Is this the end
Tullow Oil to slash exploration budget
Michael KavanaghAuthor alerts
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Tullow Oil is to abandon much of its aggressive wildcat exploration programme in response to steep falls in the oil price and a poor market for monetising discoveries.
The FTSE 100 company, which this year is expected to spend $1bn on exploration and appraisal drilling, is planning to cut that to $300m in the light of worsening market conditions.
Tullow, which alongside other leading exploration and production companies, has been hit by a sharp decline in its share price over the past year, is also preparing to make large writedowns on previous drilling campaigns. These are set to include booked losses on its positions off French Guiana and Mauritania where initial discoveries have been made but commercial development appears unlikely in the medium term.
Aidan Heavey, chief executive, said: “In light of current oil and gas sector challenges including the commodity price environment, we are reviewing our capital expenditure and our cost base.”
The cutbacks will result in Tullow attempting to extend gross reserves around existing discoveries in Uganda and Kenya as its concentrates on trying to fully develop these licences.
The company reiterated that it expected to increase production to a net 100,000 barrels of oil a day by 2017 through further work alongside partners on its west African assets, which are centred on its flagship Jubilee field and nearby TEN development project off Ghana. Last year group production stood at 84,200 boe/d.
In July, Tullow reported a net loss for the first half of the year after writing off more than $400m in exploration costs, but said it remained confident of its high-spending exploration strategy, which has typically delivered an average of 200m barrels of new oil discoveries a year in spite of a run of drilling disappointments.
However, on Wednesday Tullow conceded that its bullish approach to attempting to open up new basins, even when successful, was being challenged by market conditions.
“Given the current expectations for the oil price, reduced commercial success from offshore drilling and the lack of asset transactions, returns from drilling complex, deepwater wells are currently less attractive,” the company said. Instead, it would “reallocate capital across the business towards producing assets and the commercialisation of existing discoveries”.
Analysts at Barclays suggested write-offs on spending in Tullow’s frontier regions of French Guiana and Mauritania could result in a full-year writedown of $850m on exploration spending, although they said this should have no bearing on the company’s valuation.
“Management has responded to the lower oil price outlook and concerns over the scale of its exploration ambitions by presenting a reduced exploration,” they added, arguing the update “could be a watershed moment for the company in its efforts to rebuild investor's confidence in the business outlook”.
Shares in Tullow were up 1.7% at 490.6p in midday trading, valuing the company’s equity at £4.4bn.
