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antonvb. Please keep posting…many of us are value investors and I am very interested to hear your contribution…the store of value here is insane… if Rahul extends the debt maturities and pulls Kenya off , the price will be over a pound . You will have your day ..don't worry about that . Only a crash in the oil price will alter the situation. I am disappointed that Rahul has not drilled 2 normal development wells in Ten…I know he is focussed on IRR on his prospect inventory but the City do not understand the opportunity. Just because we have some complex channel sands in Enyenra does not mean the assets are not worth developing. I sense a game of poker unfolding over non associated gas assets.

@Steamboatwilly It will depends on the NGLs stripped on the FPSO. If its dry gas then less valuable . Remember the GOR ratios are a factor in some of the older Jubilee wells and parts of Ten are very gassy. Having an outlet for the gas is actually helpful ….and then there is the opportunity to offset some FPSO costs against the non associated gas. If the contract leads to a licence extension as a “take or pay” then there maybe a need to push out decommissioning costs..which would be very advantageous . The devil is in the detail…i suggest the management would not have referred to it , unless the numbers were quite decent .

Excellent presentation. Clearly some very considerable upsides. Looks like prospective Kenyan deal is a free carry to first oil..project cost described by a recent Upstream Online article as being worth $3.4bn ….if Tullow reduced its stake, to say 25% ? and assuming the partner wants a 20% IRR on their investment …this could infer a $1bn valuation ? against a carrying book value of $255m ? (6x cash flow). The latter is pure conjecture but no too far distant? from what Africa Oil are inferring .
On Ghanaian Gas Sales , there is a clear suggestion that they will offer gas at a significant discount to Sankofa field which realises $8 per mmscuf …that should make it very easy for the Ghanaians to agree since there should be lower pipeline tariffs as a 52kms gas spur already exists from the two fields. The other big unknown is the NGLs in the wet gas which can represent material value. Lastly if this is non associated gas project a significant recovery of FPSO lease and operating costs should also push out decommissioning liabilities …these all add up to big amounts .
Guyana drilling on schedule for May on a 200m bls prospect will also bring in the punters . I would not be surprised if we see a farm out before drilling as Rahul is not one to spend much on exploration.
The key point for people to realise is that at $65 the Company budgeted to be cash neutral , but Tullow has a lower break even, based on replacement as opposed to growth capex. When the market finally understands the difference the price may rose above 100p in short order .

@jj The recovery factors are similar between TEN and Jubilee (except for Enyenra which has channel sands and subsequently assumed lower recovery ratios). The initial paybacks at Jubilee reflected the infill drilling opportunities . Now the plan is to develop the satellite fields of Jubilee SE , etc., the field economics may not be that different . The opex per barrel slide reflects the small production number at Ten relative to the cost of maintaining an FPSO for that field . As production at TEN rises again the opex will presumably fall. It will interesting to see how the depreciation charge, as a unit cost of production during the life of field reserves, changes as production is ramped up with a new drilling programme .

Two production wells being drilled at Ten at the end of 2022 are not scheduled to be tied in and producing until 2023. The Ten field needs more sub sea connectivity infrastructure put in place as is it a less mature field in terms of percentage recovery of STOIP.

When everyone plugs in the new production numbers post securing the second rig…those selling out now will be whinging like crazy. For goodness sake its so obvious…and a point referred to in Rahul’s television interview in Ghana last week.

@antonvb. I am afraid the explanation might be a lot more simple. I have read several notes from the likes of Berenberg , JP Morgan and even IG. Each analyst is trying to put their viewpoint or build sensitivities into their models . Normally , the analysts would model cash flows to represent the production profile indicated by management . After all , production guidance has been pretty accurate recently. However, because the Board wanted to highlight , in my opinion, possible, rather than probable risk, they have largely ignored to different degrees , the projected uplift in Ten’s gross production to 50kbopd by 2025 and the 100kbopd for Jubilee . The irony is that if a second rig is contracted as expected , to start early 2023 (as specifically mentioned in the presentation slides) these numbers should be all be far too conservative . At current prices and rig rates I would estimate about a 2-3 month payback on each new well drilled because of generous cost recovery terms in the PSC.
So why have some very competent analysts been so cautious ? I don’t honestly know. The last conference call for Kosmos showed on slide 9 that gross production at Jubilee was currently 91 kbopd (before we get the benefit of any new wells in the current drilling programme) having risen from 70k kbopd from July. This year we have to allow for an additional 2 weeks maintenance shutdown in April, on the Jubilee platform and overall uptime might be provisioned at a more conservative percentage, say 4% ? rather than the 2% achieved in the last financial year …but I have seen no explanation to reconcile this. Indeed as there appeared to have been no decline shown in field performance for almost the first quarter of the calendar year, I think management will have already allowed for these planned measures in their guidance. Kosmos specifically mention that 100kbopd from Jubilee is “expected” in slide 18….after all there will be three wells drilled to “maintain” the field . People forget that field decline is primarily a function of water cut which is addressed by the injector wells which keep the reservoir sufficiently pressurised.
I think most analysts will be prepared to accept company guidance after the interims when all the variables will largely be known. Kenya is indeed a potential major catalyst for a rerating …maybe a 59p per share catalyst if modelling by one leading analysts proves accurate. …that’s more than the current price ! If you think the latter analysis (copyright prevents me from sharing all the details) is too bullish, he has admitted incorporating (deducting the cost) of all the growth capex out of $1.2bn of expenditure up to 2025, but not giving the benefit of all that to the Company. My analogy , would be , this is like preparing a deep mine shaft for exploration of a high grade proven resource , but then not producing from it. Totally ridiculous !

I think from memory , quite a few analysts assume $80 oil for 2023 in their forecasting models ….everyone knows there was a war premium on the current price …the danger, as I said before, was demand destruction from much higher prices. If the oil price were to settle at $80 Tullow would continue to make substantial returns on capital. Share price may suffer a knee jerk reaction to sudden movements but it hardly moved up because of hedging in the first place. Tullow must be one of the more insulated E&Ps to sudden changes in prices because such a high proportion of next 18 months production is hedged.

hey_arnold

Last response from me .
OK . Risks. Kenya is a binary outcome. it either happens or its does not. There is still some dispute over “community land in Turkana” but a lot of the showboating is a shakedown (IMO) by some very poor communities who want to understandably share in the new wealth creation :) Otherwise I believe from press reports that most of the land required for the pipeline has been secured. The Government also needs to fund its share of the pipeline and other infrastructure. The water requirements , enviromental impact studies and power/transportation upgrades to wellpads seem manageable to me. In the round, I can’t see such a massive opportunity for the Kenyan economy being lost, so I believe the project is extremely robust above $65 oil and should go ahead shortly.
In Ghana most of the technical risks of field development should be reduced by the fact that this Jubilee and Ten have both been producing for many years and the geology is well understood . We have updated reserve reports and the main risk is that the drilling programme get delayed or the oil price takes a dive…neither of which looks likely but it always remains a risk. The upside is many multiples of the current share price…but the capex has to be front ended because what is the point of drilling wells if the petroleum license expires. Rahul is not going to waste money on wildcat wells . Ironically , if current prices persist the exposing heavy oil discovery in Guyana will also be potentially valuable. Whilst I am excited by the Cretaceous prospects in Guyana , I do not believe Rahul is interested in exploration and i would not be surprised if he farms acreage out in advance of drilling commitments . Whilst this might frustrate many holders , Tullow has such high IRR wells to drill in Ghana as well as a look alike fan system in the adjoining block in the Ivory Coast which could be tied back subject to inter governmental approvals.

The decision to keeps management heads down and generate sufficient cash flow to allow a refinancing towards the end of 2023 may be frustrating but it will may ultimately prove very rewarding to patient holders. The more confidence the market gets in the planned execution of the management strategy , the more the price will start to outperform . We have just had another clumsy update….but as the market understands the opportunity the price will take care of itself .

Please do your own research.

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 ?