Tullow Oil: Elevated prices will wipe out £90m investment by year-end


Tullow Oil has predicted that the acquisition of two stakes in offshore oilfields could pay for itself by year-end due to high oil prices.

The energy exploration firm spent £89.7million purchasing Occidental Petroleum’s interests in Ghana’s Jubilee and TEN fields, thereby increasing its holding in the pair to 39 per cent and 54 per cent, respectively.

Should oil prices remain at current levels, around $98 per Brent Crude barrel as of Wednesday, the London-listed group believes it could pay for the cost of the acquisition by the end of the year.

Acquisition: Energy exploration firm Tullow Oil spent £89.7million purchasing Occidental Petroleum’s interests in Ghana’s offshore Jubilee and TEN fields earlier this year

Alongside this, the business has maintained its yearly production forecast at 59-65,000 barrels of oil equivalent per day (kboepd), having churned out 60.9 kboepd during the first half of 2022.

Production at its Jubilee field was in line with expectations, an achievement that Tullow attributed to three new wells being brought onstream, as was output at its non-operated portfolio in Gabon and Ivory Coast.

The company also continues to expect annual free cash flow of around $380million, with about $30million originating from the extra stake it acquired in Ghana,

In addition, it expects to earn a free cash flow of about $200 million, assuming an average oil price of $95 per barrel – much higher than it has been in recent years.

Crude oil prices tumbled in the early stages of the Covid-19 pandemic after stiff travel restrictions introduced by governments across the world and factory closures severely dampened demand for petroleum.

This caused massive financial turmoil for Tullow, which fell to a $1.3billion first-half loss in 2020 as it wrote off more than $900million in exploration assets and incurred enormous impairment costs.

Tie-up: Tullow Oil agreed to a £1.4billion merger with Capricorn Energy earlier this year in a deal that would give its shareholders a 53 per cent stake in the newly-enlarged group

Tie-up: Tullow Oil agreed to a £1.4billion merger with Capricorn Energy earlier this year in a deal that would give its shareholders a 53 per cent stake in the newly-enlarged group

Yet, following the loosening of lockdown laws and the successful rollout of Covid-19 vaccination programmes, oil prices started a strong recovery, leading to a turnaround in the firm’s financial performance.

Thanks additionally to much lower impairment charges related to property, plant and equipment, Tullow rebounded to a post-tax loss of $81million last year, compared to $1.2billion in the previous 12 months.

Its chief executive Rahul Dhir remarked today: ‘It is two years since I joined Tullow, and today, we are in a very different place. A relentless focus on costs, capital discipline and operating performance, is ensuring delivery of our business plan.’

As part of this plan, the company has agreed to a £1.4billion merger with gas-focused Capricorn Energy, with Tullow shareholders set to hold a 53 per cent stake in the newly-enlarged group.

Dhir said his firm was preparing a circular and prospectus for shareholders that is set to become available in the fourth quarter, which is then expected to be followed by a vote on the proposed merger later in the year.

The boards of both businesses have recommended that investors approve the deal, yet one prominent shareholder, Legal & General Investment Management, has voiced very strong objections on economic and environmental grounds.

Last month, the asset manager claimed there was ‘no clear strategic rationale’ for the transaction, adding that it would worsen Capricorn’s exposure to oil and be unlikely to result in major cost savings.

Allegra Dawes, a senior analyst at global consultancy Third Bridge, also suggested uncertainty over future oil prices and lack of similarities between the two exploration companies as potential problems with the deal.

She said: ‘Capricorn’s partnership with Shell in Western Desert onshore gas is a very different business to Tullow Oil’s deep offshore in Ghana. Capricorn has a very gas-heavy portfolio, and Tullow is oil-heavy.

‘The merger buys Tullow more time to address its debt pile because Capricorn is a cash-flow-rich business. However, the current high oil price may not help as much as one might think thanks to the hedges put in place at the time of refinancing in 2021.’

Tullow Oil shares closed trading 2.8 per cent lower at 42.6p on Wednesday, meaning their value has declined by more than 29 per cent in the past three months.

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