Tullow Oil plc (TLW) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. It’s 11 a.m. A quorum is present. And so I'd like to welcome you all to the 2024 Annual General Meeting of Tullow Oil plc. Before turning to the formal part of the meeting, I would just like to mention a few housekeeping points. The fire exit is located on the immediate left as you exit the room. Of course, we do not expect any fire alarm tests during this meeting. I should begin firstly by introducing myself. I'm Phuthuma Nhleko, the Non-Executive Chairman of the Board of Tullow Oil plc. I'm at the location of today's meeting and will be acting as the formal Chair of the meeting. I would also like to introduce my fellow colleagues and directors on this table. Martin Greenslade, he's the Senior Independent Non-Executive Director. He's also Chairman of the Audit Committee; Mitch Ingram, on my right, he is the Director and Chair of the Safety and Sustainability Committee; Sheila Khama, on my left, is the Non-Executive Director; Genevieve Sangudi is the Non-Executive Director and also Chair of the Remuneration Committee; Roald Goethe on my right, is the Nonexecutive Director; Rebecca Wiles, who've recently joined us, on my right, is the Non-Executive Director; and Rahul, of course everybody knows, is the Chief Executive Officer; Richard Miller is the Financial Officer; and Adam Holland, on my right, is the Company Secretary. We also have with us representatives from our auditing firm, Ernst & Young and Solicitors, Dickson Minto, are also present. So thank you very much for joining us today at this Tullow's AGM. I'm quite delighted to welcome the shareholders in this room with us. And of course, very pleased to report that we have continued to make use of technology to allow our shareholders to also participate in the meeting via video and webcast and also be able to vote on the resolutions online. So we will do our utmost to make this a worthwhile experience for our shareholders. The format for today's meeting is that as Chair of the meeting, I will firstly ask Rahul on my left hand as the company's CEO, to provide an update on the business. This will then be followed by a Q&A session with the Board, and I will direct people to respond accordingly depending on the questions. Thereafter, we will move on to the formal part of the meeting. And as we vote on the resolutions that have been submitted. All the proxy votes received by post or online, ahead of the deadline will, of course, be included in the results. All the votes taken today will be taken by a poll rather than on a show of hands. It is really intended that the results of all the votes will be announced to the London and Ghanaian stock exchanges and published on the company's website as soon as possible after we've concluded the AGM today. So I think with that, those are the rules, and that's how we hope to conduct the business of the meeting. And I'd like to hand over to Rahul on the business report.

Thank you Phuthuma. Good morning to you all, and thank you very much for joining us. You would have hopefully seen my statement this morning, and I really want to reiterate my thanks to all our shareholders and really want to appreciate your continued support. What I'm really looking forward to is talking to you and sharing the progress that we've made over the past year. This year, we really consciously, repositioned ourselves and repositioned ourselves in our brand to better reflect our very unique Pan African identity as a very unique Pan African energy company, a company that's building a better future through responsible oil and gas development. And you would have seen that over the last few years, we've really pivoted our portfolio to focus predominantly in Africa. Now why that's interesting is the scale of the resource base in Africa is vast with over 30 billion barrels of proven resources. And there is multiple opportunities across the kind of mid to the late life assets and also with new production. And you put that in perspective, so with 8% of global oil supply coming from Africa currently and over 40% of global new gas discoveries in the last decade in Africa, you get a sense of the growth potential there. At the same time, our industry is in flux, and you're seeing many international oil companies really planning to exit and divest mid-to late light assets in Africa. And that's really something that is a unique opportunity for Tullow because our platform and our capability sets, it provides us a differentiated access to inorganic opportunities across the continent. If you look at Tullow organically as well, we have a very big opportunity set within our existing assets with over 200 million barrels of 2P reserves and over 700 million barrels of 2C reserves. And again, to put that in perspective, that's almost 40x the production last year. And within this portfolio, you've got a number of very important organic value catalyst. And let me give you an example. So for example, Kenya unlocking value from that is a material catalyst, unlocking value from the Uganda royalty, getting a plan and development approved for TEN, getting long-term gas supply agreements in Ghana. Each one of these has the potential to deliver very material value. There is a lot of talk in -- about energy transition and in that context, we have a strong view, and I've been in public as well to say that Africa is developing nations, they have a real right to benefit from their own natural resources. And as you know, these benefits, they spread far and wide. And it's something that I believe differentiates Tullow from others is our approach to shared prosperity to ensure that we're bringing meaningful and long-lasting benefits to our host nations. We are a responsible oil and gas producer and very proud to again reiterate our commitment and we -- just to also reassure you that we're on track to achieve our net zero target by 2030. So with that, I think we are well positioned for the energy transition. We have a clear strategy to meet the needs of our host nations while taking into account the accountability for the impact of our operations. So if you think about -- again, this should not be a new information for you because you know that our strategy is really underpinned by a relentless focus on three critical areas. And these are now embedded across our operations. So the first is operational excellence, then capital efficiency, and increasing business growth. And last year, 2023 was a year of significant achievement because we delivered on our business strategy across multiple dimensions. So firstly, we continue to have reliable performance and consistent delivery. And that really continues to support the very compelling and unique proposition that we offer. For instance, in last year, the operating efficiency was in the high 90s, and we've managed to keep our cost base flat despite inflationary pressures. In terms of production, we saw a growth, which was driven primarily through the landmark Jubilee Southeast project. But also there is inclusion of a new revenue stream in the form of Jubilee gas sales. And these were both significant milestones for Tullow and for Ghana. The Jubilee Southeast project, I think, is a demonstration of our strong project management [indiscernible] capability and of course, it marked the start of a material deleveraging starting in the middle of last year as we saw almost a 30% step change in Jubilee production. On TEN, we did a lot of work during a maintenance shutdown to improve asset integrity and also to enhance production through improved recovery, liquids recovery from gas. We also took the opportunity to reduce flaring by 50% post the shutdown. And on TEN certainly, and I'll talk more about this, you're seeing the benefits of continuing focus on reservoir optimization there. The drilling performance continues to be excellent. This program, which we started in April of 2021 is now coming to a close six months ahead of schedule. But we've been able to give you a sense, I mean, the cost of the well is about 20% lower and nearly 40 days faster than the program that we did previously, which was in the 2018 to '20 period. And I think the cost savings and the efficiencies have been driven really by a very disciplined approach to planning, a focus on reduction of nonproductive time, improved well designed as well as very efficient and effective contracting. So now as we look forward, there is a very deep inventory of opportunity sets that remains in Ghana. So the intention is to resume drilling in 2025 once this opportunity set is matured. Last year, also quite a material event was very proactive and significant steps we've taken to materially improve the balance sheet. I think since I've been at Tullow for nearly 4 years, singular focus for us has been ready to improve the balance sheet. So last year, we reduced net debt by over $250 million and that deleveraging trajectory continues. We generated free cash flow of $170 million, that was ahead of expectations. And to put that cash generation in perspective, since 2020, this business has generated about $1.1 billion of free cash flow. And that's despite the negative impact of the hedging program that had outflows of about $600 million. Why am I sharing this with you because that gives you a sense of what the underlying cash generation potential of the businesses is? We also were active in the bond market. We executed some very opportunistic and value-accretive bond buybacks of 2025 notes. We also demonstrated access to long-term capital through a $400 million debt facility agreement with Glencore. That was in November. And what that does is it not only extends the 2025 maturities potentially to 2028, but Glencore being a very smart, sophisticated player in the industry, it provides a very strong endorsement of our business plan. We also executed post that to further tenders for the '25 and '26 notes. So buying back a total of $256 million of debt for $232 million. So that's again value accretive. So with that behind us, then in 2024, we're really starting a very different conversation about Tullow about the future about growth, about how we unlock value from the very deep set of organic opportunities that I mentioned earlier. And also how do we leverage this platform that we've built to deliver on inorganic growth? So I think if you want to fulfill our purpose and deliver our strategy is really important fundamental that we maintain our reputation as a trusted partner to our host governments. We are deeply committed, and that's really our purpose is to build a better future through responsible oil and gas development. And I hope our shareholders have had a chance to see our 2023 sustainability report, which is really captures all the work that we're doing to deliver our sustainability strategy. But what I wanted to do here was to highlight just a few areas from our 2023 operation -- performance. So firstly, we've got to start with safety. And really, there is nothing that's more important than the safety of our people and all those who work at our site. And I'm pleased to say that we continue to have strong safety performance across our operated assets. The second area I wanted to highlight really is shared prosperity, where we really focus on creating economic opportunities for those who needed the most in our host countries. And to give you a sense of the scale and the nature of this impact in last year in 2023, our local supplier spend that increased by 30% to over $220 million. And the social programs that we run, they supported over 10,000 students and over 2,400 small businesses to give you a sense of the human impact of the business. There is a tremendous focus we have on environmental stewardship. And we've made very tangible progress on our pathway to net zero on both Scope 1 and Scope 2 emissions by 2030. With modifications, we've completed the progress towards elimination of routine flaring in 2025. So I talked about the work we did at TEN in the shutdown to reduce flaring, that's part of that. Also, in addition to the work we're doing to eliminate routine flaring, you do end up with harder-to-abate emissions. So we're taking a very hands-on approach to progress a nature-based solution in partnership with the Ghana Forestry Commission and we're expecting to take a final investment decision on that this year. Now our focus on environmental stewardship is not just about emissions. But we also look at all aspects of how we protect the environment. Increasingly, certainly we feel we're at the forefront of recognizing the critical importance of biodiversity through the planet's health and resilience, and we're committed to fostering biodiversity and conservation in all aspects of our operation. The last part I wanted to highlight really was around our equality and transparency, and we've really built up our reputation as a trusted partner by holding very high standards of transparency, equality and governance. And if you look at our socioeconomic contribution in our host nations. So last year, it was over $700 million, which brings the total over the last five years to over $3 billion. And within the company, I'm pleased to share that today, 21% of our senior management positions are led by our women colleagues and over 40% of management roles in the company are led by African colleagues. I wanted to talk a little bit about our recent performance. So if we can move on to that, please. So since the start of the year, I'll start with the operational performance. We've seen good delivery on our drilling program. We've got three Jubilee wells that were brought on stream in Q1. And for the two wells, we're planning to bring them on stream this quarter. Once again, production efficiency has been very high. It's been tracking in the high 90s. We indicated in the statement this morning, the group production was in line with expectations in Q1 at about 66,000 barrels of oil equivalent per day. Though I just want to flag with you that Jubilee is kind of tracking lower than expected and TEN has been outperforming. For the year, we are reiterating today our guidance of 62,000 to 69,000 barrels of oil equivalent per day. But it's likely we flagged this was that we're going to come out towards the lower end of the range, but importantly, we don't expect any changes to our group cash flow guidance as the number of total liftings of the cargoes that we sell in Ghana, that remains unchanged. Just a brief on Jubilee, production is lower than our expectations. It's really due to some of the new Jubilee wells having lower production compared to pre-drill expectations. Now interestingly, the net pay reservoir property is very much have been on prognosis. But what we're seeing in some of the new wells is that the full impact of the water injection is not yet reaching these wells. So we're looking to see how we optimize the pressure support. So that's kind of one of the drivers for guiding the production towards the lower end of the range. Also in April, we had some temporary interruptions to water injection that was caused by problems with a gas turbine compressor that's been addressed. But this is likely to have again some impact in the short term. If you take a step back, Jubilee, obviously, is an excellent field. Our conviction around the resource remains. We have about over 140 million barrels of 2P and almost over 100 million barrels of 2C. So it's a big resource that we still have to develop. What we are doing is we're planning a 4D seismic campaign early next year. That's going to be ahead of the next drilling program and that new data will help us guide the placement of the wells as part of the next program, which we hope to restart drilling sometime next year. On financials, as I said before, we're very much reiterating our guidance on the cash flow expectations, not just for this year, but we also remain on track to deliver $600 million between '24 and '25. And importantly, we're positioning ourselves to deliver sustainable free cash generation in '26 and beyond. And as you know, for this year, our cash flow guidance is $200 million to $300 million at $80 oil. That's weighted towards the second half of the year. And that's largely driven by the fact that we have very substantial cash tax payments and capital spend, which was weighted in the first half and the liftings and the revenue receipts are typically weighted in the second half. I think we're also pleased now that the legacy hedges are rolling off in May. So the company is well positioned to capitalize on higher oil price environment. And to give you a sense of the impact of that, an increase in $10 in the oil price across the years say to $90 a barrel would generate an additional $100 million of free cash flow. So very significant for the company. The company remains on track. I talked about the deleveraging focus, we very much remain on track to reduce net debt to less than $1.4 billion and a gearing of about 1x. So that deleveraging, we believe, is a very important driver for very material equity value accretion. So it's important then to start to look ahead. I think we are positioning really to deliver sustainable high cash flow yield. And we want to, at the same time, as we're planning to prioritize deleveraging while starting to invest to grow. I think with stable production, new -- potential new income stream from the Uganda contingent payments, the completion of the decommissioning campaigns in the U.K. and Mauritania, which have been consuming capital, lower debt, which would result in lower finance costs, we believe we'll be able to maintain a sustained material cash flow generation beyond 2025. So with this sustained free cash flow generation and leverage below 1x gearing, we'll also have the opportunity at that stage to consider accelerating investment in further growth opportunities and also consider shareholder returns. I think the assurance we want to give you, while we're not highlighting any specific plans today, but the assurance we want to give you is that we'll follow the same rigorous approach to capital allocation as we have today. And I would say, just in summary, with a strong balance sheet, a sustainable free cash flow outlook. I think that the company is now well placed to deliver value to our shareholders, both through organic and inorganic growth as well as through capital returns. So again, just in close, I would say, I really want to thank all of our shareholders for their support, happy to take questions before we turn to any -- to the resolutions.

Okay. Thank you, Rahul. I mean I'm hopeful that the shareholders have found that to be a comprehensive report, demonstrating the progress that we hopefully are making in the last few years. We'll now take questions on the performance of the business or any other matters relating to the business of the meeting that you may wish to raise. And I should remind you that if you do have questions on any of the individual solutions, this would be the time to ask those questions. I will now pass over to our Company Secretary, Adam Holland, who will manage the Q&A section of the meeting.

Thank you, Phuthuma. Good afternoon, everyone. My name is Adam Holland, and I'm the Company Secretary of Tullow. This year, we are again enabling shareholders to participate remotely via webcast and accompanying the instructions to our shareholders on how to join this meeting online, you will have also received instructions on how to submit questions in writing via the virtual meeting platform, which we are using to host the meeting. So now is the time to please submit any questions that you may have relating to the business of the meeting. And so for those participating online, you can submit your question using the Q&A message box function, and you can type your question in the box on the right-hand side of your web page and click send. I will read out any questions for all the shareholders in the room here to hear and Phuthuma, our Chair of the meeting will then answer or direct your question to one of his fellow directors. If your exact question is not read out by myself, it will be because your question asks for the same information as another question that I have already read out. We may not respond to questions unrelated to the business of the meeting, but we will take such questions into consideration as we prepare for the trading statement and operational update to be released later in the year. So just whilst we give those online time to submit questions, we will now take questions from the room. Before asking your question, please give your name and state whether you are a shareholder, proxy or corporate representative. And if you are a proxy or corporate representative, please state your name and the name of the shareholder that you are representing. Thank you. And now we have a microphone in the room. Any questions.

[indiscernible] small shareholder. Yes, for a small shareholder, the news isn't at all [indiscernible]. Looking at your annual report, it's very hard to work out whether you'll move to net zero by 2030 is a compulsory regulation or whether you're doing this voluntarily? Is this move going to hammer profitability of the company? And looking at your other accounts, you gave away a lot to -- and tax contributions. I assume that you're paying quite a lot of U.K. tax, but you're also paying a huge amount to probably African governments, that may be all right, but you're also spending a lot of money on schools and other forms of education and yet the shareholders aren't getting much at all. Is it five years since we got a dividend and the price isn't very good either. So perhaps we should be given a bit more consideration when the future strategies considered? And what is your opinion of future movements in oil price and the fact that you are slightly caught between two cultures, the culture of high tax in Britain and high tax in Africa.

Thank you, sir. That's quite a comprehensive question. I think all those different elements of the question really relate very much to the financial aspects of the business. So I'm going to ask Richard to field responses, including the one on dividends and so on.

Sure. So from a tax payment perspective, maybe the first thing to clarify is, although we have a number of U.K. tax resident companies, we don't actually pay any U.K. tax because we don't have any operations within the U.K. So the taxes that we pay are purely for our operations within Africa. The tax rates that we pay are the standard tax rates within these countries, and they reflect the revenues and costs that we've incurred through the business. In terms of where we are from a shareholder return perspective, we've made a huge amount of progress from a balance sheet perspective over the last few years. And as Rahul outlined, we've had significant deleveraging and the balance sheet is getting into a much more stable place. There is a bit more room to go. And I think what we outlined at full year results is with $600 million of free cash flow over the next two years, that will take us to $1 billion of net debt and gearing of less than 1x by the end of '25 and we will still be generating sustainable free cash flow beyond that. And that's the point in time where we can start considering how we allocate that capital between shareholders and continuing to invest in the business.

I think he asked a question on the obligations of net zero and the impact on the financial statements going forward.

Sure. So from a net zero obligation perspective, it's a voluntary commitment that we've made. We are committed to delivering that from a cost perspective. I suppose it will translate in, I suppose, a few ways. First, the engineering activities that we're undertaking on our vessels to reduce the flaring. And the second thing is our carbon offset projects that we're operating in Ghana as well.

And the work that we're doing to reduce flaring, for example, in TEN, those are value positives and net present value positive projects. So they're good for the business anyways. And then the money that we would spend in the future for the carbon offsets would be a very small fraction of what we would spend from a capital point of view.

So I suppose as I mentioned. So the focus continues from a free cash flow perspective is continuing to deleverage. We've made a lot of progress. And with the cash flow that we'll generate over the next couple of years, we'll be at 1x -- $1 billion of net debt by the end of '25 and 1x geared. And that's the point in time where we will be able to start considering shareholder returns.

Good morning. My name is [ Mastelion Boni ], and I'm a man who lose about GBP 14,000 in Tullow Oil going back some years, I have no objection you spend in some of these money in Africa because we owe Africa a lot, we. What I would ask you from your report, you seem to be saying that we're doing very well, and we have GBP 7 million to GBP 8 million free cash flow. I would suggest instead of paying enumeration for the Board would you consider looking to give back the shareholders something, say, a penny per share to just encourage them, knowing that at one time, you could get almost GBP 1 per share when the share was doing about GBP 14 per share? Secondly, I could not find any report that the sale of Ghana Aqueduct share to an Italian company or Israeli company. Where is that money? You have not shown on your report at all? So this is what is puzzling me, knowing that Amanda lose about GBP 14,000 in Tullow Oil, I need to answer this question instead of you changing Board members every two years on all the strength they have. I'm looking at the Board members and that word use strength all the time. Somebody has to address all these things, where is the money that you sold part Aqueduct in Guyana? That's I cannot find it because I'm wearing two hats, we're in actually three? One at the Guyanese, one was a big shareholder for Tullow Oil and poor Adrian lost his house and everything, and you all sit there talking about good progress. I don't know if you understand the meaning of the word progress. So if you can tell me -- and the last time I was here, I inquire the rights issue money. I cannot find where that money gone three years ago, I don't know if anybody here can remember. I raised that question about the right list to money. Here again, you sold a part in Guyana to another company, and it does not show anywhere. So I want to know whether you pocket the money on the enumeration way or you forget to do it. So you have to answer those questions. That's why I come here. I'm over 80 years of age. I struggle to raise these questions because I know I would not get my money back from Tullow Oil. Adrian lost his house. He lost his truck, you see? So all I'm looking for some truth. The last time I said I told one of your members of the Board, I did -- I said to him in this world, if the minutes of the meeting would say, I'm not saying you're lying, but I don't believe you. Here again, I use the same statement. I'm not saying you're lying, but when you're telling about progress in '23, '24, '28, half of the Board member would leave you if you believe anybody believe what you're saying, it would reflect on the share price just above 29p some days. Nobody is looking to merge with you or buy you. All the other company, Itika, all of them would group, all of them, somebody want to purchase them, but not you. They have no confidence in the board. I go to a lot of AGM, no confident in the Board. Thank you very much. So one question I would let you take on to answer where is that money that you shown part of Guyana and I can tell you who you sold it to, if you want to raise the name. It's not in your report, nowhere else.

I think we give them a chance to respond and you can follow up.

Thank you very much. Let me, I think, begin with the Board question, and then I'll ask Richard, to respond with respect to the Guyana sale and/or Rahul you can add. I would really begin, sir, by just saying that the longest-serving member of this Board, I think, is four years. And therefore, the people sitting around this table have been in three years, some even less. And I certainly would like to believe that they have made a concerted effort to ensure that the company gets the right skills, capacity and advice to try and write the ship from the history. We can't sit and be defending the history. But it is our fiduciary duty to say notwithstanding the history of which we are not part, we need to do what is in the best interest of the company and its shareholders. And I can say with a great degree of confidence that the Board of Directors on this company and the broad skills that they have presented has made an enormous difference in evolving from where the company was over four years ago to where it is today. I think anybody would be hard-pressed not to see that progress, notwithstanding the difficulty of the past. So I think that's the first point. I think the second point is, of course, it's a publicly listed company, it's a plc company. And accordingly, directors will be remunerated, hopefully, in consistent with market norms. But what's more important was your point about shareholder returns. And I believe that the CFO did touch on it, that we are all working hard to get to a point where this company can hopefully return to paying dividends and ensuring that the total shareholder return begins to increase. Of course, share price in the market is not something that is completely entirely within our control. But certainly, performance, free cash flows and a credible dividend policy in the coming years is really what we are aiming for. So I really hope that in a few years' time, we'll sit here and you will [ see ] us to have been credible in variants to the way that you may see us today. So that would be my perspective. On Guyana, Richard, maybe you want to respond on, I think the question is, where's the money? What happened to the money?

Sure. Maybe just to highlight a couple of things. So the transaction was announced on the 10th of August in 2023. There is a press release that's available on our website that outlines the terms of that transaction. Also, I refer you to Page 152 of the annual report and accounts, which outlines the transaction and the accounting for that transaction. In total, we received $700,000 in respect of that transaction, and we also benefit from an ongoing royalty should that development move back into production. The $700,000 can be seen on the front of the cash flow statement on Page 133 of the annual report and accounts.

What you're saying, you have written in computer. My question was dramatically, I could not find it here. So if somebody says, I made GBP 2 profit on something, and you have not put it on the statement, so where do I find it if I can't read computers? I'm 84 years of age. So what I'm saying is failure for you to disclose only because I was from Guyana, and I get to know because there is nobody who can talk to -- about Tullow in Guyana. Everybody else is going to Guyana and find oil, you better look at the [indiscernible] on all these places, everybody is going there. Shell is going there, ExxonMobil is going there, you are withdrawing from there, you must be crazy, man. So if you can send me where it appears in your report. That is what I asked. I'm not asking you to tell me, I know what the figure is. I want you to show me where it is on this. Here, you have a lot of things on the Board there. You will have a responsibility to disclose these things. That is your responsibility. So you're failure to do that, it's a failure as well.

We can send it.