Earnings Transcript for TLW.L - Q2 Fiscal Year 2017

Executives: Paul McDade - Chief Executive Officer, Executive Director Les Wood - Interim Chief Financial Officer Aidan Heavey - Non-Executive Chairman of the Board

Analysts: Michael Alsford - Citi Alwyn Thomas - Exane BNP Paribas Al Stanton - RBC Sasikanth Chilukuru - Morgan Stanley Mark Wilson - Jefferies Rafal Gutaj - Bank of America Merrill Lynch Brendan Warn - BMO Capital Markets Robin Haworth - Stifel Joe Head - UB S James Hosie - Barclays Colin Smith - Panmure Gordon David Mirzai - Deutsche Bank David Gamboa - TPH James Thompson - JPMorgan

Paul McDade: Good morning everyone. Thanks for coming along. We will get started. I thought I would maybe just give you verbal warning that we have completely changed the format this morning. We did kind of listen to some feedback with regard to the presentation and the length of presentation. And again with the new team and myself, we decided maybe it would a good opportunity to completely change the format for these results and presentations. So here it goes. In terms of the first half results, it's been a pretty busy first half of the year for the business. We have got a new CEO. There is a new executive team and a new structure, changes to the Board. We have got the Uganda deal done. We have got the rights issue. We have pretty significant operational activity across the portfolio. And also we have would be managing what has been quite a challenging external environment. So today, myself and Les, our plan is to try and lay out where we think we are in terms of the company itself and what are our short to medium term priorities and the direction for the new executive team. The move to CEO has being that pretty positive for me. I do know and understand the business, as you would expect, after spending 16 years at Tullow and 15 years as COO. So I think the challenge for this succession is not one of continuity. It's more one to make sure that we focus on the opportunity for change. And that's what I have been doing. The first and most important change was to put in place a new and highly experienced executive team who are all here today and there will be an opportunity afterwards to have a coffee with them and have any Q&A with them here outside. And they are also focused on getting this right balance between continuity and change. As you know, Les has been appointed CFO, following a very successful period as Interim CFO. And as appropriate, I would just mention Ian and acknowledge Ian Springett's contribution to the company over the last eight years, which you would all have experienced and seen. And I am very pleased to report that Ian is doing incredibly well in his recovery and we wish him very well for the future. So while myself and Les and the exec team members across the team, we have all come from within internal Tullow succession. We have vast industry experience within the team and now working in applying that across the business. Each team member has their area of expertise and their area for accountability and responsibility, but we are acting as a team and applying that whole experience to the business as a whole. We have got a highly motivated team who are empowered by myself and the Board to both lead and drive Tullow forward with a significant focus on operational and financial performance. And that will come through, hopefully it came through in the trading statement, it comes through in today's statement and hopefully it will come through in the presentation. The other thing I have done in the last 90 days is spent quite of lot of time listening to people. I spent a lot of time listening to staff and communicating with stuff, our investors. We just completed a major review and dialogue with investors to understand their thinking. We have been visiting our key government partners in Ghana and Kenya and elsewhere at the highest level, whose assets we are managing. And also our industry partners, both our JV partners and contractors. And really, all of these discussions have led myself and the team to focus in on what should be our short to medium term priorities, which I will get on and discuss. So really, the first 90 days focused on resetting the leadership of the business, listening to all key stakeholders, setting up short to medium term objectives and continuing to strengthen our focus on business performance. I have also begun a process of trying to explore how we can increase value generation down to shareholders in the medium to longer term as well. And we are going as a team progress that through the rest of the year. I think the industry remains in quite an interesting period, as we all know. Oil price volatility continues but you know as well as creating challenges it creates a lot of opportunities and we want to ensure is that Tullow gets a chance to make the most of those opportunities and the environment we are in at the moment. In terms of the business itself, I have worked in the business for a long time but as CEO I have inherited a very balanced business and I am determined that we focus completely on delivering returns to shareholders and driving this business forward to create maximum value from the business and maximum returns from the business. We are a balanced business. We have got three strong businesses within Tullow which span production and development across West and East Africa and a major portfolio of high-impact exploration opportunities in Africa and South America. And I don't really see that balance changing in the short to medium term. That will be the areas of focus. And obviously those three businesses are the foundation that provide the cash flow and will provide the growth in the short to medium term value generation. I think more important than that the assets, in my view, are the people. We have got a team of very highly competent individuals across Tullow who, amongst other things, have very well-managed financial risk. If you look at our insurance position, our hedging position over the last couple of years, we have delivered major developments on time and on budget. We operate all the assets in a safe and environmentally acceptable and sustainable way. And we have got a proven track record across the exploration space. And I think the combination of that strong asset base I am inheriting and the team that I am inheriting and the new executive team, we really feel quite motivated about where we can take the business to. I think in the short to medium term, our primary focus is on commitment to discipline spending, efficient use of capital, maximizing the value of the existing assets. We have got our cost substantially since then the end of 2014 and we announced today further cost reductions. These savings have gone up from $500 million to $650 million. And we have learned a lot from the falling oil price period and the resetting of the business and following the rights issue. I think we owe it to our shareholders to continue to commit to that focus on these disciplined areas of spend. Deleveraging has been very important to us. Obviously, with free cash flow and rights issue, we have got herself down to 3.3 times and as we move forward, deleveraging will continue to be a focus, but it will be balanced against investing in the business as we said at the time of the rights issue. So I mean all we are going to do in the short to medium term is focus on delivering returns to shareholders, cost discipline, capital efficiency and really squeeze maximum value from both the existing discoveries and the exploration portfolio. So there's specific objectives themselves in the short to medium term, two key areas of focus, continuing to strengthen the balance sheet and extract value from the portfolio. On the balance sheet side, obviously we are focused on the refinancing, the RBL, Les will take you through that, but big focus for the second half and we expect to get that completed before year-end. But the other side is the free cash flow. Ghana has not reached its maximum potential. It will over the next 18 months or so. And that's both on the production and efficiency, the amount of production that we are getting out of those fields, but also the cost base for those fields to try and increase the margins from them. We have very low operating costs in Ghana and elsewhere, but actually we can push them even further. And on the portfolio management side, we continue to carefully consider monetization of assets but getting them done at the right time and at the right value and that's across the board. We have had quite a successful last six months in the exploration phase doing small but quite important farm-downs, asset exits and creating some value that we hadn't taken up in part of the portfolio and that will continue. I think in West Africa we will be focused on getting TEN up to full potential as well as Jubilee and as I said, a strong focus on costs and efficiency. East Africa, we have got substantial resources there. We will complete the deal with Total and CNOOK before year-end which was leaves us in a strong position in Uganda to move forward to FID and extract value from there and the team are working hard in Kenya. I will come back to that later. And then, in new ventures under Angus and Ian, very active period of divestments farm-downs, acquisition of new licenses, resetting the portfolio and extracting value already from the portfolio before we even start drilling. I am very excited to get back to drilling later this year. I will come back to the specific assets but in the meantime, I will hand it over to Les to talk a little bit about the financial side of the business.

Les Wood: Thanks Paul and good morning, ladies and gentlemen. I am delighted to be stood here as the new CFO post my recent appointment. I would like to also start by acknowledging Ian for the leadership of the finance organization over the last eight years and in particular thank him for all the support he provided my and my time so far in Tullow. And then, I would also just note that while I am standing I have spend six months as Interim and I do find ourselves stepping in as you see today settling into the position with Tullow in a much stronger financial position. I will initially reflect on financial strategy which is absolutely established from foundations. Like Paul described for the rest of the team, we have take a particularly strong team in the finance area. And I have used the step up of my position to a CFO to take advantage of promoting talent from within the team. And together, we will be able to take the financial leadership of the company forward together. Over the last two years, we have completely reset the business, like Paul says, to a much lower cost base. This allows us to maximize the advantage of our low-cost assets allowing us to generate free cash flow at today's oil prices, which is clearly reflected in the results that we have issued today. We also have a highly effective approach to financial risk management. We have a prudent approach to hedging and to insurance in particular. It has both served us well in the past but in also an important feature of how we will run the company going forward in the first half, we have taken significant steps to deleverage the balance sheet mostly of free cash flow generation, but also very importantly the rights issue which was a very important step in taking us towards deleveraging the company in a substantial way. We also delivered a key strategic objective of farm-down Uganda. We have established a disciplined approach on all our costs So really across the board within the company, including strict allocation of capital and this will continue to be a key focus area going forward. With the successful completion of the TEN project, we will require a lot less liquidity headroom going forward and after extending the RCF in April earlier this year through to April 2019, we have also made good progress on our refinancing and we are working towards the RBL refinancing at the end of the year after having conducted a positive initial markets index. Looking to the future, we will continue to strengthen the balance sheet working towards a policy target of 2.5 times. We have an excellent portfolio of assets capable of drilling the significant production and cash flow grew in the short to medium term. And each of those further growth potential, including high-impact exploration. So as you can see from the summary here, we are absolutely built on firm financial foundations and that we are well positioned in the current oil price environment to take the company forward to a growth position. This is a picture of the first half results. As you know and everyone's well aware, this has continued to be a challenging time for us as an industry. However, as a company we made considerable progress as shown in the numbers that we are actually laying out here today. In the past, you might remember we would have shown a slide of a detailed P&L summary. We actually think showing these KPIs is a much easier way for us to be able to describe and show how we are running the business. We delivered free cash flow of over $200 million and when combined with the rights issue, it has reduced the net debt by about $1 billion to $3.8 billion. I will give more detail on gearing and cost later but I would first draw you to the significant increase in both revenues and adjusted EBITDA driven by our increased production following startup of TEN, our hedging and our corporate BI insurance program. As we announced at our trading statement, we have also reduced the full year CapEx guidance by about 20% to $400 million, primarily due to reduced spending across the portfolio and we expect that to decrease further to $300 million or less following the conclusion of the Uganda transaction later this year. I would just point out the CapEx spend in the first half which shows up here as $77 million but we have CapEx width towards the back-end even though we also expect CapEx to be less than we had originally forecast in the plan. Despite generating a gross profit of $0.3 billion, we did however have a post-tax loss of about $0.3 billion and this results from non-cash impairments but these are primarily driven by the change in oil price forward curve from the year-end to the position at the end of June this year. That said, our overall numbers show us having a very strong first half and this type of arrangement with the KPIs is something I will come back to at the year-end. Just a quick look at what's happened in gearing. As you can see from this chart, we have made really good progress in the first half, significantly reducing it from 5.1 through to 3.3, really that's been achieved in a couple of ways. One is obviously our rights issue and second is the free cash flow generation from the business coupled with increased EBITDA generated by primarily production although, as I say, also influenced by our hedging and our corporate BI, all of which has moved absolutely in the right direction. Reducing our gearing to the target remains is a key priority but obviously we will strike the right balance between investing in our assets which have got significant near-term growth potential as well as further deleveraging. In this case, working on both the numerator as well as the denominator. And what I mean by that is, we will look to increase EBIT back where possible, as well as adjusting our CapEx to deal with the denominator. While there is obviously more work to be done, we are absolutely moving in the right direction and we have the ability to continue to further pay down our debt through free cash flow and also portfolio management. I would like to talk just a little bit about cost which is really what this slide is about. This is a topic you have already heard from Paul. You will hear from Paul, myself and the executive team going forward. We are really focused hard on our efforts on maintaining the cost discipline that we have achieved across the company. We are a much leaner business today than we were two years ago and as we said on our announcement, the $500 million target that we had set ourselves we fully expect to deliver beyond that and $650 million is absolutely achievable number over the same period. This is the result of significantly embedding all our adjustments to our processes in an efficient way of working and a focus on reducing costs across the business. There has also been a huge culture shift. I will say, the way we work inside the company is much different with absolute focus on discipline in all our cost areas, meaning that we talk about the $650 million as a delivery over the three years but having through that is a run rate inside the company. We fully expect that to be sustained going forward. But there is more to costs as the slide shows. As you see on the right hand side, we have got our West African assets with Jubilee obviously and TEN on the right hand side, all with OpEx below $15 a barrel. In the case of the Ghana where the bulk of our production is, we are setting up below or around rather, $8 dollars per barrel. And then on the left hand side, we have got a number of assets which we are in the process of either exiting or decommissioning which are much at higher level. And of course, if you were to actually adjust for those which we will do in the short term, it would actually take us on an overall cost basis down from just under $12 as we are to-date to below $10 a barrel. So to put it simply, our assets will make money at very low oil prices, because they have low operating costs and this is something that we are not just going to be sticking to something that would actually we will look to go beyond. So just lasting $12 today but absolutely possible to go less than $10 going forward on our overall portfolio. I would like to talk just a little bit about our capital. I briefly covered that on an end year basis in the results summary. I would like to do that now looking forward. Over the next few years, let you understand how we are thinking about our capital investment. Following completion of the TEN major project, we now have considerable flexibility on both how much we are going to spend and if we are going to spend it. And we will also have the ability to adjust the capital according to the prevailing market conditions. We will not spend capital that's not been screened effectively. We are not going to spend capital that won't be used efficiently. And I will make sure that we strike the right balance on our level of investment in terms of, like I say, working both the denominator and the numerator. We have shown on here an indicative range of about $200 million to $600 million over the next three years to give you an idea of the level of spending but what I ask you not to do is to add the three numbers up at the bottom or the three numbers at the top because in practice, what we will do is we will be doing the right thing for investment in the company and we will also be adjusting and optimizing on an end year basis. What we will be doing though is that over the next three years, our priority will be on our Ghanaian fields given, as I said, they have low cost of operation and a clear potential to deliver increased production in the short-term and therefore cash flow. They will be an absolute focus of our capital and these are good incremental investments at $50 a barrel. In East Africa following the completion of the farm-down, we will have no capital requirement to first oil and beyond as a result of doing the deal. So therefore we can expect to enjoy our share of the 230,000 barrels a day of gross production with no further capital investment from Tullow. And in the case of Kenya, we will be seeking to spend the absolute minimum that's required in order to get us to FID. So just in summary on this slide, overall we see significant flexibility in our annual capital spend. I will provide specific guidance on 2018 once we have completed the planning cycle, which is just about to got underway. So we will talk about that a little bit later in the year. So I would like to just summarize my bit through that the lens of this slide. In the first half, as you happen to see, we have made very, very good progress. Our gearing has been reduced substantially as is all of our free cash flow and our rights issue. We have made tangible and sustainable improvements on costs and we now have considerable CapEx flexibility going forward. We are making good progress towards refinancing our RBL which will further strengthen our balance sheet. Deleveraging does remain a key priority but we also have excellent set of assets that will be balancing our investment to make sure that we enhance and deliver value. And this leaves us well positioned despite the continued challenging oil price environment. But then looking forward, which is important to do, we have potential to significantly increase EBITDA in the short to medium term from our existing asset base, from Ghana in the short term as a result of increase in production in Jubilee and in TEN, Uganda in the recent time and Kenya right behind that. If you look at potential as this picture shows in to the 2020s, we see sustained production from West Africa alongside new production from East Africa from 2021 onwards. But we will also can see to consider other investment options to generate future value. A good example of that being our continued focus on high-impact exploration. Of course, one of those we are going to do in Suriname later this year. So, to summarize, as the new CFO I will be focused on a few things. One of these will be generate value from our existing portfolio, driving cost discipline across the business, investing prudently, having a strong balance sheet, maximizing cash flow and focused on delivering value from growth. Now let me hand back to Paul.

Paul McDade: Thanks Les. Thank you. I want to now talk very briefly about the three core businesses. These businesses are run by Gary, Mark and Ian who are here respectively and supported by Angus and Sandy and Claire from a corporate perspective. In West Africa, I think Gary has made good progress already. He can understand the business and starting to think about how to drive it forward. TEN's production despite the limitations of the well stock we have given ITLOS has been performing exceptionally well. Just recently, some of the optimization that the team has been working on seems to be paying dividends. So that's looking positive for the second half of the year. And obviously, once the ITLOS decision is behind us, we will be getting back to drilling on TEN and starting to ramp up the field to full potential. We expect that in September and we will be in a position to award contracts soon thereafter and get back to drilling around year-end. At Jubilee, the Turret project is progressing. As you are aware, we completed Phase 1 earlier this year and we are looking to get the next phase completed towards the back end of this year. In the meantime, production is strong. The shuttle tankers we have got there means that we are frequently doing over 100,000 barrels a day on Jubilee. And obviously from our own perspective of any shutdown period is fully covered by business interruption insurance. So I think Gary's view would be that first 90 days looking at West Africa's huge potential, the fields are operating well. The operation is run well. But that area specifically in Ghana has got a lot more to give both on the cost side and on the production side and looking at the future exploration potential in and around the field to just continue to extend the field life. In East Africa, Mark Macfarlane, this year he switched over from leading all the technical aspects in the Ghana business including obviously the significant delivery of the TEN project on-time and on-budget last year over to leading the charge in East Africa. And the main focus there is with two billion barrels discovered, it's all about commercialization. We have got good track record in Uganda. Pleased to be managed to get the second deal done earlier this year. We will get that completed and then we can focus on zero CapEx run off to first oil in the early part of the next decade with about 23,000 barrels a day net to us. And then obviously in Kenya, the big focus is on efficient use of capital to get us to the FID point for Kenya and move that project forward in a manner that we can manage at the right equity and the right development CapEx profile. And again, continuing to look in and around the area for the additional potential within Kenya. Both of these projects are very robust even at low oil prices, given the very low full cycle cost base of the projects. In the new venture space, Ian Cloke has been running the new venture business now with Angus' support on the strategic side for around two years. In that period, we have completely reset the exploration portfolio. We have done a significant number of value adding farm-downs. We have done a number of country exits where we think we had acreage that does not work in the current environment. And we have actually added a number of additional licenses with more work going on in the background to add further licenses. So very strong dealmaking team who have a portfolio that we can now get to work on. This year, there is a lot work going on operationally. We have got seven major seismic campaigns going on across the portfolio which obviously takes huge advantage of the very low costs in the seismic world at the moment. And that will then lead to a strong prospect inventory as we look through 2018, 2019 and 2020. And obviously, what's really pleasing is getting back to high-impact drilling with the Araku well in Suriname. We expect that to spud in the fourth quarter, so around late-September, early-October with a result in the fourth quarter. Very material prospect in its own right. Net cost is very little, about $14 million. That's targeting a gross 500 million barrel prospect. But actually what it does is, it starts to look at the whole acreage position. We have four blocks, two in Suriname and two directly up-dip of the Liza and obviously we were as pleased to hear about the news yesterday we saw the whole Liza block migrating up to be on to two billion barrels recoverable. So we are excited to get underway in the drilling out of those licenses in both Suriname and Guyana. So it's great to have a strong portfolio. A lot of hard work has been going on in the background. I have been talking a lot of the exploration in the last couple years, but there has been a lot of work going on to reset and get ready so that we can start spending more on exploration. But I think, as both myself and Les said, very strict commercial screening, very strict capital discipline about how much and what we spend that exploration dollar on. So I think in conclusion, as I mentioned I have been around in Tullow for a while. But a COO to CEO move has created a great opportunity for change and hopefully you can see already that there is significant change happening across the company. There is a new executive team. We have changed out a good number of the senior leadership that reports underneath that executive team. The performance focus on the organization which had started as we led the major simplification project over the last couple of years. That's getting more and more embedded. And as you saw from the $500 million to $650 million, it's a good example of that delivering very strong results, which makes us very confident about the future. I think fantastic portfolio of assets. We need to continue to work to strengthen the balance sheet but the rights issue did give us the flexibility that we can both deleverage and invest in the assets and start to get really focused on shareholder returns and increasing the value of the company as we look forward. So with that, I will switch over to Q&A.

Operator:

Q -Michael Alsford: Good morning. It's Michael Alsford from Citi. Just a couple of questions, if I could. So firstly, a lot of focus in the presentation around maximizing returns in terms of new investment for the company. Could you talk a little bit about the thresholds of returns are? So what's your threshold and what's your minimum threshold on return for investment going forward? And then just secondly, your underlying results were better but there a big impairment in the first half, most of that was on TEN. Some of that was oil price but you also referenced higher costs. So given that you were saying that OpEx is going down, how big is the CapEx increase on TEN? Thanks.

Paul McDade: Okay. Maybe I will talk to the returns and Les will talk to the TEN. I think in terms of returns, we have a portfolio where if you look at the investment plans, as you look at 2018 in Ghana, I mean, very substantial rates of returns well into the 20s and some beyond for those incremental investments in Ghana across TEN and Jubilee. So it's a matter of, we don't have a kind of minimum hard door. It's looking at the portfolio and then seeing where do we direct capital. I think we have got more opportunities than we have capital at the moment. So that's not a bad place to be because it means it forces you to the top-end of that portfolio. So definitely Ghana meets the threshold by a long margin. I think Uganda, as you know very well, where we have zero capital exposure and we will see shareholder cash flow coming through in the early part of the next decade. And then the while scrutiny around East Africa in terms of Kenya rather is on how do we appropriately set up that project for an FID that's robust and not only giving us high returns but is robust at lower oil prices in the short to medium term. And again, there is a lot of screening, the result of the portfolio and the exploration site has been, we have done quite a number of exits and that's important because that's taken things out of the portfolio so as not to distract us and also to spend cost on where we think actually the returns are likely to get there. So I think that discipline to remove things from the portfolio is just as important as looking for exciting new things to add.

Les Wood: And then on the impairment, impairment primarily driven by oil prices, you can look at year-end price, end of 2016 versus where it was at half year at June talk, it's dropped by about $10. So you see that in the forward curve rather the first thing specifically on the level of charge is dominated by TEN as we put in our numbers and as to forward, it's price driven. But the reference to costs is, as you would expect, as you get then of a project, we have got adjustment to operating these cost within the cash flows going forward. So it's not an adjustment to CapEx. That's an adjustment to lease cost.

Alwyn Thomas: Good morning, it's Alwyn Thomas here from Exane BNP Paribas. A couple of questions. First one on West Africa non-operated portfolio. What are you looking at doing to try and or the operators in the region, what are they looking at doing now with rig costs where they are to improve the production there and maybe stay some of the decline? And how will that improve some of the cash flow, the operational cash flow you are getting? On divestments and the potential ramp of portfolio opportunities, are you looking at a specific cash target over, say, a time period? Is there any sort of flavor we can get around what you are looking to achieve there?

Paul McDade: I think in the non-op, I think this year the actual capital spend is going to be very little. I would almost argue, lower than we would almost like it to be. I think there is more opportunity there. I think what we are starting to see is some of the operators of those assets starting to rethink about diverting some capital. But I don't think we will see a major increase in the amount that we spend. We are in the low tens of millions of dollars, I think at the moment and in 2018 we may see that go up to $30 million, $40 million that sort of level, maybe that. So we would probably prefer to see more investment in those portfolios because there is quite a number of reasonably high return short cycle investments. So that's something we will progress. But we are starting to see the operators refocus into taking advantage of the low cost environment. And we are building in already that is going to further decline in production next year. A good outcome would be to spend a little bit more money and offset that decline but we are assuming the decline at the moment in terms as we look forward. So any offset to that decline would be a positive. I think in terms of divestments, I think one thing we are very clear when we came out with the equity was one of the things we wanted to do with the equity was obviously deleverage really to give ourselves financial flexibility. I think we have monetized assets and we have done it successfully. I think obviously the big highlight one was Uganda in it's two stages back in 2011 and 2012 and then the recent one earlier this year. And to me, both deals were strong positive deals for shareholders in Total because we were able to do them at the right time and at the right price and I think that's the key. I think we want to maintain the financial flexibility so that if we do further divestments, we are doing them at the right time at the right price and we are never getting ourselves in the position where we feel forced to do some divestment because of our financial position. So I think we continue and we will always have monetization of assets going and that's part of what we do, but we do it at the right time and at the right price. So those are the big headline ones with Uganda is actually in steam in the exploration portfolio. I think if you stack up the deals we have done in that exploration portfolio in terms of the value of some of it carries, the value of some we are getting back costs and various licenses and all of those small farm-downs, you put all of that together, it's probably of the order of $50 million, $60 million $70 million of value add and those in my view are just as important as some of the headline ones because it shows good discipline across the whole portfolio.

Al Stanton: Yes. Good morning. It's Al Stanton, RBC. You have left me feeling slightly down about Kenya. You seem to be looking for works in singles and nothing too exciting. Should I be feeling so down on that? Or is the geologists actually suggesting that the blob maps do have the opportunity to move it quite materially from 750 rather than let's do the best with what we have got?

Paul McDade: I think we are in a program of exploration appraisal. I think there is potential within Lokichar. And I think you know there is some real good new plays within that potential that we can see. They are, of course, exploration plays, so they are high risk and high reward plays in addition to the near field appraisal and the kind of explorations here in the Greater Etom area. I think what we feel at the moment as the right way forward is to focus in on appraising what we have, understanding what we have and moving that to cash flow before chasing after some of the exciting upside which we then supplement the Lokichar basin and the long-term future of it. I think if I look in Uganda and think about the excitement in Uganda, we got to very high numbers and we got the 1.7 billion barrels. But actually it took quite a long time to get towards commercialization. It's still underway. It might have been a more efficient use of capital to actually identify some of that and then pace more the discovery of it. It's always exciting to go and try and test big high risk high reward events, but actually until we see the commercialization of Kenya, we need to be very cautious and careful about the capital investment. So it's about striking the balance. We are not any less excited about Kenya. But I think all our focus is on, we got to certain level of resource./ We want to fully understand that resource and we want to determine how we commercialize that resource. And then once we fully understand that, we can get after some of the exciting upside.

Sasikanth Chilukuru: Hi. It's Sasikanth from Morgan Stanley. I had a quick question on your net debt to EBITDA target of 2.5 times. So just wondering till what time are you comfortable with that metric staying above your target level? Is it determined by any external factors? Why exactly is it 2.5 times?

Les Wood: So we talk of the results as 2.5 times as being look at the level of the type of company, that 2.5 was a good metric. We, as a result of our free cash flow and our rights issue, have made a substantial inroad to getting from a 5.1 to 3.3. Going forward, we are setting ourselves not a specific time table on how quickly we want to get there. But having done the rights issue, we have absolutely got the right operational and financial flexibility. Now we can do that at different paces depending on the choices. We have got lots of flexibility either from cash flow from the business, portfolio options, as Paul says, which we are going to do at the right time and at the right value. So we are not setting ourselves a timetable but that's absolutely the plan.

Mark Wilson: Mark Wilson, Jefferies. Speaking of the refinancing, what kind of certainty can you give investors that there won't be further dilution, attach that refinancing, say, in the form of warrants attached? Is there any negotiation to be done with the bond holders ahead of the refinancing? And then lastly on exploration, I have seen some good news lately. So on Araku, can we talk about any direct hydrocarbon indicators or chances of success that you carry there, please? Thanks.

Les Wood: So on the RBL, as I said at my intro, we have done our initial market sounding. We have not formally actually gone to the banks just yet to start the process. That's something that we will do just as we finish up the summer. But again, I am still looking to getting that down towards the end of the year. There is no conversation and it is very early days in any event around new conditions. And certainly as far as anything around conditions with respect to the bonds there is nothing that we expect in that regard. It's very, very early and as far as the bonds, our view is that we will deal with that in good time as their maturity comes up. So that's what we are thinking on the RBL. But very good start with conversations in working towards a year-end conclusion.

Paul McDade: I think on the Araku, yes, we are pretty excited. I think some of the recent announcements, both in Guyana and obviously the Mexico announcements remind the people that you can create significant value through exploration. I think what is interesting about the Araku is not Araku just itself. It's the whole position. We were in that area back in, I think it was 2010, 2011 and built up a portfolio over time. So we were able to select the acreage we liked. I think the Araku prospect itself, there are some details in the back of the pack. But you know it's 350 square kilometers. Greater Jubilee is only 200 square kilometers. So aerially, it's bigger. It's got good amplitude support. It's a depth structure and in terms of risk, it actually is an exploration well with 30%, 35% chance which is pretty strong for something that they are drilling in a new area. So as a start to the high-impact, it's an exciting place to start just because of the scale and materiality of the prospect itself and the fact that it is only costing us $40 million to test. And either way, it starts to open up a whole new area for us in terms of the follow-on that it can lead to because we have got prospect inventory not just in that block but we are shooting 9,000 square kilometers or thereabouts of seismic over the 2P unblocks this year. So we are expecting an inventory of prospects and drill options from there as well. So of course, our focus is on the individual well, but the focus should actually be on the whole area and the potential area. And I think yes, the announcement, yes, it plays well for excellent announcing another well which if you look at the whole block, I think it's well in excess of two billion barrels. So it's exciting times in the area.

Rafal Gutaj: Hi. Good morning. It's Rafal Gutaj from Bank of America Merrill Lynch. So just going back to Kenya, I was just wondering if you could give us an update on the quantum of 1C resources you think are required to get a third-party financier onboard with the pipeline? How many wells do you think that's going to take? And where we are on route to that threshold level? And then secondly on the cost saving initiative, the $650 million. If you could just give us an idea of how much it is going to cost you to implement that? Whist's phasing on that? And how far along are you in that initiative?

Paul McDade: I think with regard to Kenya, what we said is, we are in the midst of our E&A campaign and that will run through the rest of this year and into early next year and then we will take stock because it's a matter of gathering dynamic data and static exploration and appraisal data. Once we have assessed all of that, we can put in the mix with other ones that's going on which is looking significantly at the cost base of how you develop this. It's actually, the necessary 1C resource moves around depending on when you view of oil price when this thing comes on stream and two how much is it going cost us. And the cost base, as you know when you see other places at the moment, I mean that's moving around and it's moving in the right direction and the changes have been quite significant. So we are not as mature in our cost understanding in Kenya as we are on Uganda and in Uganda, the CapEx per barrel to the upstream CapEx per barrel is heading towards about $4 a barrels at the moment. And in Kenya, we have something that's quite similar. It will be a bit higher because it will need more a bit probably higher well density. So I am reluctant to say, this is a magic number for 1C. I think we have always said that we need to push the 1C up from where we were when we started this campaign to get to commercial. But what we recognize is you need to work all fronts. You need to work the commercial front, the cost front and the resource front. And that's why we feel it's better, work all three and then see where we are around year-end or early next year and then come out and say this is our position with the whole.

Les Wood: Now on the second part of your question. If you look at it, the $650 million is a substantial part of what we call costs of getting to achieve that. We actually took at least as it relate to our people, we took most of that in 2015 in our results and a little bit in 2016. So the actual cost of implementing that was largely taken and really what we are enjoying going forward is the benefits of all that early work that we did. So really, as I said in my presentation, that's really embedded in our costs going forwards. So really that $650 million could be a much bigger number going forward, but obviously we wanted to report on a three-year target.

Brendan Warn: It's Brendan Warn from BMO Capital Markets. I guess a follow-on question just in terms of, you say you are progressing rig TEN at the moment. It's obviously a biased mark-up. What are you seeing in terms of structural contracts options for rigs lots? Just how has the market changed?

Paul McDade: Yes. So the only data point we have at the moment is the Araku well in Suriname. So we went out for one well but which generally in other markets in an attractive contract and yet despite there will be only one well, it might have secured a price I think around about $150,000 a day. So substantially down from and this is a sixth generation rig. It's a top-end rig which will be in excess of 600. So substantial drop. So that's very interesting and it is very attractive. And again, it's made us think hard about in Araku, if we did have success, how could we leverage that market and think about appraisal and early appraisal. I think what's interesting, we are out with the tender at the moment in Ghana. So I can't say too much about it because it is out there in the market right now. But what I think will be interesting is that we are trying to think about a slightly longer term relationship on the rig within Ghana. And obviously what we want to do is benefit from lower cost on a more sustained basis, but equally importantly flexibility. Because capital efficiency is about drilling wells and spending money when you want to whereas in the previous well we found ourselves as an industry with three and five year rig contracts, therefore you had to go out and drill the wells, even if you could afford to wait six months and add another production well later. So I think what will be interesting and I can't answer the question, but we will be able to, early next year, is that combination of cost and flexibility because I think both are equally important, just the costs side. So you may pay a little bit more to get more flexibility because I think that will drive capital efficiency.

Robin Haworth: Hi. It's Robin from Stifel. Just a question on Kenya again, I am afraid. Just wondering, what is this contentious about the elections in regard to the early oil production system? Why you have to delay till after that? Is it related to revenue splits between the local and government or power basis and the national ones? And if so, does that require legislation to fix?

Paul McDade: Yes. So I think you are right. There are things going on at the moment there with evolution in Kenya. We have two governments that are very important to us. There is a national government and the county government and we work very closely with both and we have good relationships with both. And then the third main stakeholder in the country is the local community itself. So we have been working with all three and we have been progressing EOPS. Whether we like it or not, it's quite emotive to see oil getting into trucks and trucks moving out to the country over to Mombasa to export that fuel. I mean, it's not particularly, if you are a knowledgeable industry insider, it's taking a couple of hundred barrels in the tank and taking it marching, it's no big thing. Locally, it's a big thing. And so, I think Charles Keter, who is the cabinet secretary, just decided although we were on track that given we are in the midst of election, it's quite a tight election at the national level and those county elections going on as well for the county governor, the idea of having trucks moving oil right in the midst of that just didn't seem like a very smart thing to do. And I think he made absolutely the right call that, is it really that important that we do it now rather wait until maybe September when the election is finished and the answer is, no it doesn't make a whole lot of difference. So why not do it later and show some respect to the election process and let people focus on the election process rather than the oil process. And I think it is as simple as that. And so there is no big deal around it. There is a lot of debate go on around share the revenue between the county, when you get to full field and EOPS plays into that. But I think the short term, it's just like why have some thing emotive as moving oil going on in the midst of what could become a quite heated election, both locally and nationally.

Joe Head: Good morning. It's Joe Head from UBS. A quick question on Uganda, or more specifically on the pipeline rate. And given what's going on in the Tanzanian mining sector at the moment, have you got any concerns about the process of negotiating of commercial and tax terms for the pipeline? And do you think that could be a risk or the timeline of the whole project?

Paul McDade: So I think one important thing was announced quite recently, I think we mentioned it at the time of the trading statement, was the intergovernmental agreement which is really a major step forward that was signed by both Attorney Generals of both countries and the port presence which really set out the main principles of the task and fiscal relationship around the pipeline. And so that's in place. Of course, there's details to be worked around. It was a high-level idea. So we feel like the high-level principles have been agreed between the two Presidents and that alloys Total who is the lead operator on the pipeline to be continued to make progress on the complex commercial agreements that were set behind that. So we don't have any particular concerns because we got over that hurdle. I think as we look forward, it's going to be quite different proposition where you are choosing to go through that country. It's not Tanzania's resources. We are choosing to go through that country. We are choosing as was Uganda to choosing to invest in Tanzania and create opportunity in Tanzania utilizing Uganda resources. I think a lot of the emotion at the moment in Tanzania is around their own resources and how they are being utilized. So we see the two quite separate and quite different.

James Hosie: Hi. It's James Hosie of Barclays. Just a question on your medium-term CapEx guidance of $200 million to $600 million as where you set in the range for one-year will be just a function of oil price? And then, added to that, the top-end of the range, is that a sign of where you could take exploration activity to in terms of spending in a higher oil price environment?

Paul McDade: So as I said in my presentation, avoid adding the top three or the bottom three, but you are right, oil price will be an ingredient. But we will also be looking at what's in front of us, what's the option set? So as I also said in the presentation, for example, the Ghanaian opportunities, while still even at low oil prices. So these are the kind of things that you would expect to be at the top of the list. And I wouldn't say which I think you are suggesting is that the $600 million would necessarily reflect of a higher exploration. Again, exploration will be through the same filter as everything else which is good technically which is what Angus and the team and Ian do today. And if it is good technically, then how does it work commercially? And it will have to stock up against what we are doing both on our existing fields as well as what we want to do on a growth basis. So we will likely end up somewhere in the range, but I think it was just to give everybody a feel for where we would be going forward. But we have absolutely no cost and have got a huge amount of flexibility. So if oil prices stay a little, we have got the ability to stay towards the bottom end. If it goes higher then we have got the opportunity to increase. So we just feel like we are in a rally good place at post the TEN project and the rights issue.

Les Wood: Maybe one point I would add to that just for clarity in terms of the range of exploration. I mean we see certainly next year and potentially 2019, we see about $150 million a cap, not a target, a cap for exploration in the short term. I think what we have committed to and we have this is that we want to get back to high-impact exploration but in quite a disciplined manner and we want to demonstrate the value that adds. So we are not planning to make a big step up early but we are absolutely planning to focus in on exploration and of course the kind of cost base that we are seeing at exploration means you can drill wells for $14 million rather than maybe $30 million. So you can get a lot more for a lower cost base.

Colin Smith: Yes. It's Colin Smith from Panmure Gordon. Just on the CapEx again, if you look at mid-point of that spend $400 million, you are producing a little over 30 million barrels a year. That's about $13 a barrel, all-in. Do you think that's a big enough number to drive a growth story for the company?

Paul McDade: Well, I think the way we look at it, building up on what Les says, is we know that we got some really great infill programs to do in Ghana that will get very high rates of returns. And so therefore within that range we can get after that. And Uganda is a zero capital base going forward which is great. Kenya, we want to get to FID. So our focus within that range is how much do we need to spend efficiently to get to FID. I think thereafter, we need to then very carefully think about how do we fund Kenya moving forward as we go post FID, yes. So that's an area that we are focused on, how do we do that efficiently and how do we do it commercially, what's the right equity. There is a lot flexibility out there in the market and different ways you can do that. So that's an area. So you could find innovative ways to drive Kenya forward, maybe at the company or more likely a lower equity and create the value without burdening yourself with massive CapEx. And as I said already, we think in the short-term up to $150 million is good enough for us at the moment with respect to exploration. We are going to drill wells in Suriname for $15 million or $14 million and be exposing the company to kind of next year of 500 million barrels prospects. That's pretty material.

Aidan Heavey: Thank you for the questions in the room. Could we see if we have any questions on the conference call, please?

Operator: We will take our first question from David Mirzai of Deutsche Bank. Please go ahead. Your line is open.

David Mirzai: Hi. Good morning gents. Just to return to Mark's question on return threshold. You talked a lilted about capital efficiency and threshold in the presentation. Bu I have seen the recent 2Q 2017 forecast for the banks for the reserve evaluators for you and a lot of your peers and most of them tend to end up at the price of $65 to $70 or even higher the early 2020s. Now if I look at the forward curve going forward, the forward curve stops at about $50 and $60 and any increase over that is more nominal than real. So that's a big $10 differential between where a lot of the banks, a lot of the reserve evaluators or a lot of the international E&P CDO price go in and where the market currently sees your price going. Now in an eventuality, what type of effect would that have on number one, your reserve base, but number two, your greenfield project? I appreciate the likes of Ghana and infill in West Africa can be done a very low oil prices. But if we are looking at $50, $55 flat long term, is there really a point to moving Kenya forward? Is there really a point to invest in exploration at the moment?

Paul McDade: Yes. I think if the RBL decks were quite familiar with where we are likely to be and that spill into Les' planning for the RBL as we go forward and the levels of the RBL we are looking at, we have got plenty of asset capacity, especially as TEN moves from a P90 up to P50 and we started the production. So I think we are well aware that we understand it and that's built in. I think in terms of the investment case, as you see, as you would imagine infill wells in Ghana, you should be running them at current pricing given that the production will come on eminently if you really scheming for capital efficiency and they work incredibly well even at these low oil prices. I just start to look at Uganda and Kenya. I think the important thing for say, you take Uganda, you add up the point forward, you add up the $4 a barrel for the development costs, if you were to take the pipeline and translate the tariff, it's probably circa $10, $11 and maybe you have got an OpEx of $5 to 48 a barrels if you are a bit conservative. All stacks up to kind of about $20 to $25 a barrel. So if you are sitting at $55, that says there is a $30 margin. Therefore, there is something to work with. And so you have only said that your FID and look at the holistically and say, does this work. Well, the good news is, there is a big margin of $30 there that you can work with to get the project over the FID line and get it invested. And I think the same will be true in Kenya. So the underlying cost maybe a bit higher, but the underlying cost are significantly below where we expect oil price to be even in the short term, never minding the longer term. So it will be different if we were sitting with assets when you add up that cycle of costs that were sitting at $45, $50 or $60 a barrels, that would be a slightly tougher decision. I think what we have got which is really important differentiator, is we have got assets that can work at these prices. It's just about actually constructing together in the most optimum way. And the same is true, that's the reset that we have done with the exploration. Things that we didn't think would work at these lower oil prices, we have removed from the exploration portfolio.

David Mirzai: I mean just to following that up, the projects you are talking about now and implement in the likes of Kenya, the likes of Uganda are discoveries. For example, you have probably sunk, what is it, $1.5 billion into Kenya? I am pretty sure if you run the IRR on that three or four years given how things have turned out, the threshold wouldn't really meet commercial standards. Do you not see a danger in doing that in the offshore? You cannot discover new projects when, as I said, four or five years time out, the oil price might still be at $50 and in that context the money you are spending today just won't meet the return threshold.

Paul McDade: Yes. I mean we have got to screen each project. If we really thought that a Suriname or a Guyana or these areas could not make you money and what we foresee is the future price tag, then you are right, we probably wouldn't be out drilling them. But again, I referred already to Exxon's discovery next door in Guyana. Exxon are kind of usually pretty well known for being quite a prudent company when it comes to investing in developments. And they are accelerating ahead with their Guyana development in water depths that are well in excess. I think they are in 2,000 meters or thereabouts of water depth, which is at the areas we are looking at are kind of 500 meters to a 1,000 meters or thereabouts. So I can only assume the costs for those developments are higher or at the higher end of deepwater and they are pushing ahead and as Exxon is generally well known for its prudence in terms of its investment process. So I think that's a good bellwether that shows at low oil prices deepwater can work. We used to do deepwater before and oil prices were doing at $35 to $40 a barrel. I think the point we need to keep focused on is that costs are coming down substantially to meet where oil prices are and we have been through a period of transition for, if oil prices came off first and cost have taken a while to catch up, but we will get into a period of stability where prices will match. So in terms of cost will match the price. And there will be some things you can't do. May be ultradeep or complex reservoirs or complex wells or complex developments but there are other developments such as the Guyana one or Suriname one or East African ones where they are not particularly complex and they do work even at low oil prices where you make maximum use of the current low cost environment.

Operator: We will take our next question from David Gamboa of TPH. Please go ahead. Your line is open.

David Gamboa: Thanks and good morning. First a few questions please. Just starting in terms of costs, a lot of mention around cost savings, particularly in Ghana. Just wanted to clarify your expectation for unit cash costs for this year in Ghana was around $10 per barrel mark. You mentioned a lot about the $8 per barrel target. I was wondering if given the cost reduction year-to-date, is there any chance of a further downside to that number next year? Just wondering where you are at the moment in Ghana? Second question, in terms of exploration. You mentioned Suriname, Guyana, huge basin, some good news from Exxon, but we have also seen the SkipJack well was dry hole there. I am wondering about your Araku prospect, which is a bit further out, that 30% to 35% chance of success you have talked about, is that based on seeing source rock, similar quality reservoirs? What are read proofs that we can expect from the Liza and CNOOK discoveries in Guyana? And then finally just on same line of exploration. You have mentioned the Greater Etom area as quite exciting in Kenya. We saw the interior dry hole. You announced there's a further well targeting the similar area, the Etete well, later this year. I was wondering if your thoughts around the Greater Etom remain the same, given they appear to be dry hole? And what's basically the prospectivity going forward? Thank you.

Les Wood: Yes. So on your first question on unit cost, as we showed in the results, the overall cost for the group are just less than $12 a barrel. Specifically in Ghana, we are in and around $8. And if you adjust for the things that we said will come out of the portfolio over the short term, it gets us to just less than $10 a barrel. And as we increase production in Ghana, we are still focused on the level of absolute spend and operating cost. So we do see the potential for that actually going down. I think your question was, is there a sort of downside risk of that going in another direction? We actually see there's more towards the positive side actually going down rather than going up.

Paul McDade: Yes. Just on the couple of exploration questions, I think in Suriname, Guyana area, very exciting. It obviously does depend on the actual prospect to sell from the setting of that prospect. And I think as we try to shorten the pack over a number of divesting the pipe, this Araku prospect, the chance to success that we have there which is high for an exploration well in a new area. The reason for the high chance of success I think is probably numerous things. But two of the highlights would be, it's a four-way dip closure which in itself we can physically see the closure on the seismic which obviously decreases risk. And then the further thing is we have amplitude support which conforms to that four-way dip closure. So what you have, as you see a very large four-way dip closure and then the seismic processing is telling you there is something going on within that closure area that stops around the boundaries of the closure area and someone as a nongeoscientist that is quite convincing to me that you got two independent analysis that are pointing in the same direction. And then obviously the other thing and something such as large as that, you would be probably quite concerned about the gas risk. Is there is going to be gas, which obviously we can't rule out. But everything we have seen in that basin versus the old Tambaredjo field up on onshore Suriname or the recent discoveries in Guyana, they all come from the same source system. And to-date, it's all been oil and quite attractive oil. So that bodes well for the balance of between the gas risk and the oil risk. So the very high chance of success on Araku is a construct of the component parts of the prospect itself. And within the Greater Etom area, I think what was exciting was we had a whole new area to look at in Greater Etom. As we appraise that area, one would expect if you are doing your appraisal properly, you would be trying to test the boundaries of it. There's no real point in actually popping appraisal wells or dead certainties in the center of Etom area really. Our teams are focused on where is the edge of the Etom area and if you are doing that properly you should expect the team to be finding the edges and therefore either very thin sands or no hydrocarbons at all. So I think that latter well is more, by nature, appraisal of the Greater Etom area. So it doesn't diminish the attractiveness of Etom area but it starts to set the boundaries of the extent of that area.

David Gamboa: Great. Thank you.

Operator: We will take our next question from James Thompson from JPMorgan. Please go ahead. Your line is open.

James Thompson: Good morning. Thanks gents. Just a quick question on Ghana actually. Just in terms of TEN, I just wondered if you could update us on how many wells you think will need to be drilled. Obviously you have had quite a bit of production data now. So it would be interesting to see whether you still feel like 13 wells is the number that you are looking to drill for the life of field there. And then also given the optimization successes that you have seen, could you give us maybe an indication of how long do you think it will take, once you have gotten back to drilling to get up to plateau, maybe in terms of months or number of wells that you think it might take for you to get production up to facility capacity? And then just secondly, in terms of CapEx guidance, could you give us a flavor in terms of what percentage of CapEx is likely to be deployed into Ghana, bearing in mind the sort of phasing on the full field development in TEN? Thanks.

Paul McDade: Yes. I think with respect to TEN what we have seen is, the optimization is working. If you look at day-to-day production, it's well in excess of 50,000 at the moment. But we continue to optimize and test that. And really the question we have in our mind is, how sustainable is that through the rest of the year? And clearly if that becomes sustainable through the rest of the year, the starting point of ramping up to full capacity is higher and we should get there sooner. If we see that that optimization is shorter lived and we are back to an average of about $50 for the year, then the starting point will be lower and it will take us longer to get to plateau. And I am stating the obvious, but that's what we are dealing with. So it's not clear exactly how many wells will it take, because we got to drill both producers and injectors. And then we also are looking to do some additional drilling in Jubilee probably at some point in 2018 and again we continue. We certainly will start with one rig and we continue as we work through our budget and plan for 2018. The question on our mind is, do we bring in a second rig to accelerate the process of drilling on TEN and Jubilee, therefore ramping up TEN to its plateau sooner and maintaining capacity on Jubilee. So I think what I would say is, we will make substantial inroads through 2018 as we go into 2019 to get to plateau. If things work in our favor, maybe we will achieve plateau by the end of 2018. If things don't work in our favor, maybe we will be into 2019, but it's that sort of timeline to get up to the capacity. But what we know is, we have got the reservoirs that can deliver and we got the facility which we have tested to in a very short term basis up to close to 100,000 barrels a day. So the facilities and the reservoirs are there, it's just the uncertainty about how many well do we need to add. The overall number of wells we are still focused on 24 in total, so we have 11 and we will add 13 over the life of the field.

Les Wood: And then on percentage, I think as we said earlier, we have not yet conducted our planning cycle. What we have said though was that the first port of call for CapEx would be investing in Ghana because it helps us in near term production. And given we do want to get back to drilling, you would expect that to take up the primary part of our capital next year.

James Thompson: Okay. Great. Thanks.

Aidan Heavey: Okay. That draws up our --

Operator: We will take no more audio questions.

Aidan Heavey: That draws our Q&A session to a close. If there were any more questions on the call, then please do get in touch with us on the IR email address which is available on our website. Thank you very much to everyone for your time. And for those in the room, we do have the executive team with us who are sitting at the front. If we adjourn next door, there are coffees available, if you would like to spend some time chatting with those guys. Thank you very much.

Paul McDade: Okay. Thank you.