AB

Tullow Oil

Posted on April 10, 2017 · Posted in Accounting & Business

It’s been a busy start of the year for Ireland’s largest energy exploration business Tullow Oil.  In the space of a few days in January and February, the company announced its CFO was taking sick leave, its founding CEO was stepping down – oh, and that it had made a full year loss of $600m.

 

Back in 1986 almost no one believed that an oil industry outsider operating from a small town in Ireland could set up an exploration company.   But Aidan Heavey did.  Today it is one of Ireland’s 60 largest companies.  Tullow Oil’s approach was simple and highly profitable when oil prices were a hundred dollars a barrel.  While the energy majors focused on the big oil and gas fields, Tullow explored smaller fields – including in politically volatile African countries.  Often it de-risked early stage developments and then sold them onto the big companies.

 

The credit for Tullow Oil’s success must lie with Heavey as its founder and CEO for more than 30 years.  Which is why Heavey’s announcement that he is stepping down as CEO represents a key point in the company’s history.  But he is not leaving yet and instead is moving sideways to the role of non-executive chairman (for a maximum of two years).  This is in breach of what is regarded as good corporate governance practice.  The company says that its dependence on Heavey’s experience led to investor demands that he retain a central role as an interim measure.

 

Paul McDade, Tullow Oil’s chief operating officer, will take over as CEO following the company’s AGM on 26 April.  McDade, who is 53, is an engineer with more than 25 years in the energy industry.  He is a former Centrica executive who has also worked for Conoco and has had operational, commercial and management roles in developments in the North Sea, Africa, Asia and Latin America.

 

McDade, says Heavey, is thus well placed to lead Tullow Oil into the next stage of its development.  “Paul has run our business as COO since 2004 and has two major deep water developments to his credit,” says the company’s outgoing CEO. “He is a Tullow man to his core and I can think of no one that I would rather have succeed me. I look forward to working with him closely during a transition period before assisting the board in finding my successor as chairman.”

 

Yet it will be a tough transition for McDade and Tullow, made tougher by the lack of a long standing CFO by his side.  Oil industry veteran Ian Springett had to withdraw from his role as CFO in January to receive treatment for an undisclosed medical condition.  Les Wood, who joined Tullow in 2014, has taken over as interim CFO.  Both Wood and Springett are former BP executives.

 

And McDade is taking on the CEO role at a difficult time for the company.  While its 2016 revenues were strong, its bottom line was poor.  The company posted an after tax loss of $600m (down from $1bn in 2015) on revenues of $1.3bn (down from $1.6bn).  This was after write-offs and impairments of more than $1bn.  Last year represented a period of significant challenge for the company – its debt rose in the period from $4bn to nearly $4.8bn (but with a significant additional debt facility), while its capital investment fell from more than $1.7bn to $857m.  Cash generated from its operations slipped from $967m in 2015 to $774m.

 

Despite the results, Tullow’s share price initially remained steady at around £3, which was about twice that of a year before.  Tullow’s weak share price in early 2016 followed the announcement of the company’s first loss in 15 years and a ratings downgrade by Moody’s.  But the company’s value remains substantially below its high point in 2011, when shares traded at around £16.

 

Unsurprisingly, Tullow has been badly affected by the collapse in world oil prices.  In addition, its strategy of exploring in areas of political instability can create uncertainty about the development of some of its potential fields.  There have been disputes about access rights in Ghana, for example.

 

Both HSBC and Goldman downgraded Tullow stocks in the run-up to the results announcement in February, anxious not only about the still low oil price, but also the level of debt that Tullow is carrying.  HSBC commented: “The group should begin to deleverage this year after five years of rising debt with production ramping up and capital expenditure falling sharply.”   This is in line with the company’s own intentions.

 

According to Heavey – quoted in the Sunday Business Post – the company is now firmly on recovery trajectory.  “Last year was quite a good year,” he said, “even though we had major issues.  But it was a year when we got all the costs under control and we got the business in a state when it was profitable even at low oil prices.  We wrote off a huge amount of stuff that was on the balance sheet and if you look at the results there’s about $1bn of non-cash [items] which we wrote-off in the last 12 months and that created the loss.  But it left the balance sheet in good shape.”

 

Africa remains the key development region for Tullow.  At the beginning of this year Tullow confirmed an oil field discovery in Northern Kenya.  It also announced a sale of most of its interests in one of its Uganda projects to Total.  The major success for the company last year, Heavey said, was delivering the TEN fields in Ghana, the country’s second major oil and gas development.  Heavey is also positive about progress on the Lake Albert Development in Uganda, which he says will generate secure future cash flow for the group “from one of the industry’s few truly low cost development projects”.

 

Heavey was also upbeat about the prospects for Tullow’s explorations, not just in Africa, but also in Suriname in South America, where it owns 30% of a major opportunity.  “Probably the best prospect we have ever seen,” he said, predicting output of over half a billion barrels “if it comes in”.  The company is also involved in new activity in Zambia and Guyana, while looking to Mauritania, Kenya, Ghana, Jamaica, Uruguay and Guyana for possible future drilling.

George Cazenove, Tullow Oil’s head of communications, says it is right that the company is positive about its future.  “Tullow is a disciplined, flexible, low-cost, full cycle business that is very well-positioned for the year ahead, having re-set the business and with deleveraging underway,” he told AB.  “Deleveraging remains our key strategic focus and we have made a good start through TEN cash flow and asset disposals…. Looking to the future, Tullow has a solid base of low cost production in West Africa with additional production coming on stream in Uganda over the medium term.  Over the longer term Tullow’s growth will rely on an exploration-led strategy. We have a diverse portfolio of high-impact prospects near current assets, onshore Africa and greenfield basin-openers.”

 

Investors might, though, be set for a still bumpy journey.  According to a report in January in the Sunday Business Post, some hedge funds were shorting the company’s shares in the expectation that the price will fall again, as indeed began to happen in the weeks following the company’s financial report. It looks as if 2017 will be a pivotal year for Tullow Oil.