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Tullow Cuts Exploration Budget to Focus on East-Africa

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Tullow Oil Plc, a U.K. explorer, will slash capital expenditure next year and focus on onshore searches in East Africa and developing existing wells in Ghana.

The exploration and appraisal budget will be cut to $300 million from $1 billion, London-based Tullow said today in a statement. On the development and production side, Ghana will continue to be the company’s primary focus, contributing “significant value and cash flow” for the group, it said.

“It’s a challenging time for the oil industry and everyone should be looking at their cost structures,” Chief Executive Officer Aidan Heavey said today in a phone interview. “We will be cutting costs to maintain margins going forward.”

Tullow has made several discoveries in Kenya’s northwest, putting the East African country on the path to becoming an oil exporter. Tumbling crude prices and the failure of Tullow’s exploration wells off Mauritania have led to the shares declining by 44 percent in London this year. The stock dropped as much as 1.1 percent to 477.10 pence in London and traded at 481.60 pence as of 8:06 a.m. local time.

The company has been able to reduce drilling costs in Kenya to $7 million a well from $50 million as exploration has progressed, Heavey had said in an interview earlier this month.

‘Watershed Moment’

This “could be a watershed moment for the company in its efforts to rebuild investor’s confidence in the business outlook,” James Hosie, an analyst at Barclays Plc’s investment-banking unit in London, said in a note. “Management has responded to the lower oil price outlook and concerns over the scale of its exploration ambitions.”

The lower exploration budget may lead to an $850 million writedown in Mauritania and French Guiana, wrote Hosie, who has an overweight rating on the stock.

The explorer expects to make a final investment decision for work in Uganda by the end of 2015 or early 2016, Heavey said today. The government of the East African nation may award production licenses by the end of this year, he said.

In total, next year’s capital spending will be $2 billion, which includes $900 million for the TEN project in Ghana, the company said. That’s $100 million less than this year.

Yesterday, the company signed an agreement with Jamaica for offshore oil blocks. It said earlier this month it plans to withdraw from the Kudu project in Namibia.