Strategy

Strategy

Our strategy has shown Tullow’s resilience during the recent industry downturn and demonstrates our flexibility to oil price volatility.

strategy 2017

   

HIGH-MARGIN PRODUCTION CASH FLOW

Strategy in action:

Our production was enhanced in 2016 withthe addition of the TEN field, offshore Ghana. With the Jubilee and TEN fields, we now have two young assets in Ghana which have a low cost of supply compared to other fields globally. These fields together with a prudent hedging policy will provide a solid revenue base for our business, even if oil prices remain low in the short to medium term.

Future plans:

Through the assets we have onstream today, our production profile has potential to reach in excess of 100,000 bopd net to Tullow from the early 2020s, delivering substantial cash flow. We also plan to further reduce the underlying operating cost of each barrel produced in Ghana through the synergies in operating two offshore fields.

Exploration & Appraisal

Strategy in action:

The fall in oil prices since mid‑2014 saw us reduce our exploration expenditure but we have made this investment work harder, focusing on targeted drilling, seismic acquisition in key prospective areas and replenishing our prospect inventory. In 2016, we continued low-cost exploration activities in the South Lokichar Basin in Kenya and management estimates that gross mean recoverable resources increased to 750 mmbbls. Exploration activity recommenced in December to further underpin the discovered resource base and close the gap towards the basin’s upside of 1 billion barrels.

Future plans:

Exploration is fundamental to our growth strategy. Lower industry costs, carries for our share of costs by JV partners and appropriate equity interests enable us to maximise a constrained budget and maintain a meaningful exploration and appraisal programme. In 2017, Tullow plans to drill the exciting Araku prospect offshore Suriname and conduct seismic campaigns in Mauritania, Kenya, Ghana, Jamaica, Uruguay and Guyana.

MONETISATION OPTIONS & PORTFOLIO MANAGEMENT

Strategy in action:

In 2016, Tullow made good progress to divest and exit/relinquish its Norwegian assets and all deals are expected to complete by April 2017. In early 2017, Tullow agreed to farm-down to Total a substantial portion of its Uganda assets for a total consideration of $900 million, leaving Tullow with an 11.76 per cent interest in the upstream, which we expect to reduce to 10 per cent once the Government of Uganda formally exercises its back-in right.

Future plans:

In 2017, we will focus on completing the farm-down of the interest in our Uganda asset. Tullow’s high equity levels in parts of our asset base also present further future portfolio management opportunities.

SELECTIVE DEVELOPMENT

Strategy in action:

We selectively develop theoil we find, focusing on development projects that are economically viable and will return sustainable future cash flows. The TEN Project, a large complex development offshore Ghana was delivered on time and on budget in August 2016. Further progress on the Kenyan and Ugandan developments was achieved in 2016 and significant steps have been taken in both countries to progress the projects and commence Front End Engineering Design (FEED) in 2017.

Future plans:

The opportunity to develop the significant resources discovered in Kenya and Uganda is a major part of Tullow’s strategy. These low cost developments make them very competitive and commercially viable, even at low oil prices.

Costs

Strategy in action:

Tullow has a focus on continuedcost management, and the Group is on track to deliver G&A cost savings in excess of its $500 million target. While some budget reductions are a result of lower industry costs, a large proportion of savings can also be attributed to thinking innovatively and adapting our processes to be more efficient.

Future plans:

Tullow will remain disciplined in terms of its budgeting, capital allocation and savings realised from more efficient ways of working. The Group is committed to retaining its cost-conscious approach, even when oil prices recover.

Shareholder value

Strategy in action:

As and when surplus cashis generated, cash is reinvested into additional operational activities, used to pay down debt or returned to shareholders. Following first oil from the TEN fields, Tullow started generating positive free cash flow in the fourth quarter of 2016.

Future plans:

The Board’s main priority is to deleverage the business and to achieve our policy of having less than 2.5 times net debt to Adjusted EBITDAX. We are pursuing multiple paths to achieve this objective, including organic repayment of debt from free cash flow; portfolio management; as well as other financing levers available.