Tullow Oil 10 Mar 14

FY13; lower net income operations not the cause

Tullow Oil has reported a lower net income for 2013. The softer outcome was the result of the continued writing off of asset values in its exploration portfolio. Both gross profit and operating cash flow improved for 2013, on a stronger operational performance. The balance sheet took a bit of a knock, but remains in good shape. Shareholders saw no change in the dividend for the year.

For the full year to 31 December 2013, the company reported a fall in net income of 67.5% on the 2012 result, to US$216.1 million. The following waterfall chart shows the factors that impacted on the 2013 result.

Source: Tullow Oil

Operations for the year had a positive impact, with a rise in revenue of 12.9% compared to 2012, to US$2.6 billion. While gross profit rose by 7.1% over 2012, to US$1.4 billion.

The company’s operational performance was boosted by a significant improvement in volumes; reflected in the US$308 million positive impact on net profit in the above chart. Volumes printed a record 84,200 barrels of oil equivalent per day (boepd). The following chart shows annual boepd production:

Source: Tullow Oil

The Jubilee field (Tullow’s interest 35.48%), the company’s key asset, in Ghana was the major driver of the better production result. For 2013 Jubilee lifted production to 34,600 boepd from 25,450 boepd in 2012. Production guidance for Jubilee in 2014 is 35,500 boepd. Of the smaller fields Ceiba (Tullow’s interest 14.25%) in Equatorial Guinea and Limande (Tullow’s interest 40%) in Gabon lifted production to 3,500 and 2,900 boepd or 22.8% and 16% respectively on 2012.

The company has provided production guidance for 2014 in the range 79,000 to 85,000 boepd.     

On an underlying basis, cash costs rose by 13.7% on the comparative 2012 figure, to US$16.50 per boe. The following chart shows annual unit costs per boe production:

Source: Tullow Oil

The increase in underlying cash costs was a result of well workover activities on the Jubilee field and higher fixed cost charges on a number of the company’s mature producing fields. By our estimation, the company will again see costs rise in 2014 to US$17.00 to US$17.60 per boe.

Operating Cash flow for 2013, as a result of the better operating performance, rose by 6.9% compared to 2012, to US$1.9 billion. The following chart shows the sources and uses of cash in 2013:

Source: Tullow Oil

The cash flow performance for the year was primarily driven by the improved production levels.

Capital expenditure in 2013 fell by 3.7% compared to 2012, to US$1.8 billion. The following chart shows the company’s capital expenditure in recent years (in US Dollars, Expl is short for exploration, App appraisal and Dev development):

Source: Tullow Oil

Guidance on capital expenditure for 2014 has been set at US$2.2 billion. The company expects to US$1.12 million will go towards development activities, US$770 million on exploration and US$310 million on appraisal activities.

A major part of the development spend in 2014 will be focussed on the Jubilee field 1A phase and TEN field, with some US$790 million committed to these fields. Exploration in 2014 will focus on Kenya, where the company will commit US$310 million.      

Despite the fall in exploration expenditure, we believe the company’s Africa campaign will continue to generate positive outcomes for shareholders in the months ahead. Replication of that success is now a focus of its strategy with its offshore Norway and Greenland acreage. Offshore Norway is certainly a proven crude and natural gas region.

The balance sheet did take a hit as capital expenditure continued to flow at near peak rate in 2013. The company’s net debt to 31 December 2013 rose to US$1.9 billion from US$989 million at the end of 2012. As a result of the movements of debt and cash in the balance sheet, the company’s gearing, on a net debt to net assets, rose dramatically to 33% at the end of 2013 from 15.8% at the end of 2012. Debt for the year rose to US$2.2 billion from US$1.2 billion for 2012, while cash improved to US$353 million from US$330 million in 2012. We have no concerns about the state of the company’s balance sheet.  

A US8 cent dividend was declared for the second half of 2013, which was unchanged from the 2012 final dividend. The total dividend for 2013 also remained unchanged compared to 2012, at US12 cents per share. We are a little disappointed that the full year dividend was left unchanged. The company cited a need to fund an ongoing work programme as the reason to maintain an unchanged dividend. We are advocates of maintaining a strong balance sheet, given the volatility in the oil and natural gas prices.

Despite the exploration write-downs, we will continue to look for positive news flow over the near-term to act as a value catalyst for the share price. We believe the company’s ongoing strategy of exploration, appraisal and production on the African continent and Atlantic margins remains an important key driver. Following this strategy, the company has, to date, delivered an industry leading exploration, appraisal and production performance.

With a production profile that continues to improve and a robust cash flow and balance sheet; Tullow is in a sound position to fund its ongoing activities. Accordingly, Tullow Oil will remain firmly held in the Fat Prophets portfolio.  For Members without exposure we recommend the stock as a buy.
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