Tullow Oil plc 2005 Results
29/03/2006
Record Results in 2005; Positive Outlook for 2006
Tullow Oil plc (Tullow), the independent oil and gas, exploration and production Group, announces its results for the year ended 31 December 2005. These results have been prepared in accordance with the Group’s policies under International Financial Reporting Standards (IFRS).
Tullow had a strong 2005, delivering record results. The Group achieved exceptional asset performance and consistent organic production growth against a background of increasing global oil and gas prices. This performance, coupled with financing initiatives undertaken in 2005, has allowed Tullow to reinvest at record levels while maintaining a progressive dividend policy and modest levels of gearing.
Results Highlights
| 2005 | 2004 | Change | |
| £ millions | £ millions | ||
| Sales Revenue | 445.2 | 225.3 | Up 98% |
| Operating Profit | 198.6 | 56.8 | Up 250% |
| Profit Before Tax | 178.6 | 46.8 | Up 282% |
| Operating Cash Flow before Working Capital | 288.1 | 139.5 | Up 106% |
| Stg p | Stg p | ||
| Basic Earnings per Share | 17.50 | 5.88 | Up 198% |
| Final Dividend per Share | 3.00 | 1.25 | Up 140% |
- 44% increase in average annual production to 58,450 boepd
- Organic reserves replacement of 118%; total reserves increased by 53 mmboe to 358 mmboe
- Current production is 69,000 boepd and is expected to reach 75,000 boepd by year end
- Three discoveries close to Tullow infrastructure in the UK and Gabon
- Completion of £200 million Schooner and Ketch acquisition and major redevelopment under way
- Steady progress in development of the giant Kudu gas project offshore Namibia
- Good progress on the key Okume Complex and West Espoir developments
- Year-to-date exploration: two oil discoveries in Uganda, one UK gas discovery, two dry holes in Gabon
Commenting today, Pat Plunkett, Chairman, said:
“2005 was a year of many achievements for Tullow which included our first operated UK offshore development, the largest refinancing ever undertaken by a UK oil and gas independent and a record level of development, exploration and new venture activity across the Group’s three core areas. Today’s record results demonstrate the quality and depth of Tullow’s portfolio. We are reaping the benefits of the scale achieved through our major acquisition and investment programme of recent years and we look forward to the many exciting opportunities for further development and growth in 2006 and beyond.”
Aidan Heavey, Chief Executive, said:
“Our production is growing strongly and is expected to reach 75,000 boepd by the end of the year. On the exploration front we plan to drill over 20 wells, including further wells in Uganda, where we have scheduled an extensive exploration and appraisal programme to build on the recent M’Puta and Waraga discoveries. The outlook for Tullow is very positive. Oil and gas prices are strong and forecast to remain so. Our existing assets and work programmes are expected to deliver robust organic growth and our new ventures programme and other development opportunities offer compelling upside potential.”
Presentation, Webcast and Conference Calls
In conjunction with these results Tullow is conducting a presentation in London and a number of events for the financial community. Details are available on page 14 of this announcement and in the 2005 Results Centre on the Group’s website at www.tullowoil.com.
2005 Results
For the year ended 31 December 20052005 was an excellent year for Tullow, with many new achievements in operations and a record financial performance. These results illustrate the benefits of the Group’s increased scale and deliver on the significant investments made over the past five years, during which period the Group has been transformed through a mixture of organic and acquisition-led expansion.
Record Financial Performance
Sales revenue increased 98% to £445.2 million (2004: £225.3 million), reflecting a full year contribution from the Energy Africa assets, nine months contribution from the Schooner and Ketch fields and oil and gas prices significantly higher than in 2004.
Operating profit increased 250% to £198.6 million (2004: £56.8 million) and profit before tax increased 282% to £178.6 million (2004: £46.8 million), including the profit of £36.1 million on the disposal of non-core oil assets in the UK and offshore Congo and the sale of equity in the Horne & Wren development.
Basic earnings per share amounted to 17.50 pence, an increase of 198% compared to 5.88 pence in 2004. Operating cash flow before movements in working capital amounted to £288.1 million, an increase of 106% over 2004, reflecting the quality of the Group's producing asset base and allowing record levels of reinvestment in the business.
Progressive Dividend Policy
The Group’s capital expenditure programmes are comfortably funded from strong operating cash flow and profit on disposals. The refinancing initiatives undertaken during 2005 have significantly enhanced the Group’s financial flexibility over both the short and long-term. In line with the Group's progressive dividend policy, and reflecting the cash generated by the business and the capital investment and acquisition opportunities available, the Board recommends a final dividend of 3.00 pence per share. This brings the total dividend for the year to 4.00 pence per share (2004: 1.75 pence per share). Subject to shareholder approval at the Annual General Meeting (AGM), the dividend will be paid on 7 June to shareholders on the register at 12 May.
Major investment in People and Facilities
A major investment in people and facilities has been made reflecting the material growth of the Group in recent years. During 2005 the London team moved to a new office at Chiswick, over 40 additional staff were recruited and dedicated teams were put in place for the important Schooner & Ketch and Kudu projects.
As announced in February, Adrian Nel, Tullow’s Exploration Director, will retire at the AGM in May. Since his appointment to the Board in September 2004, Adrian has made an outstanding contribution to the integration of Tullow’s exploration activities and enhanced the Group’s licence portfolio and exploration strategy. Angus McCoss will join Tullow in April as General Manager Exploration. Angus previously worked for the Shell Group in Nigeria.
Paul McDade is appointed to the Board of Tullow, with effect from today. Paul joined the Group in 2001 and became Chief Operating Officer following the Energy Africa Acquisition in 2004.
Continuing Positive Outlook
Tullow has steadily developed a balanced portfolio of international exploration and production assets. The performance of these assets during 2005 and the organic growth expected in 2006 provide a solid base for further growth. Projects such as the development of the Kudu field in Namibia and the exploration programme in Uganda provide possibilities for significant changes in the Group’s scale, while the Group’s cash flow and modest gearing create the flexibility to accelerate programmes and take advantage of development and acquisition opportunities as they arise. The outlook for Tullow is very positive.
Operations Review
The focus of Tullow’s business is to maintain a strong portfolio of assets and a growth strategy that will allow the Group to continue its development through all phases of the resource price cycle. Over time we have built a balanced portfolio focused on three core areas – North West Europe, Africa and South Asia. We strive to maintain this balance in the various aspects of our portfolio: between oil and gas production, between our geographical areas, across political and currency exposures and between moderate and high-risk exploration programmes.
Growing in the UK Gas Market
Tullow has steadily increased its acreage and developed its reputation as a technically innovative and commercially astute operator since its entry into the UK Southern North Sea in 2001. Tullow now has over 40 licences and a strategic position in terms of acreage and infrastructure. During this time, the UK has become a net importer of gas to satisfy indigenous demand. This market change has increased pressure on pricing, resulting in sustained gas price rises for domestic and industrial consumers. While a number of initiatives are planned to increase national supply capability, the recent extreme volatility in European gas markets provides further evidence that the prospects for independent producers in the UK gas market remain very favourable.
The Group continues to extend and enhance its position through a combination of acquisitions, organic growth via active development, exploration and participation in licensing rounds. 2005 activity, including the completion of the operated Horne & Wren development, the acquisition of the Schooner and Ketch assets and infill drilling in producing fields brought Tullow’s UK Gas production to over 200 mmscfd for the first time in December. This production level has since increased to over 210 mmscfd with the recent completion of the Delilah well. In addition, the first well in the Schooner and Ketch redevelopment, Schooner-10, has successfully encountered the reservoir and is being prepared for prodction in April 2006.
Exploration is an important part of the UK business and the gas discoveries during 2005 by the Opal and K3 exploration wells, and more recently of the Humphrey well, continue to demonstrate the prospectivity of the region and support its long-term future. Tullow plans a further six UK exploration wells for this year, including the Cygnus exploration well which is currently drilling.
African Reserve and Production Growth
Tullow believes there is an outstanding opportunity over the coming years for the Group to continue to build a truly pan-African oil and gas business. During 2005 we invested over £139 million in our African business, with exceptional results:
- In Gabon, infill drilling and exploration programmes have more than doubled reserves over the last two years and allowed us to maintain net production to Tullow in excess of 17,000 boepd;
- In Equatorial Guinea, ongoing infill drilling and careful management of the Ceiba field have enabled it to attain production levels not seen since 2002, while the Okume project remains within budget and on schedule for first oil by the end of 2006;
- In Congo, the M’Boundi field delineation is almost complete. In 2005 the field delivered further significant increases in production and reserves and improved sales prices;
- In Côte d’Ivoire, infill drilling on Espoir has brought production increases of over 20% in recent months, while first oil from the West Espoir development project is expected before year end;
- Current African oil production exceeds 34,000 bopd, with further increases anticipated over the remainder of the year.
In Namibia, Tullow continues to make steady progress in the development of the Kudu gas field. This is a strategic project, with the potential to transform the Namibian energy market and contribute significantly to its future energy requirements. 2006 will be an important year both for the gas sales negotiations for the gas-to-power development and for the preparation for two appraisal wells scheduled for the first quarter of 2007. These wells will assist in determining the potential of the significant reserves upside of the field.
Africa is a region of high exploration potential. During 2005 Tullow drilled a total of six wells, recording a discovery in Gabon and providing significant support for future work in Mauritania. Three wells were drilled in Angola and while results were disappointing, a number of further opportunities have been identified. The 2006 drilling programme has already brought very encouraging results. High impact exploration projects in Uganda produced two discoveries, M’puta and Waraga and could mark the first stage in the development of a material new hydrocarbon province. Tullow and its partners plan a minimum of four further onshore wells in 2006 and two additional wells in Lake Albert in 2007 as part of an extensive exploration and appraisal programme across its Albertine Basin acreage. Neither of two wells in early 2006 on the Akoum West and Soulandaka prospects in Gabon discovered commercial hydrocarbons and the rig will now move to drill the Dogbolter prospect in the Gryphon Marin licence.
Tullow continues to seek new ventures in Africa and in March 2006, the Government of Madagascar approved Tullow’s participation in the onshore Block 3109. Further exploration and development opportunities are currently in the final stages of negotiation and should include entry into at least one additional country.
Renewing the South Asia Business
While Tullow’s production in South Asia has been modest, an extensive work programme in 2005 covering a number of important exploration and development projects has the potential to transform the Group’s business in the area.
In Bangladesh, Tullow submitted an Appraisal Programme to Petrobangla for the Bangora and Lalmai discoveries in Block 9. The programme includes extensive 3D seismic, appraisal drilling and the initiation of production on a long-term test basis to help supply much needed gas to the Dhaka region. The seismic has been completed and provided key information and encouragement for the appraisal drilling, which will start in April 2006, as will first gas from the long-term test. The introduction of Total as a partner in offshore Blocks 17&18 brought a renewal of activity with the recent commencement of an offshore seismic survey.
In Pakistan, work on the development of Chachar field continues, with first gas forecast for the final quarter of 2006. Drilling has commenced on the Shahpur Chakar well in the Nawabshah block. We also added a number of potentially high impact exploration blocks to our portfolio in Pakistan including Kohat, where a seismic survey is under way and drilling is likely to begin early in 2007.
In India, we recently commenced a 1,152 km 2D seismic programme in Block CB-ON/1. In parallel, the joint venture is integrating information from significant regional discoveries to the South and the North, and we anticipate a multi-well drilling programme in 2007.
Rigorous Operational Risk Management
Risk management is central to our business, particularly in light of the international spread of our activities and the dynamic nature of our industry. The Group gives regular consideration to the key risks facing the business, with particular reference to those concerning the overall safety of our operations, the geographical balance of our activities and the characteristics of our individual assets and joint ventures.
Finance Review
Tullow had a very strong 2005, achieving record profits, earnings and cash flow from operations.
Compliance with IFRS
The results for 2005 have been prepared in accordance with the Group’s policies under IFRS. Tullow adopted IFRS with effect from 1 January 2004, with the exception of IAS 39 in respect of derivative financial instruments, which has been adopted with effect from 1 January 2005. The 2004 financial statements have been restated under IFRS and were published on 22 August 2005 with full details of the accounting policies adopted and are published on the Group’s website at www.tullowoil.com.
Strong Results across Key Performance Indicators
The Group’s financial performance was complemented by strong results across key performance indicators.
| Key Performance Indicators | 2005 | 2004 | Change |
| Lost Time Incident Frequency Rate1 | 0.82 | 1.96 | Down 58% |
| Production (boepd) | 58,450 | 40,600 | Up 44% |
| Operating Cash flow before working capital per boe (£) | 13.50 | 9.45 | Up 43% |
| Cash Operating Costs per boe (£)2 | 4.84 | 4.40 | Up 10% |
| Gearing (%)3 | 36% | 17% | Up 19% |
| Reserve Replacement (%) | 118% | 83% | Up 35% |
| Realised Oil Price per bbl ($) | 43.05 | 34.13 | Up 26% |
| Realised Gas Price (pence per therm) | 33.85 | 22.89 | Up 47% |
1 Lost Time Incidents per million man hours worked
2 Cash operating costs are cost of sales excluding depletion and amortisation and under/over lift movements
3 Gearing is net debt divided by net assets
Excellent Operating Performance
Working interest production averaged 58,450 boepd, while sales volumes averaged 53,350 boepd. These production figures are 44% ahead of 2004, principally as a result of a full year contribution from the Energy Africa assets and a nine-month contribution from the Schooner and Ketch acquisition, completed in March. During the year the Group disposed of the Alba and Caledonia assets in June and the offshore Congo (Brazzaville) interests in August.
Average prices realised during the year were significantly higher than in 2004. Oil was US$43.05/bbl (2004: US$34.13/bbl) and UK gas was 33.85p/therm (2004: 22.89p/therm). Tullow’s oil production sold at an average discount of 13% to Brent during the year. This discount is expected to reduce to between 8% and 9% during 2006. The Group also received tariff income of £14.7 million (2004: £9.4 million) from use of its UK infrastructure.
The combination of the higher prices and increased volumes meant that revenue increased 98% to £445.2 million (2004: £225.3 million).
| Revenue analysed by Core Area | Oil | Gas | Total | % of Total |
| £ millions | £ millions | £ millions | ||
| NW Europe (UK) | 17.6 | 161.9 | 179.5 | 40% |
| Africa | 264.9 | - | 264.9 | 60% |
| South Asia | - | 0.8 | 0.8 | - |
| Total | 282.5 | 162.7 | 445.2 | |
| % of Total | 63% | 37% |
Operating profit before exploration activities amounted to £224.4 million (2004: £74.7 million), up 200%, reflecting the strong growth in Group production, profit on disposals and realised oil and gas prices.
Underlying cash operating costs, which exclude depletion and amortisation and movements on under/over lift, amounted to £102.2 million (£4.84/boe). These costs were marginally above expectations and reflected, in particular, oil price linked royalty payments on Gabonese production. Reported operating costs before depletion and amortisation for the year of £123.5 million (2004: £60.1 million) are also impacted by the inclusion at market value of £8.2 million associated with overlifted volumes at 31 December, £5.5 million of overlift associated with the disposal of Alba and Caledonia and £7.6 million of overlift associated with the sale of the Group’s offshore Congo interests, completed in August 2005.
Depreciation, depletion and amortisation for the year amounted to £119.7 million (£5.67/boe). Depreciation includes a total of £2.4 million of impairment costs associated with Tullow’s producing interests in Pakistan.
Higher Exploration Write-off reflecting Increased Activity
Exploration costs written off were £25.8 million (2004: £18.0 million), in accordance with the Group’s “successful efforts” accounting policy, which requires that all costs associated with unsuccessful exploration are written off to the Income Statement. The Group drilled 10 wells in 2005, achieved four discoveries, and is planning to drill 20 wells in 2006.
Hedging reflected in Income Statement under IFRS
At 31 December 2005 the Group’s derivative instruments had a negative mark to market value of £147.8 million. Of this amount, £97.2 million (66%) relates to contracts acquired as part of the acquisition of Energy Africa in 2004. While the bulk of these arrangements qualify for hedge accounting and will consequently be largely reflected in the Income Statement as the related contracts mature, the variations in crude oil discounts and gas production patterns for Tullow inevitably led to a degree of hedge ineffectiveness which is accordingly included in the charge of £0.2 million recognised in the Income Statement for the year. The charge also reflects the effect of time value on the mark to market value of the Group’s derivative instruments. The Group’s hedge position as at 22 March 2006 can be summarised as follows:
| Hedge Position | H1 2006 | H2 2006 | 2007 |
| Oil | |||
| Volume – bopd | 10,242 | 11,217 | 7,000 |
| Current Price Hedge - US$/bbl | 39.99 | 42.90 | 45.06 |
| Gas Hedges | |||
| Volume – mmscfd | 91.67 | 50.00 | 15.00 |
| Current Price Hedge - p/therm | 58.70 | 42.61 | 58.68 |
Healthy Interest Cover
The net interest charge for the year was £19.8 million (2004: £10.0 million). The increase reflects higher levels of net debt arising from acquisitions and a one-off non-cash charge of £4.1 million representing accelerated amortisation of financing fees associated with facilities cancelled during the year as part of the Group’s refinancing. Excluding these items, and eliminating gains from asset disposals, interest was covered over 15.5 times (2004: 15.9 times).
Taxation
The tax charge of £65.4 million (2004: £15.5 million) relates to the Group’s enlarged North Sea and Gabonese activities and represents 37% of the Group’s profit before tax (2004: 33%). After adjusting for exploration costs and non-recurring items associated with the profit on asset disposals, the Group’s underlying effective tax rate for the year is 35% (2004: 25%).
While Tullow’s UK business has prospered, the Government’s decision to raise the supplemental corporation tax rate for the industry is difficult to understand at a time when the UK, as a net importer of gas, is seeking to promote investment in exploration and maximise recovery of indigenous reserves.
Acquisitions and Portfolio Management
During the year Tullow completed the acquisition of the Schooner and Ketch assets for a net cash payment on completion of £189.3 million. A purchase price allocation exercise has been undertaken on these assets incorporating the fair value of all reserves, costs and contractual arrangements acquired, resulting in a total allocation to oil and gas assets of £218.0 million. A creditor of £31.3 million in respect of the gas contracts which were out-of-the-money as at 31 March 2005 has also been recognised; the majority of these contracts expire in late 2007.
The Group completed the disposal of the Alba and Caledonia offshore assets in the UK and the offshore Congo (Brazzaville) assets in June and August 2005 respectively. In addition, final income has been recognised in relation to incremental consideration received based on reserves and performance of the Horne & Wren fields. The profit on disposals amounts to £36.1 million (inclusive of the £5.5 million of overlift outlined above).
Record Operating Cash Flow and Strong Balance Sheet
The strong pricing environment, allied to increasing production and effective control of underlying operating costs, led to record operating cash flow before working capital movements of £288.1 million, 106% ahead of 2004. This cash flow enabled the Group to maintain modest gearing of 36% at year end, to increase dividends to shareholders in respect of the period by 129% and to invest £193.0 million in exploration and development activities in the year.
Over 80% of Group capital expenditure was associated with ongoing development and production enhancement projects in the UK, Gabon, Congo (Brazzaville), Equatorial Guinea and Côte d’Ivoire. The programmes associated with this expenditure have allowed Tullow to achieve organic reserve replacement of 118% over the period. Tullow has approved total 2006 capital expenditure of £280 million across all assets, driving group production to a target of over 75,000 boepd by year end.
Net assets at 31 December 2005 amounted to £389.0 million (2004: £375.5 million). Net assets were reduced by £120.4 million in the year due to the recognition of a hedge reserve in accordance with IAS 39 (adopted 1 January 2005). An increase in net assets (foreign currency translation reserve) of £32.4 million resulted from the strengthening of the US Dollar against Sterling from US$1.93 to US$1.72 in the year.
Successful major Refinancing
Over the last five years Tullow has undertaken a range of acquisitions and field developments, all of which have been wholly or partly debt financed. During 2005 the Group completed a US$850 million refinancing, the largest such facility ever negotiated by a UK independent oil company. This has allowed Tullow to consolidate existing borrowings into a single facility, to halve its collateralisation obligations and to maintain financial flexibility for future growth. The Group currently has over US$400 million of unutilised debt capacity in addition to its cash balances.
Download Tullow Oil plc Results for the year ended 31 December 2005 (PDF, 840KB, opens in a new window)
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Ends
For further information contact:
| Tullow Oil plc + 44 20 8996 1000 |
Citigate Dewe Rogerson +44 20 7638 9571 |
Murray Consultants +353 1 498 0300 |
| Aidan Heavey, CEO | Martin Jackson | Joe Murray |
| Tom Hickey, CFO | ||
| Chris Perry, IRO |
Disclaimer
This statement contains certain forward-looking statements that are subject to the usual risk factors and uncertainties associated with the oil and gas exploration and production business. Whilst the Group believes the expectations reflected herein to be reasonable in light of the information available to them at this time, the actual outcome may be materially different owing to factors beyond the Group’s control or within the Group’s control where, for example, the Group decides on a change of plan or strategy. Accordingly no reliance may be placed on the figures contained in such forward-looking statements.
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