Tullow Oil plc (TLW) Earnings Call Transcript & Summary

Good morning, all, and thank you very much for dialing into our Half Yearly Results today. We've got a very focused update with the year progressing well too, as we're delivering on our operational and financial targets, and importantly, today, you'll hear us we'll reiterate our 2024 cash flow guidance. But before we kind of get into the results, I just wanted to take a minute and remind ourselves of our vision to build a truly unique Pan African platform that's delivering material benefits and value for our host nations and communities. I think all of you know the scale of resources in Africa is lost, and there's a huge potential for Africa to play a very important and a growing role in the energy mix, and it's now widely acknowledged that African nations, they have the right to benefit from their natural resources. Within this context, as you know, we have a track record of improving operations, and we've built up a pretty unique offshore operator skill set, and that's really very relevant to the opportunity set that we see that's emerging in Africa. And this opportunity set is driven largely by divestment of mid- to late life assets by the IOCs. And our strong conviction is that we can bring our skills to these opportunities and importantly to our host nations that are looking for a trusted partner to improve and extend the life of their important assets. So let me now hand over to Richard, who will go over the results and the financials, and then I'll come back, and I'll talk about the operations. Thank you very much.

Thank you, Rahul, and good morning. I'll now run through our strong first half financial results, where continued operational and financial delivery has resulted in positive trends in all of our key financial metrics compared to the first half of '23. We have seen an increase in production following the completion of the Jubilee Southeast project in the second half of '23 and also supported by the almost flat production on TEN through excellent reservoir management and facility uptime. Realized oil prices are also higher, driven by both higher dated Brent prices and lower hedged giveaway with the legacy hedge program now fully closed out. Higher production and higher realized prices have contributed to a 180% increase in profit after tax to $196 million. Capital expenditure is also lower in the first half of 2024. This is driven by the completion of the Jubilee Southeast projects in the second half of '23. Net debt has also reduced compared to June '23, despite the negative free cash flow in the first half of this year. This is driven by the significant free cash flow delivery in the second half of '23. We will see the same trend in '24, which I'll cover on the next slide. So if we now move on to the outlook for '24, our guidance remains broadly unchanged. As previously indicated at the AGM, we expect to be at the lower end of our production guidance, driven primarily by the performance of the J69 well in Jubilee, which Rahul will touch on shortly. In terms of CapEx, we expect to be $20 million below our previous guidance. This is driven by the continued top quartile drilling performance in Ghana, which has enabled us to release the rig earlier than planned. There's also been a reduction of planned expenditure in Gabon. In terms of decommissioning costs, these are expected to be $70 million, with the majority of the spend happening in the second half of the year. This is primarily associated with the commencement of the Mauritania decommissioning campaign earlier than planned. We expect to deliver $200 million to $300 million of free cash flow in '24. The exact position within this range will be driven by the timing of the year-end cargo. Due to the exceptional performance of TEN, we have gained one cargo compared to plan this year, which has offset the expected slippage of the Jubilee cargo into early '25. As with '23, free cash flow will be significantly second half weighted. And as you can see by the bars on the left-hand side of the slide, this is primarily driven by the phasing of cash tax payments, with over $300 million paid in the first half versus approximately $50 million expected to be paid in the second half of the year. The split of CapEx also contributes to the second half weighting with the completion of the drilling campaign in the first half, and this will be partially offset by the spend on the Mauritania decommissioning campaign in the second half of the year. Our free cash flow delivery should result in us being below $1.4 billion of net debt by the end of this year. Now let me talk about how we have strengthened our balance sheet over the last few years and how our near-term targets for further improvement. Since the end of 2020, we have seen a 30% reduction in net debt, not only have we reduced the amount we own, we have demonstrated our ability to raise capital with $2.7 billion gross debt raised in that period in varying market conditions and from varying sources. This was demonstrated most recently with the $400 million facility from Glencore raised in 2023, which means our next uncovered debt maturity is in May '26. As of the end of June, we had $700 million of liquidity headroom. And as I've just covered, we expect to generate $200 million to $300 million of free cash flow this year. Looking ahead, we target reaching net debt of less than $1 billion and gearing of less than 1x in the near term and remain set to continue to deliver sustainable levels of free cash flow into the medium term. Our legacy hedging program has now closed. And since June, we are only paying hedge premium, materially reducing the monthly outflows. Our policy point forwards continues with 60% hedged in the first calendar year with no more than 40% upside giveaway. These steps, combined with improved market conditions resulted in a material improvement in the pricing of our debt in the last 12 months. And with the branch profits remittance tax arbitration resolution expected before year-end, we are in an ever-improving financial position and are proactively considering various options to optimize the capital structure and manage our debt maturities. I'll now hand back to Rahul.

Okay. Thank you, Richard. I wanted to kind of just reflect on before getting into the operations is kind of a safety performance because, as you know, the safe and responsible operations of our assets, that's always our first priority. In the first half of 2024, I'm pleased to say we've had no lost time injuries. However, we had to deploy our very robust oil spill response capabilities in the first half of this year due to 2 losses of primary containment that resulted in oil being released to the sea. What I'm pleased to say is that we dealt with this very quickly, and there was no major impacts. And as always, we're undergoing a very thorough investigation, which will have actions to prevent any further occurrence. Also, on a positive note, we ended the drilling campaign without any recordable EHS incidents. So that's delivering over 1,000 days of safe operations, and that's a real achievement and a testament to our safety culture. This kind of let me lead on to Jubilee. So as I just mentioned, we've now finished the latest drilling campaign at Jubilee. And if you remember, this program has started in April of 2021, and we've completed through the program 21 wells across Jubilee and TEN. As you know, we've had very good drilling performance, and the program was really completed about 6 months ahead of what we had actually planned. And it's -- overall, I would say it's been a very successful program with the majority of the wells they've performed in line with expectation. Also pleased to share that we continued the strong operating performance at Jubilee, so with around 99% uptime at the FPSO. Now you know the production at Jubilee benefits from consistent pressure support from water injection. I've talked about this before. And this, as you know, there's a very strong focus on improving water injection performance. And in the first half, that sort of continued. We had rates reaching record highs of over 280,000 barrels of water injected per day. We've had experienced some temporary periods of downtime in the water injection system. Now if I look back at the first half, Jubilee averaged about 90,000 barrels per day of oil production, and we expect to sustain this rate for the full year. And candidly, this is below our expectations, but that's primarily attributable to the poor performance from one producing well that Richard also referred to, which is J69. Now this well was brought on stream in February of this year, and there's been some additional impact from the interruptions in water injection that I mentioned, but J69is the most significant impact, and it's producing significantly less than what we expected. And naturally, there will be an impact on the reserves that are associated with this well -- as well. Now we have a clear understanding that the underperformance of this is due to lack of pressure communication from water injection in this specific area. We're clear it is a localized issue. In the rest of the field, the pressure maintenance is working well. And in fact, the improved rates of water injection that I mentioned and the start of a new water injector, which is J70 well, that's providing good uplift in reservoir pressure and it's already -- it's offset the decline. So we're working hard now in the drilling break. We have some time. We're going to set ourselves up for continued success for the next drilling program. So what are you doing -- what are we doing in this period? Number one is our focus on operational excellence will continue. Big emphasis on sustaining water injection reliability and higher FPSO uptime. What that requires is a continued focus on asset integrity, on maintenance, and so, we're planning for a maintenance shutdown in 2025 for Jubilee. The other big focus we have in this drilling break is going to be on the subsurface front. So on that one, we're going to integrate the results of the whole recent program performance into our reservoir model. So we'll have more updated reservoir models. We're also planning a 4D seismic survey that's going to be shot in early 2025. And just to put that in perspective, remember, the last 4D seismic we had in Jubilee was in 2017. So the new survey will give us up to date view of the subsurface. It will support drill candidate selection. It will help optimize the well placement. Also on the gas, we now have an extended interim gas sales agreement in place at $3 per MMBtu, and that's until the fourth quarter of 2025. So the good thing with this is it gives us more flexibility. We continue discussions with the government, but we're also considering alternative third-party offtake opportunities. That will help us realize the potential long-term revenue stream from gas in Ghana. So when you take all of this together, it reinforces our confidence in the broader opportunity set in the pipeline of projects that's available to sustain production in Jubilee out to the end of the decade. Let me now move on to TEN and to our non-operated portfolio. TEN has been performing well. Production is beating expectations. In the first half, they averaged about 19,000 barrels of oil per day. And remember, we've not added any new wells at TEN, but the focus intent has really been on reservoir management, on production optimization and on our sustaining our operating performance. And we've had -- continue to have really good response from both Ntomme and Enyenra wells, which are both performing well. So as a result, we expect the full year gross production at TEN to be slightly higher than our expectation at 18,000 barrels of oil per day. Production from our non-operated portfolio that was in line with expectations during the first half of the year. And again, we're reiterating our full year guidance, which remains unchanged at 11,000 barrels of oil per day. Just reflecting on the kind of the very sad incident that we had and talked about this at the AGM with the Perenco operated Simba field in Gabon in March 2024. As a consequence of that, production has been shut in, while there is focus on investigations and also remediations. The -- we're expecting kind of field start-up before the end of the year once all the works and the investigations are safely completed. Now we had some loss of performance from Simba. That's been offset by improvements in other fields, including Ezanga and Echira and just speaks to the kind of robustness of the portfolio there. The ILX program in Gabon also continues, and we're currently drilling a new well. It's the Sarafina well on the Simba license. And that's again, depending on the success of that, but it sort of illustrates the low-risk opportunity set that exists in Gabon. And again, if this is successful, it can add incremental production very quickly to the portfolio. It pays back in less than a year once it's on stream. Moving on, we continue to progress along our pathway to net 0 by 2030 on both Scope 1 and Scope 2 emissions. We've talked a lot about how we are decarbonizing our operated assets. That's an important driver. But in addition to that, it's a very significant step we've taken this year, which will address what are the hard to abate residual emissions. So as part of that, in May, we took FID in partnership with the Forestry Commission in Ghana on a nature-based carbon offset program. And what this is, is it's a high integrity. It's a jurisdictional based, what they call is quite a mouthful. It's reduced emissions from deforestation and degradation. So these are called REDD+ programs. It's a big scale program. It covers 2 million hectares of land across -- was the Bono and the Bono East regions of Ghana. We will invest over 10 years, about $90 million. It's implementing the program. And that's going to generate up to 1 million tons per year of certified carbon offsets. And that's very much in line with our NetZero program. Now we've taken a hands-on approach, and it's a unique program because it not only it offsets the emissions, but it also had a positive impact in Ghana. That's in line with our shared prosperity strategy, which is impacting over 1 million local people, who will potentially benefit through the jobs, through associated opportunities and also through better forest conservation. So we're really excited about this. It's a great step forward. Let me now kind of just to wrap up. So where are we? So we -- 2024 is going well. We continue to have good operational performance. We're maintaining 2024 production, free cash flow guidance. We are now entering into post a lot of the infrastructure spend that we had. We are entering into a period of lower capital intensity. We're taking the time that we have now with the drilling break to prepare for continued success for the next campaign in Ghana. And we retain what I hope you come to recognize is a very sharp focus on cost and capital discipline. And we continue to live our mantra of every dollar that matters in every barrel comes. As we look to the second half, as Richard said, we got some important events coming up. We anticipate the outcome of the Ghana branch profits remittance tax arbitration, and we're very confident that this tax is not applicable to Tullow. I think also importantly, again, reiterating what Richard said, the balance sheet, as you see, is continuously improving. We have no near-term maturity and with a strong free cash flow outlook and the value of the underlying assets, it means that we're very well positioned to optimize our capital structure at the right time. So our focus, which is on reliable performance, consistent delivery, which is really what the message is of this results that support the very compelling and unique value proposition that we offer. I think we continue to be a highly cash-generative business that will enable us to continue deleveraging, while also investing in both organic and inorganic growth. And with this continued progress, I believe we should be able to consider returns to shareholders in the future. So I want to thank you, again for your attention, and we're -- Richard and I are happy to take questions.

Thank you very much, Rahul. [Operator Instructions] Yes. We'll take our first question from James Hosie at Shore Capital.

I'm just wondering how long you think you can sustain Jubilee production at 90,000 barrels a day without more drilling. And just noting your comments at the 4D seismic survey due to complete early 2025, does that mean we should be assuming no more drilling at Jubilee until, say, the second half of 2025?

So I think what the guidance we're giving for this year, James, firstly, it's good to hear from you. I think the guidance we're giving is we're going to -- of 90,000 barrels a day through this year. We will expect a decline starting in '25. But -- also what I said, James, is that we're focusing on reservoir management. We're focusing on production optimization. And you've seen what we've been able to do in TEN in terms of leveraging all of that to manage the decline. So expect us to continue those efforts on Jubilee as well. So -- but certainly, we have visibility through the rest of the year, where we feel we can sustain production at current levels without drilling new wells. In terms of the restart for the next program, I think that it is a big focus on subsurface. So we are refreshing our reservoir models. We're going to shoot 4D seismic early next year, and we're going to be looking to restart, I would say sometime kind of second half of '25, early '26 and that's the time frame that we're working to.

[Operator Instructions] Next question is from Mark Wilson at Jefferies.

Yes. A question for Richard here. I was just wondering how that -- the maturity of the RCF impacts your plans in the second half. Do you need that liquidity headroom to be in place ahead of when that RCF undrawn matures at the end of the year.

Yes. Good morning, Mark, so look, we've got obviously $700 million of liquidity headroom, as we sit today, where we generate a significant amount of cash in the second half of this year, which will provide increased liquidity support. And then our plans on refinancing, as I said, we're looking at a broad range of options. We're working up those options from a refinancing perspective, and we'll be able to opportunistic pull the trigger on one of those when the time is right from both our perspective and markets and whether that includes an extension of the RCF or something else, we'll determine that at the right time.

Got it. Okay. Also then, Rahul, I read -- I heard your opening remarks regarding African countries and the expertise that Tullow bring. And I read that as potentially looking at M&A options or new entries, Am I overthinking it? Is my question?

No, I'd say -- no, you're not. I think that the -- in some ways, I mean, the model is very simple, right? We are today very firmly in the space of extracting value from mid- to late life assets. Everything that we're doing, whether it's reservoir management, production optimization, capital efficiency costs, operational uptime, very much relevant to the opportunities that we see in the African continent. So it's a kind of a statement in the sense kind of the obvious. I think you see the market, where majors are reducing their exposure to these assets. So there are kind of unique opportunities. I think the point is what Richard and I have emphasized is that we are going to remain very disciplined about how we allocate capital. So because I'm going to deliver, I'm going to allocate x dollars of capital at a 40% IRR. All we're saying is that we are now introducing the flexibility to say we're going to look at both organic and inorganic opportunities across, which we allocate capital, but that discipline to capital allocation will remain. And so, from an investor point of view, you're simply saying, I'm exposed to a larger opportunity set through which these guys are going to allocate capital with the same commitment to returns -- to profitability.

Our next question is from Nikhil Bhat at JPMorgan.

I had about 3 questions. Firstly, on the Ghana arbitration verdict. Is there a date by when the court is compelled to give a verdict or by when you definitely expect a verdict, just curious on the time line? Secondly, I didn't see you reiterate the guidance of generating $600 million free cash flow '24, '25. I'm wondering if that's still on the table? And then lastly, I don't know if I misheard this, but I thought I heard a planned Jubilee maintenance shutdown in 2025. I was wondering if you could elaborate on how long do you expect this to last? And what happens to production at that time?

So Nikhil, let me take the last one and then Richard can take the first 2. It's very simple, like we periodically will actually shut down production for a small period, which allows us then to work on plant maintenance, asset integrity, equipment upgrades and so on and so forth. So that's -- and we haven't finalized the duration of that yet. But typically, that's a process that we'll go through over the next few months. But this will be approximately in the sort of 2 weeks-ish range is typically, but don't take it as guidance right now because we haven't done all of the planning work around it. And during that 2-week period, it is a shutdown. So production goes to 0. And if you're familiar with refineries, it's very similar to what refinery turnarounds are.

Sure. Thanks, Rahul. We should get a result on the Ghana arbitration no later than at some point in November. In terms of the free cash flow guidance, what we're -- where we're focused on is getting to $1 billion of net debt and 1x gearing, which is essentially the cash flow guidance that we provided is the number to get us to that position. Where we're at today is whether that is the 31st of December 2025 or due to the timing of liftings, whether that's at some point in early 2026, we can't quite determine at this stage, but we expect will be very much in the near term.

We've got time for one more question, and we'll take a follow-up question from James Hosie at Shore Capital.

Yes. Thanks, and back for more. Just as a follow-up really on the Ghana branch profits tax arbitration. I'm just wondering, could we anticipate a binary outcome either Tullow has nothing to pay [indiscernible]? Or could we end up with a ruling that's somewhere in the middle of a smaller liability due?

Yes. So there's -- I suppose there's a range of possible outcomes. Obviously, the one that we expect is that we'll be successful and then nothing will be owed. And then if there is a result, where it rules against us, I suppose there's 2 [Technical Difficulty] from that. One is that the panel will say we're unsuccessful and rule on a number. That number could be less than the $320 million, which has originally been claimed or they could then say that they find against us, but they can't rule on a number, which will then push us into the Ghana court process. But I think as we previously stated, if we're unsuccessful, we have a number of avenues to continue to explore within the Ghana court process, where we'll continue to dispute this claim. So it's -- end of it, if it's ruled against -- if it's ruled against us, then it could take a long time for resolution. Correct.

Okay. That's clear. And just is there an extent to which this arbitration would be a precedent for your other tax disputes?

Let me take a go at that. So legally, they're all very separate. And -- but I think there is a -- and we could all speculate I think that certainly -- it would -- we believe that a positive outcome on -- in our favor on the branch profits, I think, it certainly would reinforce what we and many in the government believe that there is a better way and an amicable way to resolve the others.

Well, that brings our focused presentation and Q&A to an end today. Thank you very much, everyone, for joining us. Thank you, and goodbye.