11.07.2008 Tullow Keeps One Eye On The Finances As It Gears Up...

11.07.2008
Tullow Keeps One Eye On The Finances As It Gears Up For New Growth Spurt
When Tullow Oil’s investor relations chief Chris Perry addressed the 20th Oilbarrel.com conference in London last week he made efforts to reassure investors that the company was not overstretching itself.

After a period of fantastic growth – Tullow is now bigger than BA, he noted – the company has plenty of exotic options to play with, from West Africa through to India and French Guyana, as well as lots of demands on its financial resources.

Although Perry’s words may be more grounded in truth than John Lennon’s 1966 claim that his Beatles were bigger than Jesus – Tullow’s market cap is about £6.5 billion compared to BA’s £2.5 billion – keeping track of the cash will be crucial as it prepares to enter a whole new realm.

With trusted finance director Tom Hickey on his way out later this year, this will be quite a task for the new incumbent, though he or she will find things in good order.

The company has unused debt of US$400 million, expects to generate US$1 billion through portfolio management and has cash flows in excess of US$1 billion, which equates to some US$2.5 billion to fund any planned development work.

This will be important as the group steps up its capital programme with first half spending of £170 million likely to top £480 million for the full year. This could well go up again in the coming year or two as projects enter critical phases.

Central to Tullow’s expansion is its deepwater Ghana play, and the development of the vast Jubilee field, which could hold upside of 1.8 billion barrels of light crude, according to the findings of the Mahogany-2 appraisal well, released this week.

This latest test on the Upper Mahogany reservoir flowed at a rate of 4,448 barrels of oil per day (bopd) of 39˚ API oil, and some 5.1 mmscfd of associated natural gas on a 36/64-inch choke. It follows the earlier testing of the Lower Mahogany reservoir.

In both cases, flow rates were severely restricted by test equipment and facilities, but show that Jubilee production wells should be capable of flowing at rates in excess of 20,000 bopd when fully completed. Phase 1 field production could yield 120,000 bopd.

With Tullow named operator, the FTSE 100 firm faces a stern test on numerous fronts – from its spending prowess to its technical skills. In an operations update, Tullow’s chief executive Aiden Heavey said plans to sanction the development later in 2008 remain “firmly on schedule”.

The tender for Jubilee production facilities is now underway, Heavey said, with the field on track to deliver first oil in 2010. This is an aggressive discovery-to-production timeline by any measure, just three years. Three deepwater rigs have been contracted for Ghana, with the next round of drilling scheduled for September. This is a major commitment at a time when rig rates and demand for slots are at all-time highs.

A similar schedule has been put in place for Uganda, with an early production system to deliver around 4,000 bopd, due to be sanctioned in Q3 2008.

More exploration is also planned targeting additional plays offshore Ghana and Côte d'Ivoire within the next 12 months. The separate Odum discovery has opened a new play off the Ghana coast and there are two further prospects, Teak and Tweneboa, with gross P10 potential of 1.3 billion barrels, set for drilling in early 2009.

Away from the glare and expectation of West Africa, a four-well campaign targeting Block CB-ON/1 in India is also now underway. While the excitement of Ghana may have overshadowed developments elsewhere, this could yield yet more upside.

These are giddy times for Tullow which already has production of more than 70,000 barrels of oil equivalent per day (boepd) under its belt from the UK North Sea, Africa and Asia. This will surely rise significantly as the Ghana and Uganda development projects complete in the next couple of years.

After some spectacular results with the drill bit in recent times the company must now keep a level head if it is to maximise on this success. With the financing in place, it is hard to find anything that could really hamper what looks to be more exciting times ahead.

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