Tullow Oil to slash exploration budget, FT reports Michael Kavanagh, Author Tullow Oil is to abandon much of its wildcat exploration programme in response to steep falls in the oil price and a poor market for monetising discoveries made beyond the US shale sector. The FTSE 100 company, which in the past two years has spent about $1bn annually on exploration and appraisal drilling, is planning to cut that to $300m for 2015 in light of worsening market conditions. Tullow, alongside other leading exploration and production companies, has been hit recently by a sharp dip in its share price compounding earlier declines, which has seen its market capitalisation fall from more than £11bn in 2011 to £4.4bn in spite of its large base of discovered oil reserves. Aidan Heavey, chief executive, said: “In light of current oil and gas sector challenges including the commodity price environment, we are reviewing our capital expenditure and our cost base.” He added that Tullow, along with other oil explorers, needed to adapt to an environment where much of the focus of oil majors and investors had switched towards increasing their exposure to US shale oil and gas ventures. “We have to be better than shale companies in the US,” said Mr Heavey. “We have to get better returns and better dividends than the major oil companies.” The company is also preparing to make large writedowns on previous drilling campaigns. In particular, Tullow is set to book losses on its positions off French Guiana and Mauritania where initial discoveries have been made but commercial development appears unlikely in the medium term. The cutbacks will result in Tullow attempting to extend gross reserves around existing discoveries in Uganda and Kenya as it concentrates on trying to fully develop these licences through lower-cost exploration drilling to drive near-term cash flow. The company reiterated that it expected to increase production to a net 100,000 barrels of oil a day by 2017 through further work alongside partners on its west African assets, which are centred on its flagship Jubilee field and nearby TEN development project off Ghana. Last year group production stood at 84,200 boe/d. In July, Tullow reported a net loss for the first half of the year after writing off more than $400m in exploration costs, but said it remained confident of its high-spending exploration strategy, which has typically delivered an average of 200m barrels of new oil discoveries a year in spite of a run of drilling disappointments. Analysts at Barclays suggested write-offs on spending in Tullow’s frontier regions of French Guiana and Mauritania could result in a full-year writedown of $850m on exploration spending, although they said this should have no bearing on the company’s valuation. “Management has responded to the lower oil price outlook and concerns over the scale of its exploration ambitions by presenting a reduced exploration,” they added, arguing the update “could be a watershed moment for the company in its efforts to rebuild investors’ confidence in the business outlook”. Shares in Tullow were up 1.7% at 490.6p in midday trading, valuing the company’s equity at £4.4bn.
Posted on: Tue, 25 Nov 2014 08:56:50 +0000
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