Tullow Oil : 231KB

Half year results 2021

Wednesday, 15th September 2021

Half year results 2021	Wednesday, 15th September 2021

Introduction

Operator

Good day and thank you for standing by and welcome to the Tullow Oil Plc 2021 half year results conference call. At this time all participants are in a listen-only mode. After the presentation there will be a question-and-answer session. If you wish to ask a question, please press star one on your telephone keypad. For your information, this conference is being recorded. Now I would like to hand the conference over to your speaker Rahul Dhir, chief executive officer, please go ahead.

Overview

Rahul Dhir

CEO, Tullow Oil

All right, thank you, Andrea. And good morning, everyone, thank you very much for joining. We're very pleased to have this opportunity to update you on our progress in the first half of this year. And I want to give some thoughts also about our strategy and performance.

But I thought before we start our presentation, I just wanted to share that we've announced today that Les will be stepping down. This is by mutual agreement. I'm sad to see that - well, he's not going yet but certainly it's sad to see him go, but he's been a real partner with me as we've steered Tullow through the whole turbulence of the past year. And as you all know, he has been a key architect of our financial turnaround. So now, today is not goodbye and Les is committed to staying at Tullow till the end of March. But I did want to thank him for his huge, huge commitment and his leadership.

So let me start just, you know, I really wanted to start with a reflection of where we are today. So we've done a lot in the last year to turn the company around. We've reset our cost base, we've simplified our capital structure, and we've put the group on a much firmer financial footing. As you know, we're looking to allocate around 90% of our capital to West African producing assets. These create a lot of value, they generate very material cash flow. And we're now very well set up to deliver a sustainable, self-funded production from the assets.

We also have other areas in our portfolio where we can unlock value, and I'll talk a little bit more about these, particularly in Kenya, and in exploration. We prioritise efficient and safe oil and gas operations in our host countries, while minimising the environmental impact. And, as you will see, and this has been part of our ongoing commitment to our work, we will deliver shared prosperity and will create value for our investors, staff, host nations and communities.

And, you know, Tullow has had a long and proud history in Africa and I believe we're very well positioned to continue as a leader in the continent's oil and gas industry.

So you'll remember kind of a little over 10 months ago, we held the capital markets day. And there we told you that we will focus on a few things and these included delivering sustainable, self-funded production, improving our operation performance in Ghana, including reducing well complexity and downtime. We said we would commence a multiyear investment

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Half year results 2021	Wednesday, 15th September 2021

programme in some very well defined and profitable opportunities across both Jubilee and TEN. We said we would deliver a revised Kenya field development plan. We will continue to rationalise and unlock value from our exploration portfolio, which would then align with our production focused strategy. Then we said we would look to refinance our debt to create a simplified capital structure whilst continuing with our cost-conscious approach, and we also said we would evolve our ESG strategy.

So these are all the things that we kind of talked about 10 months ago, and today, I'm pleased to share that we've delivered on each one of these commitments. But it's important to underscore the work doesn't stop there. We're in a mode of continuous improvement and we remain focused on delivering value from our existing assets. So to that end, what we have done is we've further refined our plan for 2021 to 2025. So if you remember we talked about a 10-year plan, but Les and I will share more details of the kind of five-year slice of that today.

And what we have done in the middle column that you see on the slide, some very exciting near-term catalysts that provide us, and you as well, with line of sight to both growth and value creation. But overall, what you should expect from the business plan over the next five years is that we will deliver growth and production in reserves and underlying value, along with the cash flow to support de-leveraging. And the plan is at $65 oil we'd be able to reduce gearing to below 1.5 times, so that's getting as measured net debt to EBITDA by 2025. We'll talk more about how to do that.

But before we do that, let me focus on where the world is today. And this is an important slide, because it kind of sets a little bit about our purpose.

So notwithstanding the ongoing focus on reducing the use of fossil fuels, we believe that the world will consume more energy. We also believe that fossil fuels will remain an integral part of the energy mix for some time to come. So the logical conclusion is there is need for oil and gas resources to be developed and produced, but what's important is it's got to be done responsibly, and with minimal environmental impact. And where we work, particularly in Africa, we experience first-hand how the oil and gas industry can be an engine for economic development. And we also see at the same time in Africa, it continues to suffer from extreme energy poverty, and only about 3% of global emissions are expected from Africa by 2040. That's an important point. So there's a really strong case for a fairer transition, where African economies have the opportunity, like the rest of the world can now, to benefit from the responsible development of these resources.

And with the oil and gas industry in flux, there's many companies who are allocating capital away from upstream, and they're divesting assets. So we felt it important, I think, today, given all of this flux and uncertainty that we've got to make a clear statement of our purpose, which is that we are committed to being in Africa. We have the opportunity actually to be a leader in Africa, where we're delivering safe and efficient operations, while we bring shared prosperity and reduce that environmental impact.

So our net zero commitment, which we've talked about before, that's an important aspect of this plan. Let me just now share with you how the specifics of kind of how we do that.

So obviously, the net zero commitment is an integral part of our licence to operate. We have a responsibility to reduce and in time, eliminate the emissions under our control. And within

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our business plan, we've budgeted for a number of technical projects that would help eliminate routine flaring on our Ghana FPSOs by 2025. So some of these include kind of de- bottlenecking around gas processing and include things like process modification.

And not to take you in the weeds, but the sorts of things we're looking at are quite specific. So one such project is we're looking at a bi-directional gas line, so that's linking Jubilee and TEN. And what that enables us to do is to have optimum uptake and injection of gas when it's required, both for reservoir management and pressure support. So that's an example of how we look to kind of optimise gas utilisation and reduce flaring.

I think we've talked about before, there's been the Jubilee, we have a gas de-bottlenecking plant that's underway, so a series of small projects, and we expect that to be completed by next year. And we've defined a number of process modifications for TEN and that will be planned when we have the TEN shutdown, which will be sometime in the next few years.

So that's the focus on the facilities. But in addition to this, we're also progressing work on nature based offset projects. And there's a lot of stuff in this going on. But it's a new area, it's an evolving area, and we want to look at this organically, so what we're doing is we're building up our capabilities in the space. The plan is we'll look to invest in new carbon offset projects, but focus in our host countries. We're screening projects that mitigate deforestation, that address forest degradation. What's interesting is that typically, these projects involve a degree of social investment as well. They're in this kind of social project. So they're well aligned with our broader sustainability strategy. So I think over the coming years, we'll look to update you on the work that we're doing.

So I'll talk a little bit more about the assets. But before I do that, let me hand over to Les, and he'll cover our first half results. So over to you, Les.

First Half Results

Les Wood

CFO, Tullow Oil

Thanks, Rahul. Good morning, everyone. As Rahul mentioned earlier, we announced today that I will step down as CFO in March, but after the 2021 reporting cycle. Timing's right now that we've completed a number of steps to strengthen the group, which was culminated in the refi that we did back in May. As Rahul said, I'm not leaving yet, so there's still work to do over the next six months. So I look forward to catching up with as many of you as I can to say thank you.

In the meantime, it's a great opportunity to have, to update you on the first half, which is a good set of results. I confirm our full year guidance and also underscore the positive progress that we've made on simplifying our capital structure and strengthening our balance sheet.

So firstly to the numbers. As Rahul said, our business has performed well in the first half, delivering strong operational performance. As you'll see from the numbers, revenue is essentially flat year on year with lower sales volumes broadly offset by around a $9 per barrel increase in realised oil price. Unit OPEX is up, primarily a result of lower production, extended

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COVID-19 operating procedures, and then the residual work related to the shuttle tanker operations for the TRP.

We delivered a profit after tax of $93 million and free cash flow of $86 million, which includes the one-off fees associated with refinancing our near-term debt maturities.

Capital expenditure was around $100 million, 101 to be precise, with phasing bias to the second half, primarily as the rig in Ghana only commenced work in April. Also related to the timing of non-op activity like Simba, which we'll talk about in a little bit, and also the long leads for Jubilee southeast and then really the mixture between Jubilee and TEN activity with the rig. And Rahul will tell you a bit more about these shortly.

Net debt was reduced by around 700 million from a year ago to 2.3 billion following cash received from asset disposals and pre cash flow, and gearing is down from three times to 2.6 times.

And now to the 2021 guidance. This slide is a simple summary of our 2021 key guidance figures. Where appropriate, guidance has been adjusted for the first half completion of the Equatorial Guinea and the Dussafu disposals. We've narrowed production guidance towards the top end of the range, including an adjustment for the Jubilee shutdown moving into 2022.

Our unit OPEX is higher for the reasons I mentioned earlier. We're still on track for a cash cost savings of $125 million per year. And as an example, net G&A is down by 50% compared to the same period last year.

Both CAPEX and decommissioning have been adjusted slightly to reflect the current forecast of activity phasing over the balance of the year.

We expect underlying operating cash flow to be around 600 million, and that's at $60 per barrel, and as a sensitivity, a further $10 per barrel increase for the second half as around $50 million of free cash flow.

And now to the progress that we've made on strengthening our balance sheet. At our November Capital Markets Day, we laid out our cash generative 10-year business plan. Together with the improving performance of the business, evidenced by our numbers, delivery of a billion dollars of self-help from asset sales, and the material cost savings realised from the business, and of course a strengthening oil price environment, these all created the platform to successfully complete a comprehensive refinancing of our debt back in May.

We were able to simplify our capital structure with no material debt maturities now until 2025. And with a significantly reduced, but very supportive, bank group providing a 500 million RCF facility.

We've also underpinned the revenue and cash flow through a material three-year hedging programme. And over 75% of that is already implemented and has built on what we already have in place with downside protection, with average weighting for a significant portion of our production of around $40 per barrel to the end of next year and then $55 per barrel in 2023 and also through to May me 2024. We will complete the implementation of the programme by the end of the year, as we said when we issued the bond in May.

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