tullow chief interview

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The Business Interview: Tullow Oil chief Aidan Heavey -- Tullow drills home positive message of rising oil prices
Neil Callanan



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THE credit crunch has been crucifying global business but, for Tullow Oil, it's an elevator to increased profit. Oil prices could hit $200 a barrel in the near term, said company chief executive Aidan Heavey, as the credit crunch will slow down the development of a number of oil fields because of a lack of finance.

"We're very well funded so we're very fortunate, " he said. "We've a pretty vast portfolio of stuff and we started a process last year of selling off some of the non-core assets which basically left us in a very strong financial position. We've structured the portfolio in such a way that we can benefit from either high oil prices or, if oil prices fall, we can go on the acquisition trail."

Heavey said the company tries to be self-funding as much as possible. "We're in a very fortunate position that the banks currently are trying to lend us money rather than vice versa. With a lot of other companies they're trying to get the money back."

Reaching production targets The sale of Tullow's 11% stake in the M'Boundi field in Congo (Brazzaville) earlier this year to the Korea National Oil Company for $435m (?280m)means Tullow's total production this year will average about 68,000 barrels a day. However, the company is still on track to meet its target of producing up to 250,000 barrels a day by 2010, mainly because of the company's "world class" discovery at the Jubilee field in Ghana.

"It is one of the best discoveries made in the world in the last 10 years. The first phase of the development will start off at a gross production of around 150,000 barrels of oil a day, " he says, "and then coming on very quickly from that there will be a phase two which will be another 150,000 barrels of oil a day." If things go well there'll also be a third phase, but this is dependent on future tests.

Phase one is due to come on stream in 2010 and although they "haven't pressed the button on phase two yet" it could come within 12 months of production starting.

"Basically we don't know yet how big the field is. Everything we've done so far has enhanced it, " Heavey said. "Over the next 12 months we'll be pushing out the envelope more and more and testing the perimeters of this field and that will give us a bigger handle on how big it actually is. The last well - the Mahogany 2 well - was geared towards testing what we thought was the end of the field but it proved it wasn't."

The first phase of Ghana production could result in a net output of about 45,000 barrels a day from the field. They've already contracted one of the largest water rigs in the world to service it.

"The rent on that rig alone is $640,000 a day and the full operating cost is $1.2m a day and we've contracted that for five years, " he said. "It's a huge investment but that really means we have the rig capacity to carry out all our projects in the next few years."

So is Heavey's reputation justified as something of a conservative prophet when it comes to the company's testing?

"I've been in this business a long time, " he laughed. "I've seen it all and you shouldn't be in any rush. You're better off working on 100% of the facts as you know them and not guessing what's going to happen in the future. The industry has a habit of throwing out surprises and while you may get short-term credit for good surprises, people don't forget bad ones. You're better off having a constant flow of positive news than major disappointments because when people lose money they don't forgive, they don't forget."

Don't believe the hype He argued that the company needs to take a long-term approach and therefore, rather than conservative, it is merely being realistic. That means shareholders know the company "is not overhyping things on a short-term view".

The announcement of Mahogany 2's success sent Tullow's share price soaring, giving it a market capitalisation at the time of 8.5bn. He took the news that the share price was up 25% with what sounds like remarkable restraint. "In our case we have been gearing up for these kind of discoveries for quite a while. So it was good news and obviously everyone at the company was very, very happy but given this business is long and hard you take these things as they come."

Heavey describes the find as "the envy of the industry" but says the company is not a takeover target because it doesn't want to be.

"We take a long term view of everything, we're in no rush to present the company in any better light than it is. We do things on a steady basis, long term view.

With that view you don't want to be taken over, you structure the business that you can't be taken over. We're not about building up this nice group of assets and selling them off to somebody else and the industry knows that."

They are now looking at larger acquisitions but that will be dependent on whether oil prices continue to hit new heights. If prices fall, Tullow will pounce.

"I would like to see the oil price come off for a period of time because when there's uncertainty in the industry it creates huge opportunities, " he said. "For oil prices to come off for six months or a year I'd be happy enough with that. I think that would create very good acquisition opportunities."

He said that if oil prices fell to around $75 a barrel - though by his own admission, this is unlikely - they would look to capitalise through acquisitions.

Acquisitions have fuelled the company's growth. In 2001, it acquired gas producing assets from BP in the North Sea for £200m. Tullow was criticised for overpaying but Heavey said it has since sold on more than £50m worth of assets, generated revenue of more than £1bn and the remaining assets "are still producing at the same levels as when we purchased them".

The purchase of Energy Africa in 2004 for $570m has proven even better.

"We sold one asset for $435m and we sold two smaller ones for $180m so we've taken in over $600m from selling the smaller assets within the group, " he said.

"We've also had well over $500m of net income and the assets are still producing better than ever."

"That's the secret of our business. We do a lot of homework. We can look at an asset for years before we buy it and the secret of our business success has been good acquisitions and when you have them make sure you maximise the organic growth of their assets. I think the harder you work the luckier you get."

The next major challenge will be managing the company's growth. It currently has 650 people but plans to increase this to 2,000 by 2010. "It's hard to get the quality that we want, " Heavey said.

CV

AIDAN HEAVEY