Tullow Oil plc (TLW) Earnings Call Transcript & Summary

Good morning, everyone, and literally a warm welcome to you guys. I think those of you in London, hope you are enjoying a nice summer day. It was interesting, I was -- not to get over overly philosophical, but it's been just about over 2 years since I joined Tullow. And I thought it would be good to just take a step back and really just share some key reflections with you. And there are probably 3 big things I wanted to highlight. So the first is when I came to Tullow and probably one of my earlier observations was really around the quality of the resource space that underpins our assets. And that really gave us the confidence 2 years ago to put together a business plan, which was very clear in terms of value creation and deleveraging. I think as we've looked at the resource more, we are even more encouraged and more excited. And in particular, what we've done in the trading statement is we've taken the opportunity to highlight a couple of sort of interesting projects that are coming to the fore as we understand the resource better. And let me just take a minute, I'm going to highlight these. So first is on TEN, and you know that we've been working on really understanding TEN well. And if you remember, going back in time, there's been disappointments in Enyenra. And frankly, the only real sort of consistent drilling we had in TEN was back in 2016, right? Now I think in the last couple of years, we've invested a lot of time. We have new 4D seismic data. We've created, in essence, kind of a TEN enhancement project, and that's coming to a fruition. That's working together with our JV partners into a stage where we really want to take the TEN enhancement project itself as a kind of FID next year. And I think the implications of that would be to really focus on the undeveloped part of TEN and look to drive production beyond even the 50,000 barrels a day that we have outlined back in the results, and really look to see how we can start to utilize the lot of spare capacity in TEN. So I think it's a really interesting story in TEN. I think the other one, which is, again, from a resource point of view, is we focused [indiscernible] on oil. But frankly, both Jubilee and TEN have substantial gas resources, about 2 Tcf of gas is what we've identified so far. And as you all know, I mean, with the Russia-Ukraine situation, we're seeing a massive diversion of LNG flows, in particular, into Europe. And I think that across Africa is creating a concern around energy security, it's creating a concern around affordability. And we believe developing the kind of expeditious development of these indigenous resources in Ghana, I think, would be a tremendous driver of value in energy security for their nation. So we're working very hard and fast to create, again, an FID-ready project for gas resource development in Ghana. So that's just 2 kind of things and, of course, you're familiar with the work we're doing in Kenya. So I think to round off that point, I think what I'm saying is that 2 years on, the conviction around the resource base, the tangible opportunities that we see around the resource base is even stronger today, so that's kind of one point. I think the second reflection is really around the delivery of the plan, right? And we've talked about operating efficiencies. And again, that continues, that story. We've got 95% uptime in Jubilee. We're investing heavily in reliability, so we had a construction support vessels sort of alongside through from January to May with additional 100 people really investing in asset integrity and reliability in Jubilee. And then we had the shutdown, which was again successfully done, that was back in May. So continue to invest in that so we can sustain the [ up ]. And as of the 1st of July, very pleased, we see a lot more [indiscernible] on the [ TEN ] FPSO. So that's really a step change again in us taking more control of the operations and maintenance in Jubilee, and that's again part of our journey to build a very scalable operating business in Africa. So the operational story, I think you're familiar with. But I wanted to highlight for you also the drilling performance because in some places kind of that epitomizes everything else that we're doing from an operational point of view. So we started out in April of last year, the campaign. I think to date, we have drilled and completed 7 new wells. In addition to that, we have completed another 2 wells and we have drilled 3 wells, the top-hole section. So there, we're way ahead of where kind of what people say like on a P10 sort of performance that we're way ahead of our schedule from a drilling point of view. And for the rest of the year, we're looking to drill and complete 3 additional wells, and these are focused on TEN. So by the end of the year, we would -- should have drilled and completed 10 new wells, completed another 2, which is 12, and drill top-hole sections of another 3, so quite compelling kind of sort of performance. But the point is, underlying, it's the same theme. It's a focus on costs, on operating discipline, making sure performance and continuous improvement, so that's getting embedded in the business. And the key thing is that we're building what I call is a scalable operating business, and that's quite a unique thing. We're building a scalable operating business focused on Africa, right? So you take the first 2 things, which is the big resource base, tangible projects, a scalable operating platform, and you throw in the Capricorn merger and what you've then done is you've created a step change in growth and value creation, right? And the very kind of obvious thing around the Capricorn thing is the value creation potential in that the new [ co ] offers is materially in excess of what individually any of the companies can do. And that's really around 3 things. So one is we'll have a new business plan for the new company, right? And 3 other things that I talked about, which are material projects of gas in Ghana, TEN enhancement, Kenya, these are all integral components of the new business plan. Now what's interesting also is that some people have kind of said, well, isn't the merger all about debt repayment? But no, it's actually about the reallocation of capital away from debt service into higher return opportunities. So you go from debt service into 50-plus percent IRRs, that is how you create a lot of add, right? So that's a very important pillar, that reallocation of capital into higher return opportunities is a really competitive pillar of the whole combination. And then the third aspect is really the synergies, right, and that's $50 million. It's pretax where we don't pay any tax in the U.K. as such, so it's effectively post tax. And you capitalize that, that's $0.5 billion roughly of value across 2 companies, which is individually kind of $900 million plus market cap, so very significant. So really, kind of -- I just thought I'd share kind of these 3 reflections, which is, feels kind of like a natural journey where you say, look, you've got the resource base and you've understood it well and you're seeing the evidence of that. The business plan is delivering, so you're seeing tangible changes in operating performance. You're seeing a delivery of drilling performance. You're seeing, particularly as a lot of the drilling has happened in Jubilee, you're seeing a step change in production from 70-odd thousand barrels a day at the beginning of '21 to over 90,000 barrels per each today. And you're seeing the deleveraging, so we'll continue to be very comfortable that net debt at year-end is going to be about $1.9 billion. So the business plan itself is delivering. And that platform, then you say, I couple that with Capricorn and I get to find a step change in growth and value creation. So it really -- I thought it was a good time to maybe just use the opportunity for the trading statement to really share that reflection with you all. I'm going to stop there now, and I think really it's just good to take questions and have a conversation.

Thanks, Rahul. We have a question from Alex Smith at Investec. Alex, if you can go ahead, please.

Thanks for the call today. I guess sort of start off in regard to the Capricorn merger. In the announcement, you mentioned the prospectus and circular will be published by Q4, decision by year-end. I was just wondering, is there room for negotiation on the initial terms? Or maybe an easy way to put it, can the terms be adjusted if you choose to? Second, also on the second rig in Ghana, just looking at when a decision could be made for that? Or is it a case of you wait for the decision on the Capricorn merger and that as well?

Alex, I think look, on the first question, really, I spent the last maybe 2 weeks, I was travelling a lot in kind of host nations and stuff after the merger announcement, but then the last 2 weeks, so I've had a chance to speak to investors. And I think as we've explained to people, the rationale, right, it becomes -- it's -- I think it becomes quite obvious to people that the value creation is kind of super compelling, right? The deal is the deal, but I think what we are, to you guys and to the investor group, is really a very clear articulation of what the value creation potential, right? And it's not complicated. So as we've done that, I think it resonates well with people. And what we are going to do, and that's why part of the reason why we wanted to take the time even with the [indiscernible] is to reiterate that. I think what we are going to do, Alex, is that we will do a Capital Markets Day in the fall, so ahead of publishing the prospectus, and lay out the combined business plan. And I think once people see that, then a lot of this other noise around kind of deal terms and all becomes irrelevant because the bigger picture here is that we have 2 sets of shareholders, will come into a new company. Our conviction is it's going to be materially more valuable than the individual [indiscernible] the company people want to own. So I think that's kind of the focus, so I think that's what we're trying to do. I think with respect to the rig, there are probably three things I would say to you, which is, one is that we have surprised ourselves a little bit with the pace at which we're drilling. So we're way ahead. Think -- we were probably somebody else with the other day. And I think we're probably where we were expecting to be by year-end, so we're ahead of the program. Number two is with the 2 new kind of projects, if you will, if I can call those, the gas development and TEN enhancement, the inventory of opportunity set that we have is substantially increased. The third, I think, is, and I've said this before, that our original plan on a stand-alone basis as Tullow was, this is bit typical announcement, work to have a secondary rig come in and operate for a [ year ]. I think we're taking a step back and saying, is that the right answer because you're, a, drilling faster, you have a wider opportunity. Should you be contracting a rig for multiple periods and how do you synchronize that? So I think it's fair to say that we are thinking about the timing of the second rig given the opportunity set, given the pace and given the potential to maybe extend, go in for a multiyear contract. So that's -- just bear with us, Alex, as we work through that. But there's very much a commitment to -- because the opportunity is such that I think we will need a second rig.

Our next question is from Chris Wheaton at Stifel.

Can I ask about the TEN enhancement and the gas potential? You talked about the 2 Tcf. Can I ask how much of an overlap there is between those 2 areas, getting the TEN production up beyond that 50,000 a day that was your medium-term target for the sort of mid-2020s. How much of that additional production is likely to be gas given -- and is [indiscernible] is part of that 2 Tcf, and how much of that 2 Tcf is actually separate from the TEN enhancement? Because you said there is an inventory opportunity here that you've got to get after, I just want to make sure I'm thinking about the inventory opportunity in the right bucket.

Yes. No, that's good, Chris. So I think there are 2 separate projects, right? So we've positioned -- there's a bit of an overlap, but the TEN enhancement, so the origin of the kind of -- the genesis of TEN enhancement is you start with the subsurface, right? So we had the 4D seismic, we've done a lot of work on the subsurface jointly with our partners, and that's given us a better understanding of both the oil and the gas potential. But in our minds, the TEN enhancement is essentially an oil project, and we want to take that separately as a kind of with a separate POD and separate FID. The gas is a separate project, but the overlap, if you will, obviously, for them is from a subsurface point of view. But they'll be separate, but the inventories will be additive. So when I talk about the upside beyond the kind of 50,000 barrels a day, that's oil, and then the gas piece is going to be separate. Does that answer your question?

No, that's great.

We'll go to Mark Wilson at Jefferies, please.

I'd like to ask about the FPSO option maintenance contracts. You've now taken control of that from MODEC. And the contract is now with Petrofac, as I understand it. Now uptime on the FPSO -- the Jubilee FPSO has been actually quite good for the last few years, so one imagines that improvements in uptime isn't necessarily something you're looking at. So could you remind us of what you're looking at for savings there? And are there additional outages planned for the rest of the year? That being the first question. And then the second point on the 2 Tcf of gas, could you remind us on what has been produced in terms of the gas so far and where you stand with the gas offtake agreement and execute a new contract on that?

So I think in terms of the kind of O&M, if you look back our journey over the last couple of years, it's been that we've taken more and more control around the decision-making and on Jubilee and then -- in that sense, and you've seen the kind of impact of that in terms of operating performance. And so the logical sort of case of that was to say, look, you should really then be driving it. So I think -- I mean -- and when I say driving it, what that means is that the OIMs, the installation managers are all Tullow people, the maintenance people are all Tullow people, the planning of the work is done by Tullow people. And then a lot of that is executed through, as you rightly said, through kind of people who were working for Petrofac. But in effect, the intellectual capital and the decision-making in the strategy is driven by Tullow. And I think there were 3 kind of big drivers for us, Mark, in terms of this. So one is to sustain the reliability, okay? I mean, that's very, very critical. And the way we want to do that is to make sure that if something is broken simplistically, if something is broken and it's important, we decide that we want to fix it. We don't have to then argue with somebody else to say, well, is this the right priority? Is it part of the contract? So I do believe that the transition will help us sustain the reliability. As you rightly said, it's not like, I mean, you can't go above kind of the high 90s anyway in uptime. I think the other big change we're going to see is in costs, because there was a markup anyway is on the margin. But the second one is that when we're awarding a contract, it's our money, so you see more pain and more skin in the game. So I think you'll start to see the impact of that. And what I'm hoping, Mark, is that at the Capital Markets Day we do in the fall, we can start to articulate what those numbers might look like. So as you can start to see '23, '24, what is the OpEx impact? So that's the second aspect. And the third aspect is, I would say, more kind of a strategic one, which is that we believe there is tremendous value in having an operating platform where you have demonstrated credible performance, and that's critical as you go to host covenants, as you go to [ common ] parts to look at adding more assets and things like that. And my submission, Mark, would be that you can't buy that. I mean, that doesn't exist. You have to -- the only way you can do that is to create it, and I think that's candidly what we've done. So there's a tremendous value in that. So those are the kind of 3 things from a kind of O&M perspective. So on gas, if you look back, I mean, the focus historically has been on associated gas from Jubilee and it was kind of an impediment from an oil production point of view, so how do you get it away? We were -- I mean, we were not as reliable in terms of consistency of supply, I think, for the last couple of years. We've been very reliable, so we've been consistently been able to supply 120 million cfs per day of gas the GNGC plant. So there's that part of the story. Now that, roughly, what we have supplied so far are -- you get this approximately, right, is by the end of the year, if I look at all of the gas that we have supplied, it's about -- it's about 200 Bcfs, okay? As we look forward, we've got about 2 Tcf of which half a Tcf is associated and the other one half is non-associated. And the idea is now to look at all of that holistically and say, how can we expedite the development of this gas, which would require upstream investment, which would require some midstream investment? Because today, the midstream processing capacity nameplate is about 150 million standard cubic feet of gas, so you do need some additional capacity. And what is the value proposition of all of that for the nation of Ghana? And what is it that -- what's the right price that encourages us to have the investment? So essentially, what we're doing is we're creating what I call an FID-ready project which has a clear value proposition for the nation, but also is compelling enough that enables us to make the investments needed to deliver that.

The next question is from Ashley Kelty at Panmure Gordon.

I was just wondering if you could remind us how much of the Kenya interest you were looking to farm down? And what sort of time frame you think you might be able to secure a partner?

Okay. So Ashley, I think as you guys know, I mean, we've been in the process of bringing in a strategic partner. I can't remember if I said it in one of the calls or not, but in essence, kind of the -- we kind of said either we get it done way before the elections, which is in August, or it's going to be post the election. So timing-wise, I think we're sort of in that period right now. Although a lot of engagement from the government of Kenya, but really, with the parliament not in session and stuff, I think it's -- it certainly kind of affects timing. I think, Ashley, we haven't disclosed what percentage we're looking to reduce. So I think I'm afraid I don't think I can share that. That will only come once we're ready to announce the deal.

There are no more questions at this stage, so I think we will wrap it up. Now I hand over back to Rahul to close proceedings.

Okay. Well, look, again, thank you, everybody, for your time. And it was a slightly unusual thing to do, which is you can say a trading statement. But I think what we felt is post the Capricorn announcement, we've had a chance to engage with a lot of investors. And I think the -- I feel strongly that I think the opportunity to articulate what the value creation opportunity is, our vision for the combined identity, I think was -- so we wanted to take opportunity to do that. But like I said, we will set out in the fall -- ahead of publishing the prospectus and circular, we would set out a Capital Markets Day with the business plan and everything, so you'll can get a better sense of what the company is. But hopefully, you get an appreciation of the building blocks and the directional trial. So thank you again for your time, and I hope you all enjoy the rest of the warm weather and the summer, so take care.