This is in advance of the Group’s Full Year Results, which are scheduled for release on Wednesday 11 February 2015. The information contained herein has not been audited and may be subject to further review.
2014 revenue of $2.2 billion and pre-tax operating cash flow of $1.5 billion
Significant non-cash E&A write offs and impairment charges
Major steps taken to strengthen the business to adapt to current market conditions
Tullow Oil plc (Tullow) issues this statement to summarise recent operational activities and to provide trading guidance in respect of the financial year ended 31 December 2014. This is in advance of the Group’s Full Year Results, which are scheduled for release on Wednesday 11 February 2015. The information contained herein has not been audited and may be subject to further review.
COMMENTING TODAY, AIDAN HEAVEY, CHIEF EXECUTIVE SAID:
“Tullow has already taken steps to strengthen the business to adapt to current market conditions. This work will continue during 2015 to ensure the Group is in a position to benefit when conditions improve. In late 2014, we materially reduced our 2015 exploration capital expenditure and today announce a further cut to this expenditure to $200 million. We continue to carry out a review of the business to streamline processes and improve efficiencies which will result in significant long-term cost savings.
"We have re-allocated our future capital to focus on delivering high-margin oil production in West Africa which will grow significantly to around 100,000 bopd net to Tullow by the end of 2016 and will generate stable, long-term cash flows for the business. The reduced exploration programme will predominately focus on a number of high-impact, low-cost exploration opportunities in East Africa.
"While this is a challenging time for our sector, Tullow is fortunate to benefit from world-class, low-cost and high-margin assets, strong and growing cash flows and a broad, diversified funding position."
Current financial position
Tullow benefits from a diversified and strong debt capital structure. There are no debt maturities due until after first oil from the TEN project in mid-2016, with maturities ranging from 2017 to 2022. The Group exited 2014 with net debt of $3.1 billion (2.2x EBITDAX) and unutilised facility headroom and free cash of $2.4 billion. The Group’s ongoing hedging programme has provided revenue protection during 2014 resulting in a realised post hedge oil price for the year of $97 per barrel. Approximately 60% of Tullow’s 2015 entitlement oil sales are currently hedged with an average floor price of around $86 per barrel with further hedges already in place for 2016 and 2017. The positive mark-to-market value of the oil commodity hedging programme as at 31 December 2014 is approximately $0.5 billion.
2014 full year results
Tullow expects to report revenue of $2.2 billion, gross profit of $0.6 billion and pre-tax operating cash flow of $1.5 billion, which is underpinned by the strong performance from our West Africa oil production. These results, versus the prior year, have been impacted by the oil price decline and lower gas production following asset sales in Europe and Asia.
In the Interim Management Statement in November, Tullow indicated that total non-cash write-offs and impairments for 2014 were likely to be substantial following a review of the Group’s three year investment plan. Tullow expects a write-off of $0.4 billion ($0.3 billion post-tax) in relation to 2014 exploration activities primarily relating to Norway, Mauritania and Ethiopia. In light of the dramatic fall in the oil price, the review has resulted in non-cash exploration write-offs relating to drilling and licence costs from prior years of $1.2 billion ($0.9 billion post-tax). These are largely in relation to previously reported unsuccessful offshore drilling activities in French Guiana, Mauritania and Norway.
The impairment charge for the year is expected to total $0.6 billion as a result of a review of carry values of all PP&E assets at current commodity prices and the impairment of goodwill related to the acquisition of Spring Energy. In addition, a loss on disposal charge is expected of $0.5 billion, mainly relating to an updated assessment of the recoverability of the Uganda contingent consideration and the partial sale of the UK Schooner and Ketch gas fields.
Capital expenditure and operating costs
In light of the market conditions, Tullow announced a review, in November 2014, of its capital expenditure and cost base of the business to ensure the Group is well-positioned for future success. Capital is being re-allocated towards production assets and the commercialisation of existing discoveries which generate significant value and near-term cash flow for the Group. Tullow’s 2015 Group capital expenditure is now expected to be $1.9 billion which includes a much reduced exploration spend of $0.2 billion (post Norwegian tax rebate). There is further scope for capital expenditure reductions going forward as Tullow enters discussions with partners and suppliers regarding potential savings as industry costs decline.
Cash operating costs for the Group’s West Africa operations remain low, averaging around $13/bbl in 2014. The Jubilee field operating costs averaged around $10/bbl in 2014 with potential to drive down costs further in the current market ahead of realising synergies relating to the combined Jubilee and TEN operations. Finally, a major internal review of Tullow's organisation is ongoing which will lead to substantial long-term cost savings and efficiencies across the Group. Further information will be provided at the Full Year results.
In 2014, underlying West Africa production performance was within guidance averaging 65,300 bopd. However, due to ongoing licence discussions in Gabon, which are yet to conclude, Tullow will report in 2014 a reduced working interest production of 63,400 bopd. In Europe, production performance was within guidance averaging 11,800 boepd which includes the impact of asset sales completed in 2014. Production guidance for 2015 from the West African and European regions is 63,000-68,000 bopd and 6,000-9,000 boepd respectively. Europe guidance is subject to further ongoing portfolio management activities and production guidance will be adjusted following completion of sales.
In Ghana, the Jubilee field exceeded its gross production target during 2014 averaging 102,000 bopd despite the restrictions caused by delays in the construction of the onshore gas processing plant by the Ghana National Gas Company. In 2015, average gross production is expected to be at a similar level with production building towards the FPSO capacity by the end of the year. The gas plant is now complete and first commissioning gas was exported in November 2014 from the Jubilee field. As the gas management constraint is reduced due to increasing gas export, Tullow will be able to increase the oil production from Jubilee. Elsewhere in Ghana, the important TEN development project is progressing very well and is now over 50% complete and remains within budget and on-track to deliver first oil in mid-2016.
Tullow had strong underlying performance in 2014 from its non-operated fields in West Africa. The Group aims to maintain the portfolio of fields producing at around 30,000 bopd net to Tullow for the medium term. By the end of 2016, Tullow expects to have around 100,000 bopd of high-margin, low break-even oil production from West Africa.
In East Africa, the South Lokichar Exploration and Appraisal programme continues with drilling recently completed at the Ngamia-5 and Ngamia-6 wells. In addition, the Amosing wells are being prepared for the first Extended Well Test in Kenya. The frontier exploration programme continues outside of the South Lokichar basin with the result of the Epir-1 well expected later this month. The Engomo-1 well, testing the Turkana West Basin, has commenced drilling. The Lekep-1 well, testing the Kerio Valley Basin, is expected to be drilled in the second half of 2015 along with multiple appraisal wells in South Lokichar as work progresses on the East Africa development plan.