Make or break for TLW in Uganda ...Also offshore Ghana looms.An...

Make or break for TLW in Uganda ...
Also offshore Ghana looms.
An interesting read care of Edmund Jackson of Interactive Investor.

"This is a key week in the fortunes of Tullow Oil (TLW). Its FTSE 100 shares are under pressure from a dispute in Uganda, while the result of the Owo-1 well - testing a 1.4 billion barrel prospect offshore Ghana - is due anytime now. In July, this well intersected a significant quantity of high quality oil hence the next report is eagerly awaited.

At today's [Tuesday 31 August] market open, the shares were marked down from 1,211p to about 1,190p, with selling down to a 1,180p range although busy trading has seen a recovery near 1,200p.

Investors need to be aware of the issues surrounding Uganda, as well as Tullow's high-impact exploration campaign now kicking in - with various wells to watch out for, in months ahead. I have a modest investment and may add according to events.

There is no response from Tullow this morning to reports in the African press (which filtered into British media over the Bank Holiday weekend) that the company has lost its licence to the 400 million barrel Kingfisher oilfield in Uganda - part of assets for which it only recently paid US$1.45 billion in a transaction with Heritage Oil (HOIL).

Although this leaves a vacuum, there is no point the company issuing an announcement unless matters genuinely change.

'Tit for tat' public statements won't help sensitivities ease in Uganda towards a negotiated solution. The Ugandan elite is piqued that Heritage alleged after its sale of a major oil asset, it was not (even on top level tax advice) liable for capital gains tax (CGT), and has not fully resolved the matter in Uganda. Heritage proceeded to pay $405 million CGT, some to the Ugandan government and some put in escrow pending arbitration in London; however the Ugandans have lost patience and their frustration is being taken out on Tullow now Heritage has left Uganda.

Allegedly, neither Tullow nor Heritage re-applied for a licence hence it is appropriate for Uganda to take back the oilfield and auction it.

If the intention was to put a scare on Tullow and its shareholders, it is effective given the way management is reportedly running around to get a solution, and the shares have fallen from over 1,300p just before the issue emerged with the 25 August interim results.

Yet there does not look to be any sizeable selling. In fact, institutions bought into the 950 million January 2009 share placing at 1,150p to purchase blocks 1 and 3A in Uganda from Heritage Oil.

With good reason: to await the Ugandans realising their predicament. The crucial element for a developing country to attract investment is a dependable system of property rights. No sane company would get involved at the sight of the rug being pulled from underneath Tullow amid a multi-billion dollar effort to help Uganda with transformational oil discoveries, poised in a partnership with Total and the Chinese National Offshore Oil Corporation (CNOOC) to make them a producing reality.

Since Tullow originally exercised a pre-emption right against ENI, the Italian multinational, there have been occasional reports that ENI may have been a preferred party by certain Ugandan politicians - although it is impossible to know what means of influence may have been involved.

Uganda would need to have alternative partners willing to commit to investing the required $10 billion to develop these blocks, after just demonstrating it is liable to move the goalposts in corporate financial affairs - squeezing out a partner on a technicality than respect for genuine intent and investment made. So it will be interesting to watch, what Uganda does next.

The pragmatic near-term solution is for Tullow to take initiative of resolving the CGT issue with the Ugandan government; otherwise it will delay its nascent oil industry also improving its budget deficit with remaining tax due.

Matters can still continue to sour, if Uganda decides to 'go its own way' in Zimbabwe fashion, with the licence put up for wider auction from 7 September. It would then be confirmed as a protracted dispute unlike 'the few weeks' Tullow has indicated, simply to resolve the amount of CGT.

The main financial risk for Tullow, if it cannot proceed with farming out its interest in the acquired blocks to Total and CNOOC, would be a cash flow problem to finance its highly active exploration programme.

Game theory implies a solution being found although this fiasco is a wake-up call for the risks surrounding Africa - indeed any nation where oil and nationalist politics coincide, as evidenced by Venezuela appropriating assets. Other African nations will be watching what Uganda achieves with its stance, the outcome likely affecting the ratings of other shares with African interests.

Tullow shares are therefore at a crux, and events will dictate whether they prove a worthwhile long or short trade in months ahead. Reason implies the current fall is a buying opportunity given the scope of various wells to re-rate the shares above 1,500p, and as production kicks in from the Jubilee field offshore Ghana. Yet it does not always pay to assume nations will act in line with a Western mindset.

On a wider note affecting Tullow's exploration programme later this year, it is interesting how Chevron has reportedly just been awarded three blocks offshore Liberia, underlining the area's potential. Liberia is at the western end of the West African Transform Margin play that got underway with the Jubilee Field, offshore Ghana.

Tullow's success story has plenty further upside yet its founder Aidan Heavey must now prove his claims at the start of last Wednesday's interim results webcast: about the attractions of Uganda's "very robust system" where it is 'clear, what things mean'; how Tullow 'does things properly' and the CGT dispute "will not hold up production or development plans".