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Tullow Oil cuts debt and grows cash but holds back on dividend
Tullow Oil generated $543m of free cash flow in 2017 but said it will not pay a final dividend as it invests $460m this year in current oil-producing projects and the first of a series of "high impact" exploration campaigns.
Production of 89,100 barrels of oil per day from its Jubilee and TEN fields offshore Ghana and 5,600 barrels of oil equivalent per day from its European interests led to revenue of $1.7bn for the calendar year, an annual increase of 36%.
A $2.5bn refinancing during the year saw the giant net debt pile reduced from $4.8bn to $3.5bn by year end, meaning, including the cash generated from the business, Tullow had bank headroom of $1.1bn for its investment projects.
Addressing the sensitive issue of the dividend, Tullow said: "While significantly improved free cash flow is creating a broader range of options for Tullow in how it allocates capital, the group is currently focused on investing in its portfolio of assets and debt reduction. Therefore, after careful consideration, the board has recommended that no dividend is paid for 2017."
After topping 1,500p in six years ago, Tullow shareholders have seen significant value destruction from failed exploration projects, with the shares falling 30% in 2017. In its preview note, Deutsche Bank said investors "will require firm direction" on how future excess cash flow will be allocated between investment and returns.
A 2.5% rise to 188.15p in early trading suggested they were not too surprised by the dividend news.
Looking back at Tullow's financials, gross profits of £815m were up 49%, though this dwindled to a 2017 operating profit of £22m after a $143m write-off of exploration costs and $539m impairment of property, plant and equipment, plus $15m of restructuring costs and general admin.
However, this was a swing into the black from the $755m operating loss the previous year, while the post-tax loss shrank to $189m from $597m.
Chief executive Paul McDade said the substantial free cash flow generation and significantly reduced gearing made this a year of "excellent progress".
"Strong production and disciplined cost management has allowed us to continue to both reduce debt and invest in our high-return production assets in Ghana," he said, where drilling is due to begin on the Ntomme field by the end of February.
Tullow expects 2018 gross oil production from the Jubilee and TEN fields to average a net 57,100 bopd combined, with production from non-operated and European projects adding around 19,100 bopd and around 1,900 boepd respectively.
McDade said the assessment of appraisal drilling results from a campaign in Kenya "fully supports progress towards a major development of the South Lokichar Basin", with a 560mmbo best estimate of recoverable resources and phased development planned with final investment decision in 2019 and first oil seen in 2021/22.
Finance director Les Wood said gearing was approaching the target level of below 2.5x net debt/EBITDAX, which provided "the financial and operational flexibility we need to invest in our business", while corporate and asset costs have been driven down amid a new financial discipline across the group. "Tullow is well placed to build on this strong financial platform in 2018."
New ventures boss Ian Cloke highlighted the series of farm-downs, country exits and large-scale licence acquisitions that have reshaped the portfolio. "Our high-impact, low-cost, basin-testing prospects across Africa and South America have been carefully screened, both technically and commercially, and we look forward to starting this new exploration cycle with the Cormorant well, offshore Namibia, later this year."