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hey_arnold
Tullow has done itself no favours. If you listen to the conference calls for both Africa Oil and Kosmos , you can’t help thinking that Tullow is far too conservative. The impact of the pre emption deal closing will be a significant positive. Up until the latest update, no one had really considered that there was a serious prospect of commercialising the gas production …now it sounds as though 500 bcf has been identified for a life of field contract and pricing is being haggled over. Most of the non associated gas is in the Ten field !A commercial take or pay contract would be very well received by the market …but we also have to factor in modest capital expenditure commitments relating to it. At an average gross cost of $50-60m per new well , the impact of infill drilling will be transformed with a second rig. Tullow is budgeted to spend $1.25 bn of capex NET between 2022-5 . By bringing up both FPSOs to nameplate capacity , the cash flow yield will be massive . The obvious thing to state is that 2022 is the year of comparative calm because of the impact of the hedges…but people should remember that Kosmos has 55% of production hedged this year as well (only 10% in 2023 flattered by the Oxy deal) . Tullow will pop if. 1) a Kenyan partner deal announced (worth current share price ?) or 2) gas sales agreement for Ghana or 3) confirmation of a second rig boosting Ghana production profile from mid 2023 onwards .
All of the above , are highly likely events over the next 2-6 months in my opinion . Hardly a reason to be dumping shares right now. They should be over a 100p if Kenyan reaches FID .
Correction to previous post. Broker note has alllowed for Ten production in 2025 of 31kbopd as opposed to 47kbopd indicative guidance from slide presentation .
The main theme is to avoid demand destruction from high oil prices . Sanctions will last for a considerable time and Tullow is focussed on lengthening the optimal production profile of its prime acreage which dramatically improves NPVs.
Unlike Jubilee , Tullow has failed to redress Ten’s production decline quickly enough…but if you look at the transcripts from Kosmos’s latest earnings , you can see plenty of drilling activity in 2022/3. Investors have missed the key positive on Ten last year, which was the unexpected discovery of an oil column when drilling an injector well at the fringes of the play. This augurs well, in my opinion, for significant future reserve upgrades…dwarfing the small downgrade in this years reserve report.
Investors can moan all they like about the hedging . It will continue have an impact on this year, only because of an unforeseen war. I note that one respected broker has allowed for significant capex spend by Tullow over the next three years (which it has expensed for) , but has only modelled for Jubilee production to rise to 97 kbopd (from a current 91kbopd) and Ten to 47 kbopd (both gross)…despite acknowledging that management is guiding in the presentation slides to 110kbopd in Jubulee and 47kbopd for Ten . In my view , this is over prudent….depriving Tullow of at least net 10kbopd of planned production, which would of course be unhedged as of the present time. Remember that the Kosmos presentation slides shows two producers at Jubilee (similar geology and recovery rate potential to Ntomme ) producing an extra 21kbopd (gross) after they were drilled. Imagine what production might be with the second rig !
In addition, we have a good prospect of a near term gas sales agreement . I would not be hopeful of a great price for the associated gas…but Tulllow already separates NGLs on the FPSO so offtake would still improve field performance . I am however, very hopeful of reasonable pricing for the non associated gas…because Sankofa (ENI) has established precedent and upgrading a 56kms pipeline to the processing plant is a relatively cheap and straightforward process. Lastly , waiting a few extra months for a Kenya transaction to complete , when a sensible outcome, has the potential to exceed our current market cap, is a mouthwatering prospect.
The simple fact is that with billions of capital in the form of two underutilised FPSO’s in Ghana available, the IRRs on incremental drilling make this opportunity much more compelling over the next 2/3 years , than most other E&P opportunities….but that is just my humble opinion .
@Scroderingerscat Excellent points. I feel sad that the average PI is clueless . The discussions regarding Kenya and the confirmation of advanced discussions on a commercial Gas Sales Agreement on Jubilee /Ten for 500bcf (still to agree on price) should have sent the share price higher yesterday. Analysts were also informed about Ten production increases mid term taking total Ten production up to gross 50kbopd . The only small disappointments was some small write offs or zealous impairments. We already knew about the tribunal split decision that went in favour of Spring Energy…perhaps the management should have settled before it got to court but I am sure they relied on legal advice. The write downs are minuscule compared to the prospect inventory currently placed as 2C resources until there is a defined drilling programme to bring them over to 2P. Most people still do not understand that the objective of the Company was to be cash neutral by spending the surplus from high oil prices on accelerating the drilling programme . When i hear stupid comments like “Tullow only produced a small amount of cash when we have high oil prices “ I just want to scream. Accelerating the drill out of our prospect inventory will allow MASSIVE upgrades to future years cash flow. People get a grip ! …
@January2 You need to separate out replacement capex from growth capex. Tullow said it wanted to be cash flow neutral on an operating basis. This means that any excess cash flow is deployed to develop sub sea infrastructure in advance of additional wells. This allows the Company to utilise as much of its 2C reserves as possible within the “life of field” ( reserves which can be produced before the exploration license expires). Hence, you should see capex as front end loaded . You are right to consider cash flow yield but without looking at netbacks , decommissioning costs (which falls dramatically from 2023) and the impact of potential farm outs /deals such as in Guyana or Kenya, your analysis could become pretty meaningless . Lastly, the market has completely ignored the gas opportunity which was described as potentially material. Hopefully one of the analysts will piece it all together and help the market understand the substantial opportunity.
@BigRisky
Keith Hill of Africa Oil would beg to differ…but then again he knows the facts with a 25% shareholding in the project . What basis do you describe Kenya as a failure? It is a requirement to get Governmental sign off of the FDP…what else can Tullow do?
We seem to have a lot of armchair generals today …Rahul is perhaps a little introverted …but he may well be being held back in disclosures by his legal department. Certainly Kosmos has open talked about another rig. Perhaps you should do the maths on how an extra 6/7 wells a year will affect production !
One of the Newswires beginning with R has carried interview with CEO saying Ten production 50kbpd from Ten by 2025…and 100k for Jubilee. Show me an analyst allowing for this. The market is messed up in its analysis today. IMO.
Apologies, I meant to say a second RIG not well. It would be helpful if they allowed an edit function on this website. Typing on mobiles with spellchecker lurking in the background is a recipe for comedy !
antonvb
You are right to focus on Kenya. Was anyone expecting the Company to be in discussions on gas ? This current board like to only talk about oven ready projects , so i suspect they must be pretty advanced in negotiations to mention it now. Many West African countries rely on HFSO for topping up shortfalls . Prices must be skyrocketing forcing the Government into being more pragmatic with terms of a GSA. After all the concerns over GOR and associated gas /processing capacity/ flaring the positive implications here are worth stressing. Why Rahul wants to prevaricate over a second well (which seemed a racing certainty in the last Kosmos call) …i have no idea .
I look forward to seeing the grown up analysts revise their production profiles for 2023. This is fast becoming an institutional stock in my opinion.
Brilliant conference call on so many levels.
Key takes :
1) In Q&A, Rahul send a partners meeting mid 2022 should allow a 2nd rig to be deployed in mid 2023. The latter would obviously drill wells not in forecast and accelerate production materially .
2) Straight puts in hedging portfolio now fallen out. 28m of production through to 2024 still hedged and low rates but post pre emption volumes being added …45% of production will be unhedged. This will obviously rise in new wells bring in further production.
3) Gas , both associated and non associated are described as having material value . They are not in anyones forecast as the first 200bcf wears given away to Ghana but that supply likely to end this year. Moving forward the non associated should attract commercial pricing ? …see ENI contract pricing nearby.
4) Kenya. On top of Rahul's current priorities. A partner would take lions share of capex and is a high value project not in most analysts numbers.
5) Pre emption 5kbpd would add $200m net of capex in a full 12 months at current prices ?
6) A large proportion of Ten 2C may be similar geology and recovery factors to Jubilee . TRACS reserve report has not incorporated much of these reserves into 2P because they were not in near term drilling programme . That is obviously going to change from slides used in presentation.
7) One analyst in the Q&A , even inferred (in my opinion ) that mid term production numbers on slides suggested analysts would need to upgrade their mid /long term production profiles in Ghana.
8) Rahul said numbers could be flexed on drilling expenditure dependent on oil price. If current price prevail , the inference was that they would accelerate with positive consequences!
9) Significant cost savings form taking over operatorship from MODEC.
I could go on and on, but the market reaction to these results is a joke. Watch what happens over the next week and remember there is another major investor presentation at the end of the month.
Share price, in my view, post a sensible Kenyan deal, could be double current levels (assuming $100 oil ) in the next 5 months (post 2nd rig confirmation).
@Ammu123 Tullow can only hedge based on the official budgeted production forecasts ..no one hedges assets that might come on line. This is why your statement is likely to be proved inaccurate. Until there is stabilised production, new wells will not be incorporated into the scheduled production . Happy Days Ammu…though not for you it would appear. Remember the prices secured selling forward will depend on the forward pricing curve. I would expect the curve to flatten for a longer period if the number two producer is out of the market . What do you expect ?
Ammu123
The hedging was a requirement for the bond refinancing . Hedging is mandated on a certain percentage of scheduled production forecasts. The company also keeps some exposure to the upside with caps and collars. What you seem to omit from your incessant postings with identical content ..is that additional production of 5kbpd is likely to come from exercising pre emption rights against the latest Kosmos acquisition which is understood not to be hedged.. Neither is any potential production from an additional rig being deployed at the end of 2022, which was heavily inferred in the latest update by Kosmos. I also suggest you listen to the latest webcast from Africa Oil where Keith Hill believes there is a serious prospect of securing a Kenya sale of their 25% working interest . He went to Kenya last week and suggests a ball park $1 per share or more for Africa Oil shareholders …terms may be finalised next quarter …which is roughly equivalent to just under 40p per share to Tullow shareholders. Lastly, hedging is an ongoing process. It is obvious you do not understand that PSCs often discriminate against windfall oil prices with tiered participation reducing net backs …it is far more important to develop the asset base to monetise the life of field reserves . Rahul , with certainty of cash flow from his oil hedges is able to make long term planning decisions and secure funding . Kosmos reported a 2 year payback on its purchase of assets from Oxy….would Rahul had the balance sheet to have pre emptied without the hedges in place ? I doubt it . Have a great weekend everybody and try not to be flustered by the teenage scribblers out there .
It only needs confirmation of a second rig towards early 2023 and movement in Kenya discussions to send this share much higher …IMO. Previous guidance has always suggested a $1 net back per $5 increase in price , when oil price realised reaches higher levels. There will be much greater impact from the extra production. Advancing sub sea infrastructure to reach stranded reserves will allow proven reserve upgrades and might enable greater efficiency and flexibility in controlling GOR in certain parts of the field. More importantly, after the latest conference call ,where Rahul suggested he is looking at refinancing the debt next year (presumably on much improved terms), the production profile, interest cover and reserve base will look a lot more attractive to lenders.
If nothing gives , except a sliding share price in the short term , the cash flow yield from the second half of 2023 should look insane assuming $70 oil. This may attract private equity bidders with stronger balance sheets if the Company does not have the common sense to look after its shareholders with dividends or buybacks.
Do not forget at $65 oil this company has previously suggested it has an abundance of well inventory with 70-100% IRRs. Rahul often talks about 20-25% well depletion from mature or relatively close by infill wells. When Tullow first drilled on the licence a decent number of wells had 14-17kpd volume and showed a little decline in the first three to four years. As analysts see the contribution from a new field in Jubilee and Ntomme I think we will all be very pleased.
Lastly the preemption entitlement linked to the Kosmos acquisition,which is effective from the 1st April 2020 , should see Tullow acquiring circa an extra 5 kbps of additional unhedged production on an adjusted cash flow multiple of one …it also gives them over 50% of Ten, which will allow a much shortened decision process on field development.
So please lets forget about the potential for a $10 correction in the oil price especially considering our conservative hedging profile…longer term the prize of increased production at insane IRRs is staring us in the face. Remember, also this years free cash flow is impacted by decommissioning costs which will be substantially lower in coming years and a MASSIVE subsea capex investment which is deliberately front ended to fully exploit life of field reserves. I would be very disappointed if the shares were not nearer 200p over the next two years….even with the ESG mafia trying to stymie the E&P sector !!!
Rahul made it quite clear in the conference call that the free cash flow number was to a large extent discretionary…when they mentioned $65 c/f b/e it was because they were accelerating capex spend subsea …but the field development plan … has not changed in terms of overall number of wells . It is entirely sensible to drill out as quickly as FPSO off take capacity will allow so that reserves in the ground can be booked and produced before licence expiry . Anyone who cannot understand this needs to think a bit harder !
Rahul, is doing all the right things but he as to add them up for the analysts. Imagine if he kept capex at previous guidance but just paid off the debt with extra cash flow….the analyst would probably not have lowered their valuation? ….but by investing the excess cash flow in subsea capex as a pre cursor to accelerating the drilling programme and switching one new productive well from Jubilee to Ten (where there is a small delay putting online) it tweaks the NPV down. On the plus side , with twin manifolds and other extra subsea and topside processing facilities in place, the forecasts for coming years can accommodate a larger drilling programme.
Joek1. Kosmos has also acknowledged upside in Ten field. The problem was that Enyenra had complicated multi zone channel sands..whereas Ntomme is much more straightforward. We should be able to drill some decent producers . Rahul said impact of both injectors should be felt by mid year 2022 and production can be increased in 2023. Potential to grow significantly with 2nd rig.
Thanks for update Joek1…but you missed an important point…the Ten producer will not come on stream until 2023…where Rahul stated that Ten production would start to rise. How many analysts are anticipating production growth for Ten ? This will be very bullish for their modelling.
When you have reserves that need to be produced during the lifetime of a petroleum lease…your development costs are front end loaded. The Jubilee shut down in April to upgrade facilities with significant associated capex and the last year of major decommissioning costs elsewhere is the reason cash flow is stunted this year …but this will not be the case next year.
I think when analysts work out the cash flow in subsequent years you will be surprised . Spending approx $300m on the Ghana fields , with all the benefits from three wells in Ten not showing through until the following year , should not be overlooked. Analysts previously were anticipating declining production …when clearly that will no longer be the case.
Nice of management to just confirm now that Ntomme 06, which was a gas injector, happened to find oil at the base of the well…extending the oil field North much further than previously envisaged ! That means at the very least a transfer of 2C to 2P reserves? . It could be quite material to the next reserve report. They only own 54% of the field for goodness sake ! As for not bothering to guide on next two years production profile leaves the upside materially understated in my opinion. Kenya sounds a binary outcome but looks very promising at current oil prices could be worth 40-50p per share uplift is they partner on sensible terms .
Tullow preempts to a lesser percentage in Jubilee owing to how both fields were unitised many years ago. Ten actually is a tremendous asset but needs more subsea infrastructure as the ITLOS dispute delayed investment. As soon as Rahul has a work programme agreed (he is now in complete control as operator with over 50% working interest so no problems there) he can start to bring the field up to potentially nameplate capacity by drilling 6-8 wells ? over two years. Current guidance is for two strategic wells by 2023 but I am sure the management will focus on the highest IRRs in their inventory . Previously they have prioritised Jubilee South East and North East ? now the percentage owned of Ten make the drilling programme more interesting. If ever you wanted proof that the market is dysfunctional, it is the muted reaction to todays deal. …IMO of course.