view from the top: tullow oil interview

'Zadyeus in French Guyana' - "it's the biggest discovery that France has ever had."
This in depth interview with TLW CFO Ian Springett is from:
Interactive Investor in UK at:
http://www.iii.co.uk/articles/22174/view-top-tullow-oil-interview

By Sarah Modlock | Fri, 16/12/2011 - 16:19
FTSE 100 giant Tullow Oil had a huge 2011. But how has it changed the company, are there any regrets and what can shareholders expect in 2012? Interactive Investor editor Sarah Modlock asks Tullow's chief financial officer Ian Springett.

Ghana IPO was stellar - how has it changed the company?

The most important thing with the initial public offering (IPO) is to give Ghanaians the chance to own part of Tullow, so it was a really good thing to do. It helps build relationships there with the government and the people, which is something we're very pleased with.

Has it changed your profile in Africa?

We continue to build larger operations in Africa and Ghana, being our largest operation at the moment, is a great place to start and we hope to do it elsewhere, too.

You've built your presence in Ghana from nothing - what challenges remain there?

Ghana is a very a very successful operation and as you say we have gone in just 40 months from discovering oil to first production which is the envy of the industry.

We are bringing production up to plateau. It's been a little bit delayed versus our expectations but we expect to get there in 2012 and we've got lots more potential still to address in Ghana, particularly the Enyenra/Tweneboa discoveries.

Do you have plans for gas exploration there?

Tullow as a company very much is looking for oil. There is obviously gas around in Ghana as well but our focus is on oil. Given the infrastructure we already have in Ghana then gas discoveries are something which we would certainly work to commercialise in addition but our focus is on looking for oil.

There are statutory requirements for corporate social responsibility (CSR) in Ghana, but do you go over and above these?

Our CSR programmes are ones which we are proud of. Without giving anything away we are looking to further enhance them in 2012. You can expect to see something early in the New Year in terms of how we up the game again.

Would you like the UK government to be more supportive in helping you overcome some of the political barriers in Africa?

I think the main relationship in Africa is the one we build ourselves locally and so that's where we focus our activities. Your own government is always a help but that said, the local government embassies do a pretty good job of supporting us locally so it works well.

Analysts have described the French Guiana project as a "game-changer" for Tullow. What's your view?

Absolutely, it is. It's a game-changer in two or three different ways. In one way - and this is a slightly frivolous comment - it's the biggest discovery that France has ever had.

But more importantly, we focus on two or three main types of geology and the geological discovery where we found the Jubilee field in Ghana, prompted us to look further and buy licences for exploration activity along that west coast of Africa.

This is the first time where we had taken that theory even further and said "do these also exist in the mirror on the other side of the Atlantic?" It makes sense technically but the oil has to be there as well.

We drilled the first well in these sorts of structures in an area where most people thought there was no oil at all and made a significant discovery. It still needs to be apprised but also there are number of similar structures so potentially it could be very large indeed.

You mentioned Jubilee and obviously 2010 was a transformational year due to oilfield coming on-stream as well as the opportunities that come from being a deep-water operator. But the ramp-up has been delayed - what is the timing on that now?

The ramp-up is slower than our expectations but our expectations were very high. We expect to get there now in 2012. We don't see any impact whatsoever on the reserves to be produced - it's just a timing issue in terms of how quickly we get to the initial plateau rate of 120,000 barrels of oil per day (bopd), which is the capacity of the floating production, storage and offloading [unit] (FPSO).

And the mechanical issue has been overcome?

The mechanical issue will be overcome but we certainly think we know what the issue is and now it's just a question of re-drilling certain wells. Hopefully it's a really simple fix - the holes in the screens where the oil flows through with hindsight should have been a few millimetres wider.

That's one of the advantages of developing the field in a phased way. We could have actually had the whole field. And this impact is not impacting the whole field, it's just in certain areas. But this is just a timing issue and the reserves are unchanged.

Can you say any more about timing?

Just sometime in 2012.

How much of a gamble was Jubilee?

I think Jubilee was, from the outset, such a good reservoir, such a good field that it's one of the largest discoveries in Africa of the last 10 years. So the gamble, if any, was in the exploration well, but in terms of developing and producing the well no gamble whatsoever. It's a great field and as you said before, it's been transformational for Tullow.

Even while it's not yet on plateau our revenues will double because of Jubilee, making 2011 a record year for us.

How much of your success is down to luck?

Well that makes me think of the old saying from the golfer: the more I practice, the luckier I get. We have a very technically-based exploration team, a lot of geologists and geophysicists. They have looked at a geological play which was not part of the playbook of other companies, particularly the majors, and have found oil where others were not looking.

You can seen structures on seismic and you then need the luck I guess to make sure that oil has in fact migrated there. But we do everything we can to reduce the risk and reduce the luck required and to have the best technical chance of success.

Do you think oil companies have to 'go deep' to stand a chance of big success now?

I think it's a question of where is the remaining oil? And so on the one hand we're exploring in Eastern Africa in rift basins which are on shore and shallower, but I think that certainly it's about finding some new geological plays - some different ways of looking at things.

Elsewhere, we're not actually going in that deep; it's not what I would call ultra-deep but it's in places where others haven't looked before.

Some see Tullow as a takeover target - what's your feeling on that?

Our level of success always breeds those sorts of questions. All I'd say is that we're managing Tullow the best we can for the long term. We're certainly not managing Tullow with the mindset of it being taken over. We plan to be here for a long time to come. If we continue to work hard to maximise the value of our share price we hope that shareholders will be content with that.

Looking at finances, what is the contingent liability for the Heritage Oil () issue?

As far a tax is concerned, Heritage has a tax liability and we have a tax liability. The two shouldn't be mixed though.

Do you regret the timing of that deal?

No. I think it was absolutely the right deal to be done and we're still very confident that the deal will be done. We'll look back on this after 20 or 30 years of significant production in Uganda as just being a very temporary thing.

Financial flexibility seems to be a phrase that comes up with Tullow often and it's in your annual report. What does this mean and why is it important?

I think Tullow is seen as a company that is innovative and creates first-mover advantage and it's always good to have flexibility as we run the company because we like to have choices. As financial markets ebb and flow then flexibility is again the thing which engenders strength and we associate having financial flexibility with having a strong balance sheet and a strong company.

What is planned for 2012?

It's another big year for us. We have a number of significant exploration wells we're drilling. We're planning to move forward with the development of the Enyenra/Tweneboa field in Ghana and the basin plan in Uganda.

We're also doing further work on the Jubilee field and the next phase of wells there. We will also be drilling at the end of this year and into next year our first well in Kenya. But there are a number of other locations including Guiana, Mauritania plus well results coming up in Sierra Leone and probably some more in Liberia. So it's a big activity programme.

From a financing perspective, we've got the Uganda proceeds coming in. But we always like to look at our future funding and it's quite likely I think that we will seek to further diversify our sources of financing. We have been diversifying them somewhat in 2011 by bringing in some banks from places like South Africa and Australia but I think we will certainly look at the bond market in 2012.

Can Tullow keep up this pace?

The good news about Tullow is that we really think about long-term value and pace and growth is good and we certainly want to grow the company but we don't want to grow it recklessly.

We don't set medium-to-long-term production targets which force us into bad economic decisions but what we're always doing is looking at how we fund, how we manage, which elements we operate and which we don't and our capability.

We are always looking to invest in quality assets with quality people and that defines the pace.

Your chief executive Aiden Heavey is on record as saying his simple test for the financial health of the company is whether it's in better shape at the end of the year than the start of the year. How are those prospects for the coming years?

If you look at our shareholders, they often still see Tullow as a company where a lot of the value growth comes from exploration and that's absolutely where we deliver most of our value.

But we also deliver value from successfully developing those projects we choose to develop and also through the dividend programme. We have a strategy which is good for most seasons. We then, over time, tweak and amend that strategy so ours is around looking at the company each year.

Aiden describes himself as a "crap accountant" but has talked about doubling the company's £13 billion market cap in the next three to five years to make shareholders happy. Is this possible?

Here's one example of how we grow: when people hear we have discovered oil in French Guiana, they imagine we have made one discovery in one field but actually there are about five or six more structures right alongside that discovery which look pretty similar and they are pretty large - they're bigger than Ghana for example - all within one big licence that we hold on good economic terms.

So Aiden's aspiration is one which we are trying to deliver. And if you have those sorts of aspirations then it does engender very good performance.

What do you see happening to the price of oil next year?

Short-term oil price forecasts are difficult but I think that the long-term indications are that they will trend upwards rather than downwards although there will always be volatility. As a company we undertake hedging to ensure we are protected against the downside but this is done in a way which still enables us to have access to the upside as well.

How important are individual private investors to Tullow's success?

Very. I think that Tullow has had a core base of loyal shareholders for many years but we're a growing company and I hope we can deliver the size of returns that they are looking for.

Tullow shares have a lot of attraction: the interim dividend doubled and earnings per share climbed 270% in the first half but on the flip side, production levels were below estimates and there was the disappointment of Montserrado in Liberia. What would you say to someone who was thinking of buying Tullow shares now?

If you have said at the start of this year that you could have had even modest success in just one of the two new wells - Montserrado and Zaedyus in French Guiana - we were drilling then that would have been a great result from an operational perspective.

The fact that we've had very significant success in Zaedyus while Montserrado was not a commercial success but has demonstrated evidence of hydrocarbons, is a level of success which most explorers would give their left arm for.

It's all relative and it's important with Tullow that our level of exploration success is one which people understand has been very, very good but in the exploration industry just finding oil one in three times is considered successful and we do a lot better than that.

And a message for existing shareholders?

The executive team and the whole of Tullow is committed to delivering long-term shareholder value.

Looking for more on the FTSE 100 giant? Watch the iBall TV team's episode on Tullow