Tullow Oil plc (TLW) Earnings Call Transcript

Good morning, and thank you for joining us today. I'm Richard Miller, CFO and Interim CEO, whilst the process to find a new CEO is ongoing. This is taking longer than expected, but I'm pleased to share that it's progressing well, and I do expect that the next time I sit here, it will be back as just CFO. During this period, our senior leadership team's expertise and commitment has ensured our continued stability, and we have made good progress on a number of fronts that I will cover on the next slides. During the first 6 months of the year, we have progressed a number of strategic priorities. We started the year with the successful outcome of the Ghana branch profits remittance tax arbitration, and we continue positive engagement with the government of Ghana and GRA with the aim of resolving the outstanding disputes on a mutually acceptable basis. We have signed the SPA and completed the Gabon transaction in the space of 2.5 months, realizing $300 million of proceeds. We signed the SPA for Kenya and are looking to complete and receive the first 2 milestone payments totaling $80 million before the end of the year. We have made good progress from a cost reduction perspective with $10 million reduction in '25. We have plans underway to further reduce G&A, targeting at least $50 million of savings over the period '25 to '27. We have repaid the '25 notes and extended the revolving credit facility, which has now been repaid. Our focus is now addressing our upcoming '26 maturity and further deleveraging. I will now turn to our operational performance and catalysts. From an operational perspective, we've returned to drilling in Ghana and have successfully completed the first production well of the current campaign. The well encountered a higher-end net outcome for net pay and came on stream in late July. The high-quality 4D seismic data, which we acquired at the start of the year, is now being used to generate improved models that will directly inform the well planning process. We will further enhance this data set with the capture of an ocean bottom node seismic survey in the fourth quarter of '25, which will underpin infill drilling locations across both TEN and Jubilee. Jubilee has underperformed in the first half of the year, which has impacted our free cash flow for the year. However, we have a number of production optimization activities that have been delivered or are planned that give me confidence in our ability to improve the declines we have seen. We have commissioned artificial gas lift on the eastern side of Jubilee and have sanctioned artificial gas lift on the western side of Jubilee, which will both uplift production and add reserves. We have a collaborative and constructive relationship with the government of Ghana and have made a valuable step forward with the signing of a memorandum of understanding to extend the licenses in Ghana to 2040. This step will maximize the value potential of both TEN and Jubilee, and I'll cover this in more detail later on. Now moving on to our first half results. Production has been lower in the first half of the year, reflecting the downtime from the successful Jubilee maintenance shutdown, the fact that we had no new wells on stream and the recent Jubilee underperformance. Oil prices have been lower in the first half of 2024, which has also impacted free cash flow for the first half. Following the completion of drilling campaign last year and increased capital efficiency in 2025, we have seen a material reduction in capital expenditure in the first half of the year. Free cash flow for the first half of the year, just like last year, is negative and represents the phasing of tax payments, gas receipts and higher operating costs associated with the shutdown and CSV campaign. As a result, net debt at the end of June was $1.6 billion. Now let's move on to the full year outlook. This slide highlights the changes in our full year guidance based on the completion of the Gabon transaction. Group production guidance remains unchanged and has been adjusted for the removal of about 10,000 barrels of oil per day from our Gabon assets. We do not expect -- we do expect to come in at the bottom end of the range of 40,000 to 45,000 barrels of oil per day based on performance year-to-date. Capital expenditure after removing Gabon is expected to be $185 million weighted to the second half of the year with only $25 million spent outside Ghana in Côte d'Ivoire and Kenya. Decommissioning guidance for 2025 is adjusted to $20 million with the removal of Gabon escrow payments and free cash flow at $65 a barrel, excluding disposals is negative for the full year. This is driven by the loss of Jubilee cargoes, tax payments in Gabon and higher operating costs associated with the shutdown and CSV campaign. I'll go into more details on the actions underway to materially improve the cash flow potential of the business later in the presentation. Cash flow guidance, inclusive of the proceeds from Gabon and Kenya disposal is $300 million at $65 a barrel. This does include $35 million of Gabon tax for '24, which was not reimbursed as part of the deal. This cash flow generation will drive year-end net debt to around $1.1 billion, which is in line with where we previously guided. I would now like to go into more details on what we're doing from a cost perspective. We continue to focus on reducing our cost base in line with the simplified business that we are. We have made positive steps in reducing our G&A costs in 2025 with a 60% reduction since 2019 and have put in place further steps to take G&A run rate down even lower for '26 and beyond. We're targeting around $25 million per year of net G&A. From an operating cost perspective, Ghana costs are slightly higher in '25 than the year before, and this is due to the inclusion of the shutdown and CSV campaign. Looking ahead, we have plans to reduce routine OpEx by $10 million per year for '26 and beyond. Further to these cost base adjustments, I would like to talk about the broader potential of the business and actions and options we have to realize increased organic free cash flow. As highlighted earlier, the organic cash flow of the business for '25 is negative at $65 a barrel. However, we are making significant progress on a number of fronts to reduce the cost base that will enable us to generate material free cash flow in the future. These steps include G&A and OpEx reductions that I've just touched on, reductions in the 10 FPSO lease costs from 2027 onwards, completion of the U.K. decommissioning campaign and finally, reducing interest costs through the reduction of gross debt. In comparison to 2025, if we deliver on all of these actions, we can increase our annual organic free cash flow by over $200 million. On top of these organic free cash flow potential, we have a number of strategic income opportunities, which I'll touch about later in the presentation. Moving on, I'll now talk about deleveraging progress and our hedging portfolio. Refinancing is the key strategic priority for the business for the balance of the year. We have made good progress with deleveraging so far this year, reducing gross debt by $0.3 billion. This has given us an annual interest saving of $8 million. I'm really pleased with what we've been able to do with the disposals and refining our portfolio to date. This puts us in the best possible position to refinance our capital structure. Our senior notes mature in May '26 and the Glencore facility matures in November '28. We are advancing discussions with private capital providers, and we have plans in place to complete the refinancing of our capital structure before the end of the year. In terms of hedging, following completion of the Gabon disposal, we have around 70% hedge protection in the second half of '25 with a floor of $60 and a cap of $75 a barrel. We have now begun hedging in 2026 and have average floors of $58 a barrel and caps of $76 a barrel. We are still looking to maintain 60% downside protection whilst retaining at least 60% upside access through a combination of hedge structures. I'll now move on to operations, and I'll start with Jubilee. Jubilee production for the first half has been disappointing and has been impacted by certain wells in Jubilee cutting water earlier than expected and as a result, impacting riser stability on the eastern side of the field. Water injection rates in the first quarter of the year and the last quarter of 2024 were great, but we've been lower than this in the second quarter of this year. And this is due to the extended maintenance work on our gas turbine generators, which has now been completed and mechanical issues with our seawater lift pumps, which will be addressed around the end of the third quarter. With these challenges resolved in the second half of the year, we expect to close the efficiency gap and get back closer towards the capacity, which is currently 300,000 barrels of water per day. This will help improve reservoir pressure management and improve voidage replacement, which has still been over 100% for the first half. As I mentioned earlier, we have a number of activities underway to optimize production, address the declines we've seen in the first half. This includes riser base gas lift, which is now operational on the eastern side of Jubilee, and we've sanctioned riser base gas lift on the western side. We expect that this will not only increase production, but also add reserves. We have also drilled and completed the first producer well of a 6-well campaign. This well came in the high end of expectations of net pay and was brought on stream at the end of July. The second well we expect to drill this year will also be a producer and is expected to be on stream around the end of the year, providing a further production uplift. We will then continue the campaign with 4 wells in 2026. We've completed the 4D seismic survey in the first quarter and are working through the fast track results to optimize future well locations. The team are excited by the uplift in quality of the data and the potential this has to drive future value through high grading and uplifting of infill drilling candidates. We will also undertake an ocean bottom node survey in the fourth quarter that will further enhance the velocity model and complement the 4D. The actions we've taken through the first half of '25 and leading into the second half give me significant confidence in the future potential of the field. I'd now like to focus on what we're doing to build that value. We've agreed a memorandum of understanding to extend the Ghana production licenses to 2040. This will allow us to realize a material 2P reserves uplift associated with the extension, and we also have the right to drill up to 20 additional Jubilee wells. Importantly, we've agreed a guaranteed reimbursement mechanism for gas sales and we'll commit to work to increase the supply of gas from around 100 million scfs a day to 130 million scfs a day. We will also focus on advancing Ghanaian capacity working with both GNPC and the Petroleum Commission. The next steps are laid out on the slide, where we'll agree a Jubilee plan of development amendment, enter into a fully termed gas sales agreement and secure parliamentary approval for the reimbursement mechanism and license extension. We expect to execute these steps ahead of the end of the year. With the license extension, combined with the high-quality 4D seismic data and the OBN survey, we are really excited by the potential of both Jubilee and TEN. Based on the current recovery factors, we see a great opportunity to materially uplift reserves in the future and maximize value for Tullow, our partners and Ghana. Now moving on to TEN. At TEN, the team have done a phenomenal job on production, minimizing declines. Production is ahead of expectations. And based on this performance, we see enormous potential in both Enyenra and Ntomme and through the monetization of TEN's material gas resources. We have identified a number of production optimization activities to realize this potential. At Enyenra, we'd opened new zones uplifting production, and we have projects in the pipeline at Enyenra South. At Ntomme, riser base gas lift is supporting higher recovery, and we see potential for water injection and infill drilling to drive recovery even higher. We will look to mature these opportunities through the 4D and OBN seismic surveys. As mentioned earlier, from a cost base perspective, we are actively working on a significant reduction in the overhead cost on TEN by removing the annual TEN FPSO lease cost in 2027. Now to focus on the value from the rest of our portfolio. In addition to our valuable producing assets, we have a highly value-accretive portfolio of opportunities through sales and royalty options. We've made significant progress this year. We signed heads of terms and SPA and completed the sale of our Gabon business for $307 million, all within the space of 5 months. We've progressed the sale of Kenya. We signed the SPA in July, and we expect completion and FDP approval in the second half of the year, which will see $80 million proceeds this year. Looking into the future, we have the Dussafu contingent payment in Gabon, which is up to $24 million over 5 years that we expect to start receiving next year. There's also the Uganda contingent payment, where we understand first oil is expected in 2026. Therefore, we expect to start receiving the royalty in 2027. In Kenya, we should start to receive the additional Kenya deferred payment of $40 million in 2028 with a bullet repayment in 2033 of any balance. We also retain future upside optionality through royalty payments related to oil price, resource and production as well as a no cost back-in right for 30% participation in potential future development phases. I'm really pleased with the scale, speed and consistency of the strategic actions taken, in particular, the completion of the sale of our Gabon business and SPA signature for Kenya. We will look to carry this forward into the second half of the year and beyond. Now to conclude the presentation. We have made exceptional strategic progress during the first half of the year. We have a clear set of priorities for 2025 and beyond. We have put in place a set of actions to stabilize production on Jubilee and have returned to drilling with 6 wells planned across '25 and '26. We'll look to drive value through efficient capital allocation and deliver strong production and cash flow. We are taking measures to reduce the cost base to reflect our revised portfolio, and we continue to have a supportive and constructive relationship with the government of Ghana as demonstrated by the license extension MoU, which paves the way to deliver value from our fields. We will look to complete the sale of our Kenya assets to support continued accelerated deleveraging, and I have confidence in these plans as we aim to build on the positive momentum during the second half of the year to deliver the refinancing of our capital structure. This will position the company to focus on value creation for investors, host nations and wider stakeholders. I'll now take questions.

[Operator Instructions] Our first question comes from Matt Smith at Bank of America.

I mean thanks for all the detail that you've outlined on the potential cost saving initiatives. I think that sort of cumulative number above $200 million certainly seems to be larger than I had anticipated, which is clearly very material and helpful for the potential cash flows going forward. I guess the critical factor in my mind has been the production performance. And of course, you've had a long drilling hiatus, which has now been reversed 5 more wells ahead. So I mean that's the other critical point that I wanted to touch upon, if I could. Where do you think Jubilee production in particular can grow to from here? Do you still believe it can grow as a result of the new drilling? Where could we be in '26, '27? Because I think that's the other critical component to lifting the cash flows from here, please?

Yes. Thanks, Matt. I mean we've got enormous confidence in Jubilee. And one of the -- obviously, one of the steps we've taken this year that underlines that confidence is extending the licenses through a combination of optimizing our current production base and stemming declines and also getting back to drilling, adding new production, we believe that there's fantastic potential to grow the Jubilee production base from where we are today. We've just bought a producer online, which has given us a decent uplift. We've got another producer at the end of this year and the full well campaign next year. So we see significant potential to be able to grow from where we sit today.

Our next question is from Colin at Capital Access Group.

A couple, please. Could you just provide a little bit more detail on the decision points around repurchasing the 10 FPSO and removing the lease costs? And secondly, I thought there was an interesting bit in the announcement about the hearing on the loan arbitration case being delayed in order to give more time to allow settlement negotiations to continue. Presumably, that suggests there's a reasonably good prospect about actually negotiating a settlement here rather than having to run the arbitration process. And I wondered if you could talk a little bit about that and whether it has any bearing on the third arbitration case, bearing in mind that you successfully won the case over branch profits remittance tax.

Yes. Thanks, Colin. So the fixed period on the 10 FPSO comes to an end in the first quarter of 2027. And our focus is on creating the most sustainable cost base for 10 point forward. And we're working on a couple of options in terms of how we can drive that cost base down, one potentially being acquiring the FPSO at a discount or the other being extending the lease at a lower lease rate. So we've got a number of actions that we're looking to complete during the second half of this year that will enable us to essentially realize that saving that we've got within that cost bridge. From a GRA perspective, we are actively working with the government of Ghana and GRA to resolve both arbitrations on an amicable basis. We're in discussions. We believe that the best outcome for both parties is to get to an agreement sort of on an acceptable basis. We both know where we stand in terms of the bid ask. It's about trying to now move that forward to some negotiated settlement.

Our next question is from Lydia Rainforth at Barclays.

I actually have 2 or 3, if that's okay. On the free cash flow side, can we just come back to that? And I just think it's -- I understand fully. If I think about where the guidance was at the AGM and where it is today with that $100 million difference, can you just walk through kind of where that bridge is for us? And then if I'm thinking about it and take a step back, at $65 oil on an organic basis, there's not very much free cash flow there. So is the idea with the kind of the cost base and the cost savings activities you outlined '25 to '27, that basically you get to a point where incremental free cash flow is $200 million higher, and that's the base that we should think about in a $65 world. And then sorry, the third one, if I could, I'm sorry, Richard, I know you've got a lot of these. But just on that cost base, can you just take a step back and take us through that holistic approach to how you're thinking about running the business now that it is basically just Ghana and having taken out Gabon and Kenya and Côte d’'Ivoire because I think actually that helps in terms of setting up where we are going forward.

Yes. Thanks, Lydia. In terms of, I suppose, the revision in free cash flow guidance, I mean, the single biggest delta is the impact of Jubilee year-to-date production, which has essentially shifted 1.5 cargoes from 2025 into the first quarter of 2026. So that makes up the vast bulk of the difference. The only other changes is a slight increase in costs from running the OBN survey and also the inclusion of our second round of redundancy payments. In terms of sort of how we think about, I suppose, the -- where we sit today versus where we can go going forward. I think there's obviously 2 aspects of our free cash flow bridge that we're working on. The first one is, I suppose, as we set out on the slide, which is reducing the fixed cost base of the business, essentially being able to generate up to $200 million and potentially beyond of incremental free cash flow a year by reducing that cost base, but also in line with Matt's question around looking to grow production from our assets. And so the combination of production and also driving those reductions in costs, we believe that we can improve on where we currently sit from an organic free cash flow perspective today. As we start to think about how we run the business going forward, I think the reality is we're a much simplified business. We just -- we are a Ghana business with obviously some corporate activities. And that gives us the flexibility to significantly reduce the complexity of the organization, both in terms of layers and scale. So this should allow us to focus, much more day-to-day focus on the operations in Ghana and also streamline decision-making, which I think has continued to improve significantly throughout this year. So going forward, it will be a much flatter, leaner organization solely focused on Ghana and looking to really run as much of the business going forward out of Ghana as possible.