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Totally agree…but you have to see the cryptic message. Look at the IRRS given at the capital markets delay presentation and then look at the capex budgets. The production profile is going to rise close to nameplate capacity over the next two years . Why dont they just say it ! Meanwhile Kenya looks a much more interesting project..reserves are brought more quickly onto production with a much lower cash operations cost. Looks like a farm out is on the cards !
For goodness sake…the FTSE250 quarterly changes which have already been announced, often results in some funds selling short in advance of the rebalance which formally occurs at close of business on the 3rd Friday of this month. The shorters know the passive funds will sell as Tullow ‘s lower market capitalisation makes its drop out of the index. Some of that supply will be hoovered up by the small cap passive funds but sometimes there is a timing mismatch and a surplus of stock. The problem for the shorters this time, is the next trading update from Tullow is expected next week before the rebalance date…and should show the Company making great progress (judging by updates on jubilee production from Kosmos) .
We could see an almighty battle next week when the bulls turn up to the party…at the moment the bears are relying on the weight of passive selling into a thin market .
Most people do not understand how hedging work…..still plenty of upside on the base case …we are talking about caps and collars..which allow some upside participation to rising prices . Also production which is above forecast levels is not necessarily going to be hedged …until new budgets are agreed.
@Rock8. The greatest risk was that the first two new wells did not perform... Kosmos gave production guidance which showed Tullow was basing its contributions on the low end of each new wells productivity. IMO, If these wells can be brought on stream in the next few months as implied in the press conference we will be ahead of more conservative guidance which was not assuming much of a contribution . Also, the Company has guided to only 4 wells this year....possibility of a fifth now ? If the oil price holds up and they are discussing a third FPSO in theory it suggests an additional rig might also be being looked at. With the cost recovery terms so attractive you would have to be stupid not to consider it. I am sure the company will want to put appropriate hedging in for existing production to provide them with the cash headroom for additional investments over that agreed as part of the bond refinancing ..but we will have to see what they decide. In the meantime the main logjam to increased production was managing the waterflood and gas off take from the rig (GOR) . Judging by the latest published monthly field production numbers (production up 4K ?), it looks as though facilities have been uprated and these bottlenecks are being addressed. Very encouraging .
@Rock AGMs are not generally the time to update on trading , so I am not expecting any fireworks...after all Dorothy is still occupying the Chair ...for the last time ....so I expect nothing .
@kilman. Talk of evaluating a second FPSO on Jubilee at the Ghana presentation , is a pretty big hint that Dorothy’s production guidance to analysts (for a producing field with only 500m out of 2.9bn in place of reserves) may be a tad over prudent to say the least. Over the next six months prepare to understand what Tullow is really worth . IMO, It’s going to be an eye opener . By the way I guess you can lease second hand FPSOs ...on interesting terms these days....just sayin !
@JJ many of these deals take several months to complete. As evidenced by Tullow's sale of EG assets , the price was agreed many months previously with the cash flow received on the assets in the intervening period, being offset against the purchase price. I have to laugh at people who forget the pricing of oil in 2020. We can all do a better job with the benefit of hindsight .
JP MORGAN have to rely on production guidance supplied by the Chairperson. If she wants to take a conservative, or some might say overprudent view on 1) FPSO percentage downtime 2) oil price hedging 3) well decline rates 4) new well productivity 5) the time taken to bring new wells on stream 6) the use of an additional rig to drill out prospects 7) timing of abandonments 8) a farm out of either Kenya or Guyana , etc etc . ...it will materially affect their conclusions./valuations. Boards of public companies worry about getting sued for non disclosure of liabilities or overestimating likely cash flows ...so many cover their backsides by throwing in the kitchen sink provisions ....Now the debt has been syndicated I would expect a short cooling off period and then some of these assumptions will be more relaxed. To be fair to the Board , the pathetic attempt to resuscitate TEN has no doubt been hampered by the imminent ? sale of the Occidental interest which must have had an affect on agreeing an ambitious work programme.
Let me be clear , if high impact wells with outstanding IRRs for Ten are delayed, it will ultimately mean that recoverable reserves will not be recovered during the licence period. Dorothy might as well pour the oil down the drain. In my opinion this constitutes incompetence and will not impress the Govt of Ghana .
Hi Joek1
I was a little lazy. Tullow outline the hedging policy designed to “protect” $2bn of revenues on page 22 of the credit presentation.
https://www.tullowoil.com/application/files/3716/1969/4591/Tullow_Oil_Credit_presentation_280421_FINAL.pdf
50% of the required floors for 2022 will be put in within 14 days (presumably of closing) with the remaining 25% for 2022 production a few months afterwards. You can read the rest for yourself. I have not perused the final documentation to see the additional safeguards required by bond holders but I think these stated commitments form part of the agreement . Incidentally, I think a similar hedging requirement formed part of the old RBL for what it is worth. Important to remember that these are floor fixes and the Company retains some upside to rising prices.
I
@JMAX you do realise that the majority of Tullow’s production will need to have floors set in the next 14 days for the next two years forward. This requirement to hedge production is laid out in the bond agreement. Tullow will be most fortunate to lock in at current levels but it makes some of the analysts commentary pretty much redundant straight away.
@Prosecco. Tullows high share price sensitivity to oil prices reflects a low market cap percentage relative to the total enterprise value which is five times odd greater. This means that the shares have a comparatively large asset base to generate returns. which accentuates the operational leverage both ways to free cash flow. Tullow is also able to hedge up to 18 months forward, so short term pullbacks in the oil price may have only have a limited impact . Tullow activities are purely upstream, whereas many integrated oil companies have downstream operations (retail , refining and distribution) which have little elasticity to the movements in the price of oil. On the other side of the equation. Tullow has a large proportion of 1P reserves producing, which means that unlike other exploration companies (which may still be burning cash as they prove up potential reserves) Tullow can benefit from the short term movements in prices. Hope this helps. none of the above should be constituted as investment advice. All exploration companies should be considered highly speculative.
Bailiff....if you care to view the price of Tullow bonds trading near highs for the year, you do not have to be a genius to form an opinion. Rather than tell you what mine is , I would suggest that the negotiations to reschedule debt maturities are drawing to a conclusion . The art of investing is to look through the noise and look at the probability of different outcomes and invest according to your risk mandate. Notes like Cannacord’s, point out obvious balance sheet risks but fails to point out how a few sensible moves could resolve those issues. The direction of travel , if the bonds and RBL are successfully redetermine is obvious.
Does anyone want to comment on Carmichael’s 2023 production number which appears to assume that almost $600m of capex is expensed largely on an infill drilling programme over two years, results in no virtually increase in production ! Whilst i acknowledge, mature fields have a natural depletion rate this is too conservative ? Each development well in Jubilee should add 8kbpd gross and each injector almost a similar uplift to field performance. This was all highlighted in their last Company presentation. He also uses 12% debt financing for 2023 ....well with the bond refinancing we will be able to determine the accuracy of this charge. Many analysts these days have a habit of producing risk adjusted models that always seem to stay within certain levels of a share price. We can all play that game but it will not help investors spot the multi baggers or the disasters lurking out there. Decommissioning costs peak over the next 2 years and then the free cash flow profile of this company combined with very high IRRs will be very attractive albeit in a world fixated with making batteries for electric cars which require refining almost a house full of raw materials ...just to make one battery. The latter environment is choking off oil industry capex..which may result in very oil prices post 2025.
OK Happy...lets see what happens to the tax case shall we ? But you have probably noted it is quite an historic demand. By the way , i take it from your answer that you believe all the partners to the licence have paid their due amounts claimed ? Perhaps you could show me proof of that and show the disclosures associated with it. I think Ghana has been very progressive and professional in its approach to oil and gas companies otherwise i would not have invested in Tullow. However, as the furore over gas allocations and certain government expenditures have caused some well documented controversies . If you want me to elaborate with examples , I will provide the links with my next post. Even the taxman in the UK has been known to get greedy on occasions . The point i am making is I believe such issues are resolved by international tax tribunals ...otherwise the E&P sector would be defenceless from all sorts of claims. If you can show me where Ghana has successfully won a case at an international tax tribunal for “branch profits tax” levied against an PSC agreement for oil exploration I will retract immediately . Otherwise , you are entitled to your opinion and I to mine. Whilst your at it, do you believe this is the first time the tax authorities have tried this ? Give me a laugh ! I afforded you the courtesy of a response because I will always retract or apologise when I feel I have misunderstood something . I am just a private investor. People should never rely on my opinion when making an investment decision . I for one , do not knowingly mislead or misrepresent. I certainly have every respect for the lovely people of Ghana so do not make this a personal slight ...it is just business . The Ghanaian Government finances are stretched. They have just successfully issued a zero coupon bond but they are under great pressure to fund public services ( in common with all governments around the world).
Well let me elaborate a little further. Tax claims under the auspices of “branch profits tax” are a regular occurrence for oil and gas companies. The board of Tullow have decided to disclose them but other companies receiving such ludicrous demands choose not to bother . I will let the discerning readers of this website guess who has not bothered to make disclosures of such spurious demands. The original PSCs did have different treatments but then they unitised the two fields where standard terms apply. Apologies for my verbosity. Also Tullow book reserves based against the P90 reserves whereas the US E&P I understand use more of a P50 a approach .
I must clarify /retract an observation I have just made. I now understand that the PSC terms do not now vary between any of the partners..none of whom have recognised this tax demand as legitimate. I think i will get me coat ....
I have read the article. He has not taken on board positives changes to the GOR resulting from the work programme...or the fact that gas compression facilities have been considerably expanded over the last 18 months. He ignores 2P reserves ....how Tullow categorises 1P &2P is a debate for another time...but to ignore 2P is just plain wrong. The depletion in Ten is from a lack of historical drilling and the reserve upgrade was also a function of recoverability rather than just additional reserves added. The author might have observed that reserve replacement from enhanced recoverability has been achieved pretty much continuously on Jubilee over many years...it does not need additional reserves to be discovered just more of the existing in place to be recovered.
MOST IMPORTANTLY. I understand that Tullow enjoys different fiscal PSC terms to Kosmos . To pass judgment on the viability of the Ghanaian tax claim is above the authors pay grade. This would need to go to International Arbitration ...where i am led to believe there is no case to answer. I note he omits to discuss the contingent assets which have also been disclosed. Some might argue that the Cretaceous prospects in Guyana are exceptional...which i am confident will attract a farm out partner by the end of the year (which would allow a sensible monitisation of the asset).
The reserves booked by Tullow have to reflect the length left on the petroleum licence. With such conservative accounting standards, few have allowed for the consequences of not assuming more wells are drilled in these circumstances (leaving reserves not produced in the ground) At $65 per barrel oil , Tullow should recover almost all new well expenses for “cost oil “ within 3-4 months .....therefore the decision to drill more wells , with there subsequent impact on OPEX charges and unit cost amortisation of the FPSO lease, is profound. If any of the teenage scribblers ever worked out what a second rig would do to cash flows , they would probably be all over this stock. I am afraid it is a case of a little knowledge is a very dangerous thing...especially in the hands of a shorter...who motives are plain for all to see.
Try reworking the numbers after deploying a 2nd rig ...and you will understand the share price. Remember at $65 oil the Capital Markets day presentation suggested a 130% IRR on well inventory for Jubilee and a little lower for Ten. Investment is sometimes the art of anticipating the likely/possible rather than waiting for it to happen. The risk averse may wait for the debt to be restructured and the cash headroom to become officially available for a second rig to be chartered. Imagine how the unit cost of depreciation will change when two rigs are available rather than one. At the moment field recoverability has to be limited to the life of the licence.
If i am honest , i have to admit , i just bought more...but i did sell 70% of my holding at higher prices because they were technically overbought. If the oil price goes down $10 is does not bother me. The company is adequately hedged in short term. The key is the bond refinancing which i see no reason not to go ahead smoothly. GLA
You do realise that at $65 oil we can invest the money in Jubilee well stock with an IRR of 130% ? All we have to do is the tie ins on new producers from 2P reserves. From a risk perspective the EG assets do not qualify for inclusion in the RBL so this all makes sense. The returns at a higher oil price are exceptional ..Tullow just needs to refinance to gain control.