strong potential but also, importantly, its culture and its strongly stated desire to make a genuine difference in the countries in which it works through its commitment to shared prosperity. This commitment to a good and responsible culture guides all aspects of our work. It is reflected in how Tullow approaches its health, safety and environmental responsibility, its zero tolerance of bribery and corruption and our strong commitments to inclusion and diversity across the business. Despite the tumultuous year Tullow had in 2019 and the times in which we now live, that commitment remains. I'm also very pleased that we have made real progress on our portfolio management by the time Rahul joined Tullow. The announcement we made this morning around Uganda is an excellent start to our divestment program and will allow us to realize value from East Africa at a time when we must drive down our debt and there's considerable uncertainty in the oil markets. We'll be very sorry to leave Uganda after so many years, but we are all proud of the role that we have played in Uganda's economic and social development of almost 20 years. I'm very pleased, too, that we have a system of contingent payments in place, should the oil price recover, that will allow us to retain access to value from the development as well as a small stake in Uganda. While the headline consideration is lower on face value than the previous deal announced at the beginning of 2017, this deal provides cash up-front and allows us to access value from East Africa now. While we are focused on the immediate challenges facing Tullow, we know that we must also consider the impact of climate change. As an African-focused company, emerging oil and gas-producing nations are confronted with complex trade-offs between the need to maximize the value of their natural human and financial resources whilst building the foundations for a lower-carbon future. We continue to support our host governments as they seek to use oil revenues to promote sustainable and inclusive economic development, and we will align with the actions that they take to mitigate climate change. But we are also very conscious of the extent to which climate change has risen up the agendas of investors, our employees and the public, which is why during 2019, as you will have read in the annual report, we have assessed climate change as a principal risk for Tullow and have formalized our support for the goals of the Paris agreement by including in our 2020 scorecard, a KPI to define an energy transition strategy for Tullow to achieve net 0 emissions. This is taking into account scope 1 and scope 2. Although we have not set a time frame for this commitment, we will report on the scope and time frame of the delivery plan for our net 0 commitment at the end of 2020. We also increased our transparency on reporting of climate change risks by aligning with the recommendations of the Task Force on Climate-related Financial Disclosures. Clearly, we still have a lot of work to do here, but the Board and I are determined that the company makes solid progress on this agenda, which will be vital to Tullow's long-term success. And now to your Board. We made some important additions to the Board in 2019 with the appointment of Sheila Khama and Genevieve Sangudi in April and Martin Greenslade in November. They have already contributed a great deal and each have specific areas of expertise, which we can use, given their diverse business backgrounds. I look forward to working closely with them in coming years. We also say farewell to Steve Lucas after 8 years on the Board. We thank him for all his hard work, his valuable insights and guidance and particularly his strong chairmanship of our Audit Committee. We wish him well for the future. Clearly, this is a difficult time for oil and gas and for the global economy. It's difficult to know what the landscape will look like once the coronavirus pandemic has passed. I'm pleased to report that Tullow staff are working well and coping with the pandemic. In particular, I would like to stress the extraordinary resilience of our colleagues in Ghana who have adjusted our production operations and worked tirelessly to get our people into the right place at the right time whilst making sure they are fit and well. The improved performance that we have delivered since the start of the year is reflected in our AGM trading statement today and is a tribute to the work that the entire Tullow team has undertaken in recent months. This work has involved a substantial business review with 3 main objectives: first, to stabilize Tullow; second, to establish transparency, accountability and rigor in our processes, and this includes forecasting; and third, to identify how we create a robust and sustainable and attractive business going forward, which builds on the strengths of Tullow. The organizational review has created a more agile, more focused and more streamlined, centralized organization. This has meant the departure of a number of employees who have served Tullow loyally for many years as well as the closure of our offices in Dublin and Cape Town. Overall headcount has been reduced from around 950 to closer to 600, with savings over the next 3 years of over $200 million. We have also changed the way we run our assets. Mark MacFarlane, who's appointed as the Chief Operating Officer in December, has oversight and full responsibility for all operations across the group. We have a dedicated and experienced Ghana asset management who reports to Mark, and we have centralized our subsurface expertise in London, aligning all our assets, both operated and nonoperated to benefit from shared lessons and experience. We've also completed a major portfolio review. We have evaluated each asset. We have assessed the options and monetization. We have ranked those options, and we have developed a plan to deliver the monetization to deliver, in turn, reduced net debt and gearing, in line with a more conservative capital structure strategy. The Board has concluded that we must raise in excess of $1 billion from portfolio management, and because of the good quality of Tullow's assets, I'm confident that this target is achievable, especially following today's announcement in Uganda. It is the quality of our assets that underpins our balance sheet. Les Wood and his team have been able to successfully redetermine our reverse -- the reserves-based lending facility with our lending banks, even at the height of the coronavirus pandemic, because of the quality and scale of the reserves associated with our producing assets in Ghana and the nonoperated portfolio, which remain firmly in place. These are low-cost barrels of oil, and combined with our hedging program, we have $700 million of liquidity available. Since December, I have been deeply impressed by my colleagues at Tullow. The quality of their work, their complete commitment to the business and the underlying quality of our assets gives me huge confidence in Tullow's ability to grow the business going forward. Shareholders should be in no doubt that the business continues to have substantial potential and that I am certain that under the new leadership that Tullow will flourish again. That process, in my view, has already begun. Today's AGM statements show the company control of its own future. We are producing exactly in line with our forecast with strong performance from both the world and the facilities at Jubilee and TEN. The West African nonoperated portfolio continues to perform well and has the potential to deliver more. Our hedging program that has 60% of our production hedged at a floor of $57 a barrel will be of material assistance as we navigate the current crisis. Our new reserves and resources auditor, TRACS, have confirmed the long-life potential of producing and development assets. We are also seeing good levels of interest in our exploration portfolio where we intend to execute farm downs that will allow us to exploring some of the world's key industry hotspots at suitable equities and in line with our even more conservative capital program. For all the challenges that we have encountered over the past year, Tullow remains a balanced E&P business with a very substantial potential. We will now take questions on the performance of the business or any other matters that you may wish to raise. Just to remind you, if you do have questions on any individual resolutions, now is the time to ask them. I will now pass over to our company's Secretary, Adam Holland, who will manage the Q&A process.

Good afternoon, everyone. My name is Adam Holland, and I'm the company's Secretary at Tullow. Given the current U.K.'s government's advice regarding the COVID-19 pandemic, Tullow has arranged for our shareholders to join the meeting today by teleconference. And accompanying the instructions to shareholders on how to join this call, you would have also received instructions on how to submit questions in writing via Lumi. Lumi is the platform we are using to host this call. Now is the time to please submit any questions you may have. Our Investor Relations team will be receiving these questions from you, collating them live in real time and sending them to myself; Dorothy Thompson, the Executive Chair; and Les Wood, the CFO. We are sitting at the location of the meeting in London. I will read out the questions for all shareholders to hear, and Dorothy, as Chair of the meeting, will then direct answers. As Dorothy stated earlier, all of the other directors are also on the call and available to answer questions. In addition to the live Lumi facility we're using, in the weeks leading up to this AGM, we provided an e-mail address on our website for shareholders to submit questions to be answered at the AGM, and so we will also read out those. If your exact question is not read out by me, it will be because your question asks for the same information as another question that I have read out. If we receive a multitude of questions today, we will focus on those that are related to the business of today's meeting, but we are, after the meeting, seeking to respond to all questions asked, either directly via e-mail or on our website as appropriate. And with that, I will read out and ask the first question. One of the questions that we have received via e-mail -- on the website, heading up to this meeting is, the annual report and accounts on Page 20 disclosed the group has sufficient liquidity at $30 a barrel, a downside sensitivity for 12 months. Given the oil price is now closer to $20 a barrel. How long will the group remain liquid?

So it's Les Wood here, CFO. At the end of March, our free cash flow breakeven oil price for the rest of the year was around $35 per barrel. Of course, with Brent trading significantly below $35 per barrel throughout April, the breakeven oil price for the year will have increased slightly. However, we do benefit from our hedging program, which provides financial protection, both in 2020 and also in 2021, where 60% and 40% of our production is hedged at $57 per barrel and $53 per barrel, respectively. We're, therefore, confident that even in the absence of any portfolio management proceeds, we will retain sufficient liquidity through to July 2021 when the company convertible bonds mature.

Very good. The second question we have received in the lead-up to the AGM via the website was, the annual report and accounts on Pages 36 and 7 (sic) 37 discuss the viability statement. Specifically, it discloses the Board plans to raise $1 billion to facilitate repayment of 2021 convertible bonds and 2022 corporate bonds. States the Board intends to do this through equity dilutions, farm-outs of exploration licenses and asset sales. The question is whether any progress has been made on these, whether these are viable sources of funds given current oil prices and if there are any other ways the Board is seeking to raise cash.

So as we -- Dorothy Thompson here. As we laid out in our results in March this year, the Board is holding strongly to its strategy of reducing net debt through portfolio actions, and we have received a pleasing level of interest in the assets, and that is what gives us the confidence that these portfolio actions will be able to deliver the necessary proceeds. And I think this is very well illustrated by the deal we have closed today, which will deliver $575 million of cash proceeds. And I would note that there are no taxes due on those cash proceeds. So those will be direct payments to us. And in addition, we should get refund for part of our expenses on the project during this year.

I'm just getting submissions through -- via the platform, which says that currently no questions online have been submitted. So I suggest what we do is we just wait, say, for 30 seconds or so or for a couple of minutes for any shareholders to submit their questions. Okay. I can confirm that no questions have been submitted via the platform, but I would just like to take this opportunity to remind shareholders that they can always submit questions to the company via myself using the e-mail address, which is available on our website and also in the annual report. But with that, I will hand back over to the Chair of the meeting, Dorothy Thompson.

Thank you, Adam. We will now move to the formal business of our AGM. The notice of this Annual General Meeting set out on pages 7 and 8 of the AGM circular dated the 27th of March 2020, explains the business to be proposed and voted on today. The notice of the meeting was made available to all shareholders, either electronically or distributed in hard copy with the 2019 annual report and accounts or with the notice of availability, informing you the doctors -- the documents were available on your website -- on our website. I propose the AGM notice is taken as read. Thank you. In accordance with best practice, the directors have once again decided to conduct each vote on the resolution set out in the AGM notice by way of a poll, which provides an opportunity for shareholders who are not present today to vote their shares. The results of each of the polls, which will include all votes cast, including all proxy votes submitted by post or using the online voting facility, will be announced at the London Stock Exchange as soon as they are available, which ought to be no later than 6:00 p.m. this evening. The results will also be posted on the company's website later today, and copies may be obtained at the company's registered office tomorrow. That concludes the formal business to be carried out at this Annual General Meeting, and I, therefore, bring the meeting to a close.

That does conclude our conference for today. Thank you all for participating, and you may now all disconnect.