London-headquartered Tullow Oil has unveiled an ambitious plan to turnaround its financial performance centred on getting the most out of its producing West African assets, focused on its multi-billion-barrel resource base in Ghana.

Rahul Dhir, Tullow’s recently appointed chief executive, outlined the company’s new strategy in an investor webcast on Wednesday, telling analysts the aim is to “maximise cash flow and margins in the medium term to reduce debt and create value".

'Flexibility'

He said Tullow has “a very large portfolio of investable opportunities … in assets where we have under-invested in the past,” specifically highlighting the 2.5 billion barrels of in-place resources held in its Jubilee and Tweneboa-Enyenra-Ntomme (TEN) fields off Ghana.

Also highlighted were short-cycle, nearfield exploration prospects that could be drilled and brought onstream quickly via existing infrastructure.

Dhir said this turnaround plan is expected to give Tullow “the flexibility to self-fund capital expenditure and pay off debt, even at low prices".

Getting a grip on its debt levels and refinancing loans has been a key challenge for Tullow and a worry for shareholders.

Assuming an oil price of $45 per barrel in 2021 and $55 per barrel from 2022 onwards and with over 90% of future capital expenditure focused on its West Africa producing assets, Tullow believes it will generate about $7 billion of operating cash flow over the next 10 years.

Cash flow application

After capital investment of some $2.7 billion, there will be about $4 billion of cash flow available for debt servicing and shareholder returns.

Cash flow will initially be applied to reducing gearing to between one and two times net debt/earnings before interest, tax, depreciation, amortisation and exploration expenses, while retaining appropriate liquidity.

The first phase of investment will begin in the second quarter of next year with the start of a multi-well drilling programme in Ghana.

International asset base

Tullow also highlighted “considerable opportunities” to unlock value in Kenya — where it operates the South Lokichar oil project — and South America through “innovative” approaches, deep geoscience and engineering expertise but do not require significant capital investment in the evaluation phase.

The company is reassessing the Kenya oil development to come up with an economic project at low oil prices while preserving the phased development concept.

In South America, Tullow has material positions off Suriname, Guyana and Argentina and its focus is to better understand prospectivity in these basins.

Tullow will continue to consider additional asset sales, if they are value accretive and strengthen the balance sheet, but pointed out that “in light of the material cost savings that the group has realised and the cash flow generation from this new plan, there is now less urgency to sell additional assets”.

Delivering 'material value'

Expanding on the revival plan, Dhir said: “Since joining Tullow in July, I have been deeply impressed by the strength of the assets, especially in Ghana. Following hard work by our team and with input from our partners and external experts, we have a clear strategy and plan for the next 10 years.

“The plan focuses our capital on a deep portfolio of short-cycle, high-return opportunities within our current producing asset base and will ensure Tullow can meet its financial obligations and deliver material value for our host nations and investors.”

Commenting on the turnaround plan, BMO Capital Markets analyst David Round, wrote in a research note: “Whilst the theme is consistent with our thinking, as is the level of investment, the scale of cash generation is better and, assuming it is achievable, would go a long way towards addressing the market's funding concerns.

“We continue to believe that Tullow's high-quality asset base gives it the levers to resolve the current balance sheet pressures.”

Finance

Tullow looks to West African assets to steer financial turnaround