Earnings Transcript for TLW.L - Q3 Fiscal Year 2019

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Tullow Oil January trading update. At this time all participants are in a listen only mode. After the speaker presentation there will be a question and answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, the 15th of January 2020. I would now like to turn the conference over to your speaker today Nicola Rogers. Please go ahead.

Nicola Rogers : Thank you everyone for joining today's call. I'm joined by Dorothy Thompson, our Executive Chair; Les Wood, our CFO; and Mark MacFarlane, our COO. We thought it was important to do a call today, but it will be fairly short of about 30 minutes. And I just said, there'll be opportunity for questions at the end. And I I'll now had over to Dorothy.

Dorothy Thompson: Good morning, everyone. Thank you again for joining today's call. We thought it's important to speak to the market today, even though today's statement is short and fully in-line with expectations. The Board and I are fully aware of the need to rebuild trust and update you on our progress. I'll hand over to Les and Mark shortly. But in summary, today's statement reflects solid 29 financials ahead of results, production so far is in line with expectation in 2020 and our guidance for 2020 remains unchanged. Our recent reserves and resources orders continue to underpin the quality of our assets, our business review is well underway, and covering all areas of the business. We have a very good capable team in place to start this review. And along with the Board, we are acting with pace to take appropriate decisive actions. I will provide more details on the review at the end of the call, but Les will first run through the financial details of the statement.

Les Wood : Thanks Dorothy. I'll quickly just run through some of the key numbers we expect to report 2019 free cash flow of around $350 million. This leaves us with net debt of around $2.8 billion and gaining around two times. CapEx in 2019 ended up around $490 million, this was largely forecast due to a combination of four things. One was deferral of planned liquidities, and general reduction in expenditure, release of accruals and impact and impacts of TRP insurance recoveries in Ghana, which has not been expected. And moving to the P&L, we do expect to report revenue of around $1.7 billion and a gross profit of around $0.7 billion. We've also outlined in the statement that we expect to report significant impairments and exploration write-offs. Impairments of around $700 million driven primarily by two things, the reduction in TEN 2P reserves, driven by the reduction in Enyenra; but also $10 per barrel reduction in the group's long-term accounting all price assumption $65 per barrel which is much more in-line with the current market. We've also written off exploration costs of around $800 million, which are also predominantly due to reduction in the long-term accounting oil price assumptions impacting the volume of the Kenya and Uganda assets. The remainder of the write-offs include the recent Guyana wells as a result of drilling results with the balance due to the change of lab. So the levels of planned future activity of licensed exits in Kenya Block 12A, Mauritania, Namibia and Jamaica While these impairments are being driven by the fact that I've outlined, it's important that we believe that the quantum announcement there reflects our more prudent approach to the accounting treatment of these assets without reflecting a shift in our view of the underlying quality of these assets. As we have chose not to keep the exposure on leasing Guyana wells on our books, we continue to believe it could be many important areas for us. Mark will outline in more detail the steps for Guyana just shortly. Impact of the impairments and impairments will obviously have an impact on our reporting as far as our operating and post tax profits and we will report on these at full year results. Looking ahead to 2020, our guidance remains unchanged from what we laid out in December. Capital expenditures are expected to be around $350 million, with an additional $100 million expected to spend on de-commissioning. We expect to generate underlying free cash flow of at least $150 million and 75,000 barrels a day at $60 per barrel. We also announced this morning that we have made an decision to move our full year results to March, three reasons for that change are, it aligns us with our FTSE 250 E&P peers and gives us more time to and report on changes required by the business and our time table in previous years has been extremely tight and I'm certainly pleased to get my finance teams a bit more time to be able to prepare it. With that, I will hand it over to Mark.

Mark MacFarlane: In 2019, we delivered an average full year production of 86,700 barrels of oil per day. As we start 2020, I'm very pleased to say that our operations are performing inline with our expectations and our production guidance for 2020 remains unchanged at between 70,000 to 80,000 barrels of oil per day as are the out years at around 70,000 barrels a day. A detail we have added in our statement is a summary of our audited year end 2019 reserves. After reviewing over 95% of our assets, our auditors have confirmed the quality and scale of our reserves and resource base. Our audited year end '19 reserve is 245 million barrels of oil equivalent and while these audited reserves in both Jubilee and non-operated asset have increased, it has not been sufficient to offset the 31 million barrels of 2019's production and the reserves production Enyenra and we will publish our fully audited reserves and resource details with our results. Also in the portfolio in Kenya you may recall back in late November 2019, we had to shut down the early oil pilot scheme due to the significant rains and floods in Kenya. The Kenya highways authority are actively repairing the road network and trucking will resume once the roads are repaired to a safe condition for our trucks to drive in. The various work streams for Project oil can you continue and we'll be meeting with the government in the next few weeks as we make the progress on the various items that fall under their control. In Uganda, multiple conversations continue between the government and our joint venture partners and we remain committed to farming down our stake. In exploration, we recently announced the Carapa well results, the third well in our Guyana campaign. As a reminder, our preliminary review of view I should say is that Carapa encountered around four meters of net pay in the upper Cretaceous. Based on the rig side measurements we have 27 grade API ore with less than 1% sulfur and those oil samples are on the way to the laboratory for detailed analysis. However, the results was below our expectations. But importantly, the well proved two things for us. Firstly, the extension of Stabroek Block's prolific Cretaceous play into our acreage. And secondly that our predrilled expectation of light oil at Carapa was validated and that defines further confidence in the petroleum system modeling for the Kanuku block. Our next steps are to integrate these well results with our seismic geological models and our petroleum systems models to high grade our Cretaceous portfolio across both the Kanuku and Orinduik blocks. After we completed this, we will then be able to define our future drilling campaign in Guyana. And finally, as you're all likely aware, we'll shortly be drilling exciting Marina exploration well in Block Z-38 in Peru, prospecting about 300 meters of water in the Tumbes Basin, adjacent to the prolific onshore Talara basin and the well is targeting Tertiary age turbidities with a prospect size of around about 160 million barrels of oil. The rig has arrived in country and Peru. Our operator should start drilling 40 to 50-day well by the end of the month. So a steady start to the year. I look forward to discussing this all with you at our results.

Dorothy Thompson: Thank you, Mark. I'll finish by talking a little more the progress of our business review. As I've said in today's statement, Tullow's senior team has been working hard since our announcement in December. While it's in early stage, I've been really impressed since working more closely with the interim executive team and other members of staff at Tullow at their level of confidence and dedication. I am confident that we have the right team in place, and it is clear that they have a firm grip on the business and are committed to taking sensible but decisive action. Our most recent work is focused on simplifying the structure of the organization, and these changes will be implemented in the coming months. This is very sensitive as it involves our people. So understandably, there is limited detail I can provide at this stage. The next phase of the review will focus on the plans for each of the group's major assets, looking at further elements on cost base, our investment plans and ultimately our strategy, including monetization options across the portfolio, consistently asking ourselves how best to operate within our means and deliver value to our shareholders. Overall, I believe we will be able to make meaningful improvement to operational performance in order to deliver sustainable free cash flow and reduce our debt. Looking further ahead, the recruitment of the new Chief Executive Officer is well underway with the assistance of a very good executive search firm. We have made a very good start to and I look forward to providing an update on the business review in March. Thank you again for joining us today and we will now move on to questions and answers.

Operator: [Operator Instructions]. Your first quarter comes from the line of Michael Alsford from Citi. Please ask your question.

Michael Alsford : I've got a couple around Guyana if I could please. Could you just confirm what are the current production levels at both Jubilee and TEN, whether you assume major sort of downtime or maintenance activity in 2020? And then just a little bit more color on what the money is being spent on the $140 million of CapEx, just to understand what can that be in terms of impact on production into 2021? Thanks.

Mark MacFarlane: It's Mark here. Certainly, the, if I, if you'll excuse me, let me tell you, talk in gross terms. So the gross oil production from Jubilee at the moment is in the order of about 84,000 barrels of oil per day and 52,000 - 53,000 barrels of oil per day from the TEN field. We as a part of our 2020 production forecast, we do have planned shutdown activities that are occurring in January. One is on the gas system, which will be a 9-day slowdown and then also be a 4-day total oil outage, oil to oil, as we undertake some maintenance taking advantage of the fact that we'll be shutting the gas system down. Important to state, all of that is explicitly included in our production guidance for 2020. In terms of where the CapEx is being spent, we are drilling wells in Jubilee and TEN, water injectors in Jubilee. We'll be drilling oil producer in the well location called Ntomme-9, which is currently underway. And we also have CapEx invested for long lead items for Jubilee to bring additional reserve onto production in the Jubilee field over the course of 2021, '22 and 2023.

Michael Alsford: And then just a follow-up, unrelated on, to Les on the, given the large impairment. I'm just wondering to confirm that none of your debt facilities have a debt-to-equity covenant, please?

Les Wood: No, that's correct.

Operator: Next question come from the line of Sasikanth Chilukuru from Morgan Stanley. Please ask your question.

Sasikanth Chilukuru: Hi, I have two questions please. One on the 2019 guidance itself. There has been a reduction in CapEx but not changing free cash flow. So I was just wondering if there's anything offsetting this? On the second one, essentially, for the, on the details of the, that you have provided on the 2020 CapEx. It seems like Uganda is at $50 million but essentially kind of implies there's not much activity going in or whether you'll be farming down, farming down if there is more activity coming in. So, I was just wondering if there was any pickup in activity and in that context, would that mean an increase in the CapEx levels there? And also for the taking a look at the Kenyan spend, are you still confident for having an FID by the end of this year or just wanted an update on that?

Mark MacFarlane: Yes, on your, first part of your question, I mean, I think the, the thing to say, I mean it's quite straightforward really, so we did see some reductions and year-end items that will have moved into 2020, but we always have, as you expect, working capital movements at the year-end. And when you kind of net outfall our positions, we ended up, give or take, around about the same position. So it's as simple as that.

Les Wood: In terms of in Uganda, we do have CapEx allocated to Uganda in 2020. And we also confirmed that we will be producing equity before we sanction the project. And that's probably where we should leave Uganda. In terms of Kenya and your question on FID, we are still targeting FID around the end of the year. It certainly will be a challenging task to achieve it, and it might infer with the floods, for example, like [indiscernible] activities in the field is quite challenging. So, that's our target, but it will be challenging.

Operator: Thank you. You ready for the next question? Your next question comes from the line of Duncan Milligan from Goldman Sachs. Please ask your question.

Duncan Milligan : Thanks for taking my question. I wondering if I could just ask about the movements of 2P reserves at Jubilee and given the reduction inflection of the scene how are you and how you're forced to thinking about that increase. And then just a little bit of color on 2C increase that we're seeing and where that comes from and how we should think about that in the medium term? Many thanks.

Mark MacFarlane: Sure. So you might have read in my comments on Jubilee last year that even with the high water cut that we forecasted the reserves unchanged. Our auditors have reviewed all of that data and have come to the same conclusion that our reserves in Jubilee are robust and we in fact did see a small increase in Jubilee. In terms of our contingent resources, the main changes that we drive the increase to our continued resources, volumes of oil in Jubilee that are outside of our license period, that contributes to some of the increase. Some of the reserve reduction that I mentioned last year that the auditors have confirmed. They have been transferred into continued resources. There is an opportunity in Ntomme field with a new opportunity that could increase reserves in the future, that has been added to our contingent resource base and then there's been some increases in our continued resources obviously with the Guyana volumes that we discovered last year coupled with some small changes in increases in Equatorial Guinea and Gabon.

Duncan Milligan: Thanks very much. And just on that Jubilee point, because I think there is a lot of concern from the investors about that kind of Jubilee reserve figure. What is it that's driven it? Is it an extension to the field and product expectations, is that oil columns or something like that? Do you have any color in terms of why that's increased so much relative to the increased water that was announced back in December? Thanks.

Mark MacFarlane: Fundamentally gets down to the decisive field and the geometry that allows us to change the placement of our future wells to allow us to continue to deliver the reserve that we currently forecast. To give you some color, the year end '18 reserve in Jubilee was about a 123 million barrels, year end '19 was about 120.5 million barrels despite the fact we have 11 million barrels of production from Jubilee. So, that's why we believe and the auditors also believe that our reserves in Jubilee are robust and are unchanged.

Duncan Milligan: Fantastic. I really appreciate the color. Thank you.

Operator: Thank you. Your next question comes from line of James Thompson from JP Morgan. Please ask your question.

James Thompson : Good morning. Thanks very much for taking my question. I just had one. Just wanted to get an update really on where your are with Uganda in terms of the farmed down negotiations potentially bringing them back on the table, you know currently how things stands there cause clearly that's pretty important cashless balance sheet for the near term so just an update on Uganda will be very helpful. Thank you.

Dorothy Thompson: Sorry. I don't think we can say anything more than we have said in the announcement and what Mark just said and confirmed and we think the sell down will must happen before we're willing to support a final investment decision.

James Thompson: Okay. Thanks.

Operator: Thank you. Next question comes from line of Colin Smith from Panmure Gordon. Please ask your question.

Colin Smith : Yeah. Good morning. Thanks for taking my question. Two for me. First of all, in the review, I just wondered if that you're undertaking, I wondered if you could provide a bit more color about the operational and longer term issues that might allow you to improve the guidance you gave for 2021 to 2023. And secondly, on the exploration program, I just wondered, if you could provide a little bit more color on the number of wells you expect to drill this year. At the moment, I think you've got firm wells in Peru, which you've discussed, but also one in Surinam. And I wondered, if you're in particular if you're expecting to drill in Guyana this year or whether that is likely to be in 2021? Thank you.

Mark MacFarlane: No problem. In terms of the operational improvement, one of the key areas you might remember me talking about last year was the need to ensure we injected sufficient water into Jubilee. So there is a dedicated Task Force looking at how we improved the reliability of our sea water injection systems. There's a dedicated piece of work that should support future production growth for delivery. Similarly, with the overall uptime of the FPSO, some of the shutdown work I just mentioned into increase the ability to handle gas on the FPSO, as well as improve the reliability of that gas production system. So there's a couple specific examples and there are many others to what we're doing to improve their reliability of the overall FPSO. In terms of exploration, you are correct. We do have the Peru well that I mentioned in Block Z-38. There is a potential that Surinam well will be late this year or early next year, that is yet to be optimized. And in terms of further Guyana drilling this year, we really do need to integrate that real world data that we've got from our three wells into our various models. So unlikely that we will be drilling any Guyana wells this year, but we need to let that technical work run it's course before we decide what will be our next well and when would be that next well.

Operator: Your next question comes from the line of Allen Stanton from RBC. Please ask your question.

Allen Stanton: Can I ask a couple questions with respect to the write-downs? I think the $75 to $65 oil price reduction was anticipated, but if it hadn't happened would still have been write-down. So the questions are other production profiles in Guyana now lower for longer and resulting, as you perhaps have indicated some reserves to ferment into resources? And so a lot evaluation. In a related points, is Uganda still an asset held for sale and if that comeback is there some sort of write-down associated with that? And then finally, if I may, the $75 million exploration spend, is that assuming current equity stakes? Or is there some farm-downs anticipated perhaps in Surinam or anywhere else?

Les Wood: So I'll talk to the first couple of questions. So the impairment is really made up of what is primarily tenants made up of two things. One is the price that you pointed to. But actually, the most substantial part is that's driven by the reserve adjustment in Enyenra. If you then look at the exploration write-offs, there would have been exploration write-offs absent the movement on oil price. Those, of course will be across the well that we drill in Guyana will be a flavor of things like Jamaica, Namibia and a lot of teaming with the other examples, which we would have written off in any event, absolutely more than we would have made on the oil price. So there'll be a bit of both in practice.

Mark MacFarlane: And can I just comment on your comment about Jubilee contingent resource? My comment about the 37 million barrels or so oil that we've added to Jubilee contingent resource out of license is not to do with us reducing reserves outside the license period. It is purely because we had not previously recognized those volumes as contingent resources. In terms of the Surinam well, certainly that's an option that's on the table as to whether we farm down that particular well and how much we farm down that particular well. And that's work that we will progress over the course of 2020.

Allen Stanton: Okay. And I appreciate, it's just semantics. But is Uganda still an asset held for sale? Or does it come back to the portfolio?

Les Wood: Sorry, I was looking at my list of, any questions that we have. Yes, but we on, we will move it from that category. And as in line with the impacts on Kenya as a result of adjusting long-term price we do see an impact in Uganda as a result of adjusting the long-term accounting price.

Operator: Thank you. We will now take our final question. The final question comes from the line of James Hosie from Barclays.

James Hosie: I guess just wondering if you can give us a breakdown by geography of the contingent resource number you've published today. And then also just to provide some sort of update on when you set a time frame for new CEO being appointed?

Les Wood: In terms of contingent resource, look, I'll be very happy to provide that at the full year results, all that detailed breakdown.

Dorothy Thompson: In terms of the new CEO, all I can say is the search is well and truly underway. We'll be looking at both internal and external candidates, but it's too early to give a firm timetable on that.

Nicola Rogers: Thank you, everyone, for joining the call. We'll now bring it to a close. If you do have any further follow-up questions, do please get in touch with Investor Relations by ir@tullow.com or contact myself, Matt Evans or Chris Perry directly. Thank you very much.

Dorothy Thompson: Thank you.

Operator: Thank you. That does conclude our conference for today, Thank you for participating. You may now all disconnect.