LONDON - Tullow Oil Plc has a record 49 wells planned this year, and drilling engineers due to deliver news by February are under pressure after a disappointing trading update from the Africa-focused company on Friday.
After a mixed year for one of the industry’s best performing drillers of recent times, Tullow’s output guidance for 2013 at 86,000-92,000 barrels of oil equivalent per day (boepd) came in below some analysts’ forecasts, and its 2012 output at 79,200 boepd undershot company guidance.
In addition, parts of the update on drilling in Uganda and Kenya were more cautious than some analysts had hoped from Europe’s largest oil and gas exploration and production company outside the industry’s integrated giants.
Tullow’s shares, which have tripled since 2007 while peers have flatlined, fell 5.3% to 1,160 pence on Friday.
But finance director Ian Springett said the company’s view of its East African assets was unchanged and stressed that exploration, not production, remained Tullow’s driving force, with a record 49 wells to be drilled during the year.
He said the negative Ugandan well results were establishing the margins of the basin and were relatively low cost, while in Kenya “it’s very, very early days.”
“We need to drill a lot more wells in Kenya before we really understand where are the best locations and what the flow rates are,” he said. “We have a very large exploration programme active in a number of countries with some basin opening potential in a number of them. It is a big and wide programme.”
What is the focus?
The company said it would continue to focus on “high value oil and early monetisation” in its exploration-led growth strategy - selling assets where it has found oil relatively early in the development and production process.
Some investors have begun to worry it is losing that focus, especially since December last year when it bought Norwegian driller Spring Energy, and attendees at a Macquarie investment conference this week expressed a desire to see it maintained.
Out of the more than 30 who responded, 65% said Tullow should avoid getting sucked into a production target structure, and err on the side of early sell-out.
Macquarie analyst Mark Wilson tagged Tullow shares as underperform early last year, and other analysts have moved in that direction since.
“While still a best-in-class explorer, we see ongoing challenges for Tullow as it continues to seek the right balance between the “E” (exploration) and “P” (production) sides of its portfolio,” said Brian Gallagher of Investec, who rates the stock a sell, in a research note on Friday.
Analysts at Charles Stanley on Friday downgraded the stock to hold from accumulate.
In Kenya and Ethiopia, Tullow said it was expecting a result from its high-risk PaiPai-1 well in February and a flow rate test completion at its Twiga-South-1 well it shares with Africa Oil in the same month. The flow rate from the Twiga-South-1 test is unlikely to be more than 500 barrels a day, it said. Drilling on the Sabisa-1 well in the South Omo block in Ethiopia is expected to commence within the next two weeks.
In Uganda, Riwu-1, Raa-1 and Til-1 did not encounter commercial hydrocarbons, Tullow said, but extensive further drilling in partnership with operator Total is planned for 2013.
At another important prospect in French Guiana, drilling at Priodontes-1 (GM-ES-3) adjacent to the already drilled Zaedyus prospect started at the end of December 2012, and is expected to continue for four to five months, Tullow said. Zaedyus-1 was encouraging last year but Zaedyus-2 found no commercial quantities of oil, news that hit Tullow’s shares in December.
Tullow has long targeted 120,000 barrels a day of output at its Jubilee field in Ghana, and had once hoped to reach that by 2011. The company said it was now producing 110,000 barrels a day “therefore allowing the current FPSO (floating production, storage and offloading vessel) capacity to be tested over the coming weeks.” Analysts said this was good news.
Last year Tullow raised $2.9b by selling part of its Uganda franchise to Total and China’s CNOOC.
Tullow is trying to sell more assets to help finance its capital expenditure programme, which is expected to total $2b in 2013, up from $1.9b in 2012, but it had no firm news on disposals in its trading update.