Tullow Oil plc (TLW) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and I hope you all had a good summer and you had a nice break. It's great to have this opportunity to update you on our business and I'm with Richard Miller, who is our Interim CFO. He's also here. He's going to answer all the difficult questions. So a little bit of a reflection. I mean, 2 years ago, we embarked on a pretty comprehensive turnaround, specifically designed to bring a very private equity type of value-focused mindset to the business. And you'll remember, we implemented a very radical restructuring of our cost base, really looking at both OpEx and G&A. And you'll see the impact of that today on our EBITDAX and the cash flows. We also sold noncore assets. We restructured our debt to provide us the run rate to invest in the -- in our business. And at the same time, we worked hard to improve capital efficiency. And you'll see evidence of that today in the drilling performance. Now what we did do is we focused our CapEx on this incredible resource base that underpins our assets. And what you'll see is that we invest, the production increases. It's a very simple equation, and that's clearly evident in the performance of Jubilee that I'll share later today. And the returns on these assets are phenomenal. So for example, our CapEx from last year, that's already paid off. And all this is, of course, delivering cash flow. So Richard will demonstrate that the business this year will deliver nearly $400 million -- $400 million of underlying free cash flow. And if you account for the acquisition of the initial stake in Ghana, the legacy litigation payments, we'll still get free cash flow to be over $200 million. So when you look at that, we started like, say, 2 years ago, oil price outlook was less. We -- it's higher today. And on the back of improved operating performance, we're clearly ahead of our long-term plans in terms of delivery. And so we started to pay down debt. The year-end guidance for gearing is 1.5x. So that -- you compare that to where we were 2 years ago when we were looking at achieving that in 2025. Now between this year, 2022, and '25, the current business plan will deliver nearly $2 billion in free cash flow at $100 a barrel. That's more than double our current market cap. So they're just going to give you some more color on that. Plus, there is very significant value from contingent payments that we expect to receive in Uganda, in Equatorial Guinea and in Gabon. So that's the kind of core business plan. But as we looked more deeply at our asset base, we've identified multibillion-dollar investment opportunities that deliver cash flows beyond the current business plan. And these will enable us to grow and to add value beyond sort of what the plan is that we're implementing. So with this asset base and the operating platform, we're confident we will deliver very material value. And it's important, I think, again, as what we've built along the way is a very scalable operating platform with a focus on cost, on value and sustainability, not to mention that this is very unique. In fact, that's why it's priceless. You can't really buy this. This is something you can only build. I think the merger with Capricorn, it enables us to accelerate on the additional opportunities. I'll talk about that in my presentation. And that is going to deliver material value for both sets of shareholders. I think the key thing I want to share with you from a team perspective is 2 years into the turnaround, people are finally energized, very motivated. And where we see Tullow is we're really well positioned for growth as the industry restructures. So that's kind of a little quick introduction. And then let me hand over to Richard, he'll talk about the financials.

Thank you, Rahul, and good morning. I will now take you through a strong set of financial results for the first half of 2022, with continued operational delivery, our relentless focus on costs and improved oil prices of accelerating underlying deleveraging. Our strong operational performance through excellent uptime and focused investments on our producing asset base is reflected in our results. On a like-for-like basis, if you exclude the impact of the assets we sold in EG and Gabon, last year, production is up 5% despite the plant shutdown at Jubilee in the first half of 2022. Thanks to this strong performance and combined with higher prices offset by hedging, revenue is growing to $846 million. Our continued focus on cost has enabled us to keep OpEx and G&A flat from 2021 despite inflationary pressures, a higher Ghana equity interest following preemption and the planned maintenance shutdown on Jubilee. Increased revenue with flat costs has resulted in significantly higher EBITDAX of $1.3 billion over the last 12 months, and therefore, a material improvement in gearing. During the period, we have increased our capital investment to $156 million, of which nearly 90% was allocated towards producing assets to drive production growth, deliver the material value through short-cycle returns, which Rahul will touch on later. We have also invested $126 million in Ghana preemption, which would pay for itself within this year. Despite the significant investment in the first half of the year and the one-off legacy Norway arbitration payment, free cash flow is effectively neutral. If you take into account 2 early June liftings that were received shortly after month end. Our free cash flow guidance for the full year remains at $200 million, as Rahul said, $400 million on an underlying basis, excluding the one-off payment for Norway and also preemption. This demonstrates the robust cash flow generation of the business. Our guidance for 2022 remains unchanged. However, current business performance and oil price, we expect deleveraging to accelerate with gearing below 1.5x by the end of the year, something we previously guided as Rahul said for 2025. If we move on to hedging. Whilst we've seen material payouts from our hedging program in 2022, we have realized the price of $87 a barrel against a pre-hedge price of $107. During this period of high prices, the hedging we put in place as part of our 2021 refinancing has come into focus. It is important to remember the hedging requirement of our bonds are not building requirement. But instead required a set volume for May 2021 forwards. As a result, our hedging levels, as you can see by the graph, do decline over the next 2 years, providing increased access to possible upside in oil prices. But as you're all aware, Tullow has significantly benefited from its hedging program in the past. And as such, we will be reviewing the implementation of our hedge policy for 2023 and be performed as part of our annual budget process. Our key focus for Tullow continues to be the deleveraging of the business. We are able to achieve this objective while investing up to $2 billion of self-funded CapEx through to the end of 2025. During this period, approximately 75% of this expenditure is allocated to drilling. However, in the near term, we have taken advantage of higher oil prices and [indiscernible] bonds to pre-invest in more infrastructure. This capital program provides high-return, short-cycle opportunities, which aim to maintain the underlying gross asset value of the company through 2025. This will deliver close to $1 billion of free cash flow by the end of 2025 at $75 a barrel with significant exposure to upside in oil prices, which at $100 a barrel could deliver a further $1 billion of incremental free cash flow over this period. Self-funded CapEx and the ability to maintain gross asset value whilst delivering material deleveraging provides significant potential equity accretion for shareholders. In addition to the base part, and as a reminder, we have very material upside for contingent payments linked to previous divestments. Take the Uganda payment, with first oil targeted in 2025 at a plateau production of 230,000 barrels a day, it will deliver a material additional income stream to the group, which we have not included in any long-term guidance. The group was also due to receive up to $40 million contingent consideration for EG and Dussafu. So in summary, Tullow continues to deliver both operationally and financially with like-for-like production, EBITDAX and profit up from prior year, whilst maintaining cost discipline and keeping costs flat despite increased activity in the inflationary environment. We have a clear runway to deliver significant free cash flow whilst maintaining gross asset value, providing significant potential equity accretion for shareholders. And with that, I'll hand back to Rahul.

Okay. Thank you very much, Richard. And let's move on to the operations. So -- yes, thank you. So what makes Tullow unique really is the depth, the diversity and quality of the resource base. And this is really what underpins our ability to deliver visible production growth. If you relook at our 2P reserves, nearly 80% of those are in Jubilee and in the non-op assets. And these 2P reserves, they drive near-term production and cash flow. So at the end of June, we calculated the NPV10. This is something that is done for our bondholders. And that was $4.7 billion. I think that presents -- it kind of highlights the value that's associated with the cash flows from these 2P reserves. If you look at the 2C, it's really dominated by Kenya and TEN. And it's the conversion of the 2C to 2P that will help drive medium-term production growth. As you know, material part of the TEN resource base is undeveloped and we're working actively with our joint venture partners to come up with an optimized development plan for this. And then separately, we've talked about this before, we're actively pursuing farm-down in Kenya. And I just wanted to highlight these numbers here of the Kenya resource is prior to any farm-down. So what would happen if we did a farm-down? It would reduce the interest, but importantly, it would significantly derisk the project and therefore increase the value very materially. And I also want to make a special note of the preemption of the Oxy sale. Richard talked about how much this is accretive from a value perspective, but it also -- just to note, we've added 22 million barrels of 2P reserves and another 43 million barrels of 2C resource to this. Just another point to highlight that our group production guidance remains unchanged, and that really underscores the focus that we have on our operating performance and the control and the employees that we have across both our operated and non-operated business. That's important to ensure the timely delivery of our plans. Let me move on and talk a little bit about drilling because drilling is important because it's a single largest component of our CapEx spend, right? And therefore, it's a really important driver of returns. And what you see here is that we've really achieved the step change in our drilling and completion costs. So if you look at the current program, we are delivering wells at about $50 million. And you compare that to about $75 million, which is what we were doing in the previous program from 2018 to '20. So you're drilling cheaper wells, but they're also fast. And that's really what it is, is kind of top quartile performance relative to the industry. So since the start of the program, we started in April last year, we worked on 11 wells. Not all of these will have been completed and connected. So they only contribute to production this year if they're completed and connected. As a consequence of the acceleration of what you see in the bottom is the 2 kind of rig lines of what the initial plan was and the final and that demonstrates you, as a consequence of the acceleration, we've been able to bring forward here sort of 3 Jubilee wells, the drilling of those wells, into this year. And these will be completed next year. So they will contribute to production in 2023. What's interesting is at these performance levels, we'll be able to deliver the planned program of well through next year with just 1 rig. So that means we can deliver the same program in a much more capital-efficient manner. So we have decided then to move further with the decision on the second rig in Ghana. I think as you reflect on the step change in the performance, really, the way we've been able to achieve that is through a focus on operations, through integration and through continuous improvement. And we've got long-term contracts in place. So we were able to work a lot more collaboratively with our suppliers and major contractors to proactively manage the inflationary cost pressures that Richard talked about, and that the industry is on [ currency basis ]. So that's a little bit on drilling. Now moving on to production. What I illustrated was to be -- could you go to the next slide please? So what I've illustrated previously was the depth and the diversity and the quality of the resource base and also like the step change in drilling performance. This slide really demonstrates the key premise in our plan. It's a very fundamental equation, which is that as we invest, we will increase production. So if you look in Jubilee, the June production averaged 90,000 barrels a day. If you look back and we compare this to in December of 2020, so let's say that's a little over 18 months ago, the production was 71,000 barrels a day, right? So you've seen a dramatic step change increase in production. It's a direct consequence of the addition of new wells or improvements in processing capacity and better reservoir management. So if we look in the first half, what did we do in Jubilee? So we added 2 water injectors, we added 1 producer. So these were brought online, connected. And together, these added material production, as you can see, that more than offset the natural decline. Now as I mentioned before, we are adding 3 new Jubilee wells in the second half that's ahead of schedule, but these will only be completed in '23. So what you can see in our second half also for Jubilee, we've got no new wells contributing to production. The blip happened in TEN. So in the first half of production in TEN, we had no new wells added in the first half. But we were able to flatten the decline rate. So in Ntomme, we're performing better than expected of our forecast in terms of base decline. And that's due to the gas injection. So you may remember, late last year, we put on stream and gas injector in Ntomme, that's helping now kind of flattening decline. And on Enyenra, what we have done is, as a strategy, we're targeting new parts of the field. So that's also helped offset declines. We're adding some new wells in Ntomme this year. The first strategic well that we drilled in the riser base was unfortunately water bearing. But again, that's part of a multi-well programs, you will get both pluses and minuses through that program. So on the plus side then, we had a stronger-than-expected result from the first Enyenra north well and that's expected to come on stream in 4Q. So even in TEN -- sorry, please, could you go back to the slide please -- so what you'll see in TEN, of course, in the second half is that as we're adding new wells, you will see production. So that's just reinforcing the premise, it's a very high-quality resource. And as we invest, we see production growth. Now we can move on to the non-op, please. So the non-op business, again, it really delivers consistent production and very high return. So the focus, particularly in Gabon, I think we are -- as you look at the business, we're well placed to consistently deliver, I'd say, 15,000 to 20,000 barrels a day, right? And the production is underpinned by our focus on near-field developments and infrastructure-led exploration. And these are also, like in Ghana, they're very high-return investments. Now you'll see we had little production kind of added this year. And part of the reason is that 70% of the capital spent in non-op is invested in infrastructure, but that's important because it will support future production growth. So for example, we're adding a mobile processing unit in the Tchatamba field in Gabon and that's going to facilitate the development of the Tchatamba South development and then a number of ILX projects there. We also have a long-term well test is underway on a discovery that we made last year. And this is in Gabon again and that will help test future development potential of a new play, which is in the region. In CDI, kind of our focus is twofold. So one is we have some production from the CNR operated STOIIP field and where we're looking at various options for remediation of the FPSO. And then separately, we have a Total-operated Block CI-524 that's adjacent to the 10 facilities where we're targeting the Westward extension of the Ghana phase. So that's pretty exciting and we'll update you as we go on. I want to talk a little bit about now our focus on cost reduction and efficiencies. And we've got a deep-seated belief that every barrel matters and every dollar counts. And that drives what we call having relentless focus on both cost reduction and efficiencies. And you know as a business model, you can say that as you deliver volume and you control costs, you [ create a lot of that ], right? It's as simple as that. Now since 2019, we've achieved a material step change, as you can see, in operating costs while at the same time, we're increasing investment in system reliability and availability. And one of the big drivers of this is that the teams are better integrated across the subsurface, across wells, operations, maintenance and so you're able to drive a lot more optimization. But also at the same time in the year, we said that the net G&A, which you see from this, is more than half. And we delivered over $240 million in cash savings over the past 2 years. It is a culture of continuous improvement and cost focus that is deeply, deeply embedded in the organization. And I would say this kind of working more like a private equity team to well place, to identify and deliver material synergies in M&A. So it's that experience that we have and the track record that gives us the confidence in our ability to deliver synergies from the proposed merger with Capricorn. I think also over the past 2 years, this what I said before, we've really built a very unique and a scalable operating platform. And I've highlighted earlier the stellar drilling performance, and you've seen the very material improvement in the FPSO uptime, which is over 95% consistently. And then also our track record in managing gas production. What we're doing here was illustrate what we are doing operationally to achieve the next level of operating performance. So over the past 2 years, if you look at the systematic improvement that we had in our operating performance, it's a direct result of greater control by Tullow over the operating [indiscernible], right? Now on the 1st of July, it was a big date for us because all the components of the Jubilee operations are finally brought under our direct control and that's the culmination of months of intensive work as we've transitioned the MODEC O&M contract. Now why did we do this? It's going to help us find efficiency improvements, cost reductions, and it's going to help improve system reliability. What's also critical is that we've built now our own operating team, its scalable operating organization. It's got a strong culture and it's got the appropriate systems and processes. And that, I would say, creates a really differentiated capability that we can bring to other assets and to other opportunities as we grow our business. So we move on to kind of sharing with you a little bit more of a strategic perspective, and I really wanted to start with a focus on sustainability. We've got a strong commitment to responsible operations. And with that, we're ensuring that the oil and gas resources of our host nations were developed efficiently and safely, while at the same time, we're minimizing the environmental impact. At the same time, we're also delivering economic and social development in our host nations. So I want to share maybe 2 projects that really illustrate the impact that we're having and also our capabilities. So in Ghana, for example, with our JV partners, we have a program where we support micro and small and medium-sized enterprises. So something called the Fishermen's Anchor Project. But what it does is it really enables the beneficiaries who are dependent on the fishing industry to access finance to develop additional sources of revenue. This is a pretty high-impact project because since 2019, over 1,000 small businesses and individuals have received training and business development support. And just this year, 17 new businesses are being established and over 280 loans have been disbursed. And what we're trying to do now is working to see how we make the project sustainable for the long term and make sure that can be scaled up. On the other side, looking at carbon offsetting, that's a really important contributor to our net-zero strategy. And what we decided was rather than simply acquiring carbon credits in the market, we work with our host nations to implement projects on the ground up. So in Ghana, we're working with the Forestry Commission to identify their jurisdiction and project. That's already been identified. And what this is, it aligns with also Ghana's REDD+ strategy, and it also aligns and facilitates the delivery of their nationally defined contributions. Important to also highlight, we are very much on track to deliver our 2030 net zero target and also the interim target of eliminating routine flaring by 2025. So here too, as you can see, how we're building a differentiated skill set that delivers very real win. Let me move on to kind of just reflecting on the business plan. So Richard talked about the current business plan that will deliver nearly $2 billion in free cash flow during the '22-'25 period of $100 a barrel. Now that's really based on a very disciplined capital allocation to well-defined opportunities. And on the left here, we presented some of them. The ongoing Ghana drilling program and the preemption are both rapid payback opportunities, and they really illustrate the sorts of things we want to be delivered. The Jubilee Southeast and Northeast projects are well underway. And what they do is they provide visible growth in -- both in value and in cash flow in the near term. So that's kind of with the business plan as is, right? But what you won't be surprised to notice is that we learned and we pushed ourselves to think beyond the current business plan. And to that end, we brought a lot of focus and creative thinking to our assets, and we were able to identify some very material additional opportunities. And these are highlighted on the right. So on a cumulative basis, if you stack all of these up together, we estimate these opportunities will require development CapEx in the range of $1.5 billion to $2 billion. That's net loss. It's quite a material CapEx requirement. But importantly, they would deliver over $5 billion -- potentially deliver over $5 billion of operating cash flows net [ the CapEx ]. So you can get a sense of why we're so excited about this. So I think we'll provide more color on this at our Capital Markets Day. But I just want to pick maybe just 1 to just illustrate the mindset and the approach. So if you look at our business plan and the focus on Jubilee, almost 2026, the CapEx in Jubilee falls off. But we looked at the field and we say in 2036, that's the end of license as currently stands, it's still producing 30,000 barrels a day. So it's got a lot of resource that left. So the team looked at that and they said how do we bring this forward within the license period. It's $120 million kind of a gross resource, right? So they're looking at ideas of additional infrastructure, people willing to bring this forward. So that's the sort of idea that we have in the portfolio. The other one, of course, in Kenya, as you know, we're making good progress to bring in a strategic partner and we're confident that we'll be able to share that progress before the end of the year. And importantly, as you know, yesterday was a landmark day in Kenya when President Ruto was sworn in. So following these elections, we expect the new administration in place, and that we'll be working pretty closely. We plan to work pretty closely with the new administration to progress this project. And that truly is going to be a project of national significance. So we're pretty excited about that. So as I reflect on all this, it's -- hopefully, you think this is the delivery of our current business plan is well underway. It's going to create a lot of value. But with additional capital, we can do a lot more. So let me just pull all that together. So when I joined Tullow in July of 2020, I think someone wrote that I'd run into a burning house, right? I would say kind of many times it felt like it was a nice comparison, but I think it's fair to say that all that is kind of in the distant past. And we've truly had a pretty remarkable journey. I think we started in 2020, it was challenging, but we did set the business and we set out a very clear long-term strategy. We then embarked on a pretty comprehensive turnaround, and it's really rewarding for me to see that's going better and faster than I had expected. And I think it's important to say there is more to come here. And all of that has placed us on a path to delivering our strategy. I think most fundamentally, we've got a really inspired and committed team, and we have a scalable operating platform. So we're really, really well positioned for future growth. So that remains very much what I kind of planning. Moving on, with regards to the capital merger, we're very committed to remain fully committed to that combination because we see the potential of material value creation through the acceleration, the implementation of a new business plan, which can obviously accelerate some of the investments I talked about, leveraging the operating platform that we have and the synergies. And also, while the Capricorn Board is also committed to the merger on the current terms, we understand they've stated publicly that they're reviewing potential alternative transactions. So we have to wait to see what the Capricorn Board [indiscernible] (00:26:57) on that process and provide an update to the market. What we've outlined today is the exciting potential that we have on our standalone asset base and our operational performance. So we're very confident, as you can hopefully see, about the value creation of our own business. And therefore, we are very comfortable with our own future platform irrespective of the outcome of Capricorn merger. So I wouldn't really have much more to say whilst we await Capricorn's assessment of whatever the alternatives are. So I hope you understand, I won't be able to engage with questions on this, whichever way they are asked or you guys want to frame that. So the key message is that we're looking through the future today with a lot of segments and competence. So with that, let us move on to our Q&A. And Richard and I are looking forward to having -- to answering your questions.

Thank you very much, Rahul, and Richard. We'll now move over to Q&A. And we have our first question from Nathan Piper at Investec.

Thanks for the presentation. And I guess I've got 2 questions, Richard. I know you've tried ahead one-off in the past, but let me have a go. And first of all, on the transaction between yourself and Capricorn, given the arithmetic of the deal and who seems to be owning the stock, can you maybe talk through -- I mean, I guess, former investment banker, what options do you have in front of you to try and conclude that deal? And then secondly, on the Kenyan disposal or the Kenyan transaction, you've been quite clear that you expect some progress by the end of the year. So that suggests to me that you're talking to 1 person and sort of finalizing what the deal might look like or have I got the wrong end of the stick here. And so it's -- what could -- what is the state of play there really? And then lastly, on Ghana Gas and realizing value there, could you maybe provide a bit of detail on that as well, please?

Nathan, you put me in a really awkward spot because you asked 2 out of the 3 questions I can't really -- but I'll try to answer. I said I won't answer. But look, on the Capricorn merger, it's very simple, right? From our perspective, we've got a good business. That's our plan A. We believe we can do better with the merger and create a lot of value for both of the shareholders. I keep reminding people that the new company is going to be owned by both sets of shareholders, right? And there is very material value from the synergies, from the acceleration of the business plan and some of the opportunities that we highlighted. So we are very confident that on the current terms, the merger creates a lot of value for both sets of shareholders. I think it's a decision for the Capricorn Board and their shareholders to say, how does that value compare to any other real opportunities to have? Not spreadsheet opportunities, but real opportunities there, right? And my submission is that it's a very simple equation, and they have to be able to assess that and then present it to their shareholders candidly and take a call. So that's on the merger. On the Kenya deal, yes, we're confident. I think we're in a good place with the elections behind us, I think, so we can move forward and you'll hear from us in due course on that. I think it won't be appropriate for me to comment on who is in the process and who is not in the process. So we'll leave it to that. I think on the gas commercialization, I think a couple of things. So one is, look, what's interesting is that these fields have a significant amount of gas reserves, 1.5 to 2 Tcf of gas, number one. Number 2 is that we believe -- it's a fact that the way the energy flows have happened is that you've seen a lot of gas being diverted to Europe. So that's creating an imperative within Africa and particularly same countries like Ghana to really accelerate and facilitate the development of indigenous gas resources to facilitate energy that's a gearing driver. And we have a strong commitment to obviously support the government in that endeavor. So we're working hard with the government, strong engagement, around what is their commercialization strategy for the gas. So I think that's the focus, and we're looking to progress that. I wouldn't want to give you more color than that because, again, that's all sense. So hopefully, I've answered your questions in some way.

In some way, Rahul. But I have 1 last go a different way around. I mean, I guess, some people who own Capricorn are not completely convinced not being public -- about not being convinced about the combination of the 2 companies and the deal that currently stands. I guess where I was trying to come from was -- how do you acknowledge that and incorporate that feedback within the proposal to try and put the 2 businesses together, I suppose?

So again, I'll come back, Nathan, to the point that our job is to deliver -- to demonstrate and deliver the value of what we have, right? And we will do that every day. So we've done that. Today, we're showcasing the very strong operating platform being built with the track record that we have, $250 million, really, of G&A savings over 2 years. We're reinforcing our confidence and hopefully building conviction around the synergies. So I think all of that should help people when they do their assessment to be able to compare the 2 alternatives, right? And that I will defer to the smart people, I defer to their judgment on saying what's the realistic alternative I have, how does that compare to the value creation from the Capricorn deal -- the Capricorn-Tullow merger. And of course, we see a lot of value, we have a lot of conviction around that. And that's why we're staying firm with regard to our recommendation.

Now our next question is from Chris Wheaton at Stifel.

Firstly, well done on getting the uptime up, getting the well factory going, that's really good progress in terms of pulling those wells forward. My first question is on the drilling. You mentioned the top first strategic Ntomme well was dry. Could you perhaps run through why that was and what -- whether that alters your plans -- near-term plans for what you do next with the TEN field given that, obviously, the dry well wasn't in the plan?

Yes. No, it's -- look, I've always said -- so thank you, Chris. So I've always said that the important thing with any program is you put yourself in a position where you're drilling multiple wells and you're not dependent on any single well. And you're going to have surprises, positive and negative. So the Ntomme riser base well was a surprise. [ I won't deny it, because ] I was definitely disappointed. But the next one, the Enyenra North well was better than this. So part 1 is that any single well doesn't change the overall sort of picture. We have another well in that riser base area, we're going to drill later this year. And then we have other wells also planned in different parts of TEN. I think the key to remind really is that we have a very large undeveloped resource. And we just need to kind of improve the infrastructure here and continue the drilling program. So yes, disappointing for sure, doesn't change our plans in the near term.

That's great. Could I then perhaps move the conversation on to what happens next in terms of going after that additional resource base you referred to in those slides, the 320 million BOE and the gas on top? At what point does the -- and this is probably a question for Richard as well. At what point does the balance sheet start enabling you to do that, to commit to a second rig and, therefore, a 3-year higher CapEx program? I would have thought if you're looking for sort of 1x net debt to EBITDAX, you're probably there at current rates close to 2024, probably. So is that the point at which you then start to decide a second rig and we go after the additional things? This is all, of course, assuming the Capricorn merger doesn't go ahead because clearly, if that happens, as you've said, you delever to below 1x net debt to EBITDAX instantly. And you know my views on the Capricorn merger, so I won't ask any more on that. Could you perhaps talk about that timing? And then, therefore, your willingness to go ahead and the commitment on that second rig?

So I think maybe just to give you an overarching sort of things. So I think point 1 is, as you've said, and I'm just building on this thesis that we are not opportunity constrained, okay? We had our business planning session, that's kind of sort of Richard and I've been doing this with our teams over the last couple of months, and the opportunity set that we have underlying the business is fantastic. So we're not opportunity constrained. I think the key for us is that whether it's the second rig, whether it's acceleration of Jubilee, whether it's TEN enhancement, gas commercialization, all of these things, we really need a capital allocation decision that Richard and his team will do. And if oil prices are still sustained, I think we can bring these things forward. If we go ahead with the Capricorn merger, we can bring these things forward. So really, in a very simple sense, there's a lot more we can do with the business, with more capital and the capital will come from different sources, we're not fussed about that. So I don't know if Richard...

Yes. No, I think that's fair. At $75, we're generating $1 billion of free cash flow after investing $2 billion. At $100 a barrel, we're doubling that to $2 billion. That provides a lot more flexibility, particularly given our debt maturities to either invest in the business or seek to do other things with that cash. And I think the other thing that's probably worth highlighting is the drilling performance. So we -- the business plan as it sets out going forward in that capital program is all based on a P50 outcome from a drilling perspective. We have performed against that at the moment. So not only is it sort of oil price dependent, but also our underlying performance can help drive our ability to bring some of those investment opportunities forward.

Great. That's really clear. And Richard, last question for me to you. The working capital build in the first half, you can sort of explain $200 million of that from the delay to the receipts of the cargoes, there's another $100 million of trade receivables in there as well. Are you expecting all of that $330 million (sic) [ $300 million ] of working capital then to reverse in the second half?

Yes. It's a good question. It's partly due to unfortunate [indiscernible]. We had 2 cargoes that lifted right at the beginning of June, which we received on the, I think, the 1st and 5th of July. So just shortly after month end. We don't usually sort of give this guidance. But at the end of August, we were sitting on net debt of $2 billion. So it shows that a lot of our working capital has already sort of outplayed within the last couple of months. There will be a lifting potentially that happens in December that we would receive the cash flow this year. So it may not be the unwind. But then the other thing I'd point to as well is, we did have a large stock build in Gabon with the challenges we had with the [indiscernible] so we got plans in place to fully monetize that during the second half of the year.

Okay. That's very helpful. Well done again and well done to your teams again.

Next question is from Mark Wilson with Jefferies.

Rahul, I just wanted to check that the 3 wells that you've added to the drilling program, being able to drill much more efficiently at Jubilee. Just can I just confirm those are Jubilee Southeast development wells? I think you spoken to before.

Yes, exactly. And what will happen -- thank you, because I just want to clarify because those will be hooked up once the Jubilee Southeast infrastructure is completed. So that's probably a kind of 2Q sort of event.

Got it. Okay. So you've spoken about being able to get a lot more wells into the year from the current 1 rig setup in Ghana. So when we speak looking forward to the idea of acceleration of the opportunity set, are we specifically talking to the idea of putting a second rig in because clearly, you're working what you've got at the moment and very well. Is that what you're talking to specifically? Or does it also talk to gas side of things? Can you potentially -- what encapsulated in that acceleration of the opportunity set?

So I think the glib answer is all of them. So when we look at acceleration, I think what's very interesting is that the opportunity set that we have is across the board, right? So we've got Kenya, we can accelerate kind of that. We have -- we could take FID on the gas commercialization project. We could take FID on a TEN enhancement project. We could now look at accelerating further the Jubilee resource recovery into the license period. We've got a number of ILX opportunities and demand. So it's across the board. And the interesting thing is going to be -- is how do we prioritize that, right? So with, let's say, kind of we have additional capital, whether it's through higher oil prices in Capricorn, how do you prioritize that? Now I think what's also clear is that if we were doing everything that we want to do in Ghana, you'll need a second. If you were to say that I want to really accelerate gas wells, I want to accelerate TEN wells, I want to do more in Jubilee, even with these super kind of performance that we have, I think we would still need a second rig. But I think what we've managed to do with the efficiency that we have is we deferred that decision. So I think the inventory of opportunity is big and it's growing. And if you want to do all of that, you will need more test.

Got it. Okay. And then a couple of points for Richard, just for clarification. The amortization of the 2026 notes, should we consider that to be $100 million in May each year going forward is the first question. And then the second point, I noticed cash tax in the first half was higher than it's been in other years. What would be the general guidance for cash tax in the coming years?

Sure. Yes. So the amortization is $100 million per year in May, so it's a simple one. In terms of cash tax, obviously, the tax we pay in both Ghana and Gabon, 35% in Ghana, 45% in Gabon, is very much linked to our sort of underlying gross profits. Obviously, at higher oil prices, those gross profits are sort of very increased. And so therefore, the tax that we're paying has increased sort of just linearly. The one thing I would just add is on timing. So Ghana, we've made quarterly equal payments based on our estimated tax bill for the year. In Gabon, it tends to be deferred. So we'll pay the bulk of the tax book for 2022 in early '23. And the final thing to add that sort of plays into the mix is the [indiscernible] refund. So we receive that in the second half of the year, every year. So it should be about $20 million for 2022. Obviously, as that activity sort of starts coming off, going forward, spending less on [indiscernible] tax rebate will get less. So that's a smaller offset for cash tax going forward.

Next, we're going to go to James Thompson, JPMorgan.

So thanks for giving us a little bit more detailed color there in terms of the longer term growth opportunities, just on the role. In terms about development CapEx, you've identified $1.5 billion to $2 billion. How much of that is Kenya? Previously, you've been guiding on CapEx, assuming essentially no spend in Kenya, so it would be just interesting to know the split of development CapEx between the Ghana opportunities and Kenya? And then secondly, thinking about Ghana, I mean, obviously, you kind of gave us the detail there that Jubilee is going to be producing 30 KBD by the end of the license. What are the options for you now to extend that? Should you want to? Can you engage in those discussions yet? And finally, in terms of Côte d'Ivoire, I mean, obviously, it's still very much in the exploration stage. But have you had any kind of initial discussions around the kind of scope to tie that back into facilities in Ghana? Or is that something that's still to come?

So Matt had warned me. He says you're going to ask for a breakdown of the CapEx, and he named you, and he said Richard is going to ask that. So I think what we do is we'll give you a better sort of individual project color on -- around the Capital Markets Day. So if you don't mind kind of holding on to the questions till then. But the general point I wanted to make is that it's -- we have a very rich opportunity set. These are approximate numbers. So depending on the deal structure, the precise numbers are going to change. But the message we wanted to drive was that these are materials and very profitable, right? So that's kind of your first question. Your second question was Jubilee extension. So I think the way kind of we would look at it, and I think this would be very much in the government's or nation's interest is -- I think the first step is to make sure that we're not leaving any stone unturned in terms of accelerating the potential. So like I said, the way our current business plan is the CapEx in Jubilee kind of just tails off after '26. So the team has gone back and looking at that. And it's the kind of -- the source of things we're going to look at is to say where do we need additions such as infrastructure, where do you need additional wells? If you have multi-base flow through the subsea, what sort of pumping facilities we need and things like that. So that's kind of what the guys are working on. So that's the Ghana -- the Jubilee one. And on CDI, look, it's -- as you know, kind of the water dispute was settled. We have not had discussions yet around sort of joint developments and things like that because that's premature. I think both sets of governments are aware because we have shown them the data around the extension of the play across the border. I think both sets of governments are aware of the proximity of the 10 FPSO and the outage, but I would say it's a bit premature to go further than that. We will see synergies. So we've run into the next phase in CDI [ CI-524 ]. So we plan to drill a well there sometime in the next couple of years. And there will be clear synergies from the -- because we will essentially use the rig that was foregone as part of that program. So there will be clear synergies from that.

Okay. A couple more for me. Obviously, results are cleared now for yourselves and Capricorn. Can you be any more -- can you give us any more granularity in terms of timing or expectations of the circular in the CMD?

So I think we're working backwards from the results -- sorry, from the books. So we said that we're targeting shareholder vote towards the end of the year. We work backwards from there, and I think, James, we've given pretty good guidance in timing. So we're certainly going to align with that. So you need to have a circular and prospectus in time for that, and we would do a Capital Markets Day ahead of that. And all of that is sort of [indiscernible] by timing of various government approvals, which is generally going well. But the government approval is kind of hard to be perspective on or be specific on the timing. But still, I would say that we very much look towards shareholder vote towards the end of the year.

Okay. Just finally then, I mean, in terms of the carbon bit you talked about there, I mean you're still targeting eliminating routine flaring by 2025. That's been quite a challenge for the business over the last couple of years. Can you just remind us what's kind of key to achieving that?

So we're already seeing -- I mean -- look, it's a pretty well-defined program because it's about -- in essence, it's about enhancing gas processing capacity on both the 2 FPSOs, right? And -- so that work is underway. So we've increased gas capacity a little bit at Jubilee. We'll do more next year. There is a TEN shutdown, which will be planned in the next 18 months or so. We'll do increase in gas production capacity there. So it's really very, very explicitly linked to some pretty well-defined projects which are part of the business plan, part of the CapEx program, so next year.

And apologies, I don't think we'll be able to get through all the questions. So myself and Rob will follow up with any further questions afterwards. But I think we can probably squeeze in 2 more before we finish. So the next question will be from Dmitry Ivanov from Jefferies.

Can you hear me?

Yes. We can hear you.

Thank you for the presentation. And congrats on the strong results. I have 2 questions. The first one on the situation with the -- in Ghana, with Ghana initiative to bolster this state reserves by using -- by purchasing FX liquidity from oil and gas companies and mining companies. And could you give us more color on the real implications for Tullow in terms of your ability to repatriate cash? Are there any kind of deterioration in this environment? And then the second question, I know this is like a quite tricky kind of headline with Ghana. But do you have any kind of plan B if the situation deteriorates and you see more kind of capital controls in Ghana? So for instance, maybe you have like -- you will use more cash from Gabon to upstream to holdco to pay for the -- for holding company expenses and et cetera. So any kind of color on the situation in Ghana would be very helpful for investors.

So let me just give you a high-level view and then I'll get Richard to give you more specifics. So firstly, Dmitry, I think it's important to recognize that we work -- we've been working in Ghana number of years under a trading agreement where we sell our crude all offshore. The funds are received overseas. So we don't actually bring any capital into the country or nothing comes in unless we choose to, right? So that's just to be very, very clear on that, right? And the other thing I would say is that the government has always been very consistently supportive of that agreement. So I don't think that there is a concern around that -- the basic sort of construct of the contracts and -- but we're not alone in it. So that's just -- I just need to be very clear on that. There's a separate piece, which is that the government is -- we recognize -- look, we've been in Ghana a number of years, are very supportive of the government and kind of we recognize what the issues are. And -- so let me hand over to Richard because he has been in the middle of a lot of the discussions about how we're constructively and voluntarily looking to support the government.

Yes. Thanks, Rahul. I mean I think the key thing for me with this is, obviously, we've been in Ghana for a very long time, and we want to continue our presence and increase investment in Ghana. So we want to help out where we can. We've had sort of I think, as has been documented and you referenced, a number of requests that have come forward. We are sort of analyzing those with other oil companies and mining companies as well in terms of how we can help out. I mean I think one of the clearest things that we can do, we purchase $100 million worth of CDs every year and that tends to be through sort of indigenous banks, so doing that through the Bank of Ghana provides that dollar liquidity straight into the government, which will help. In terms of repatriation of cash, as Rahul said, we have a contract in place that dollars are paid offshore. It's something we will maintain. I think the second thing is as and when we can help with liquidity constraints, particularly around tax payments, we'll look to sort of help to optimize cash flow by potentially advancing payments to the government of Ghana as well that are contractually due. So we've got a plan in terms of how we can assist and which we're proactively looking at it. I suppose not just looking at the requests that are coming from the government of Ghana, but proactively looking at how we can support them as well. So I think that's the best way forward. And it needs to be and it so far has been very much a collaborative approach to the requests that come through very much [indiscernible] discussion.

Understood. Understood. So as of now, kind of there is no deterioration of business as usual and kind of you continue just to collaborate without any kind of additional impact on the business on the cash flows and repatriation, right?

That's correct. Yes.

And just to be clear, we receive the funds offshore. So it's not like we're getting them [indiscernible] whatever we can do voluntarily, within the scope of our business, I think -- and look, the best thing that we're doing to help the nation really is by investing right? Because we have short-cycle investments. We generate a lot of cash immediately at the high oil prices disproportionately the value goes [indiscernible] so really, the value of that is far in excess of [indiscernible].

Apologies for 2 broad questions.

I think we've almost run out of time, I'm afraid. So we're going to have to wrap it up there. So thank you for all the questions and any follow-up, we will duly follow up afterwards. And then I'll hand back over to Rahul.

Okay. I just thank you all for your interest and support, and I just encourage you all to reach out if you have other questions. We are excited about the business, so hopefully that comes through. And let us know how we can help you understand this better, and have a good day, everyone.