January 28, 2008

Tullow Oil: Lucky strikes in unlikely places

When Tullow Oil was born in 1985, some of its main founders would have been hard pressed to imagine that the company could ever make it into the FTSE 100 index. It would have been almost as difficult for some investors to imagine that the company's reputation would ultimately be based on finding oil in Africa, particularly in countries that are not traditionally seen as significant hydrocarbons plays.

But that is exactly what Aidan Heavey, a former chartered accountant and the Irish chief executive of the London-listed company has succeeded in doing, building up a strong portfolio in a continent that has come to the fore as a global exploration hot spot in the last decade.

In the past two years Tullow has struck it big in Ghana and Uganda, drilling in newly acquired assets and confirming the discovery of hundreds of millions of barrels of oil in the two countries which, until then, were not even considered as oil-rich countries.

The company began its Africa foray in 1986 in Senegal, after drilling a dry well in Ireland, but only began a period of accelerated activity when it acquired £200m ($395m) of gas assets in the North Sea from BP in 2000.

It then decided to move back into Africa in a big way with the acquisition of South African-listed Energy Africa for $570m in 2004 and the £595m acquisition of Australia's Hardman Resources in January last year. Each company had African assets. The deals boosted Tullow's production profile and gave the company exploration rights where its most important discoveries are located.

Tom Hickey, Tullow's finance director, says the key to the company's success has been in "picking up assets ignored or not appraised by major companies and using those as the levers to grow the business".

The company's production stands at roughly 75,000 barrels of oil equivalent a day with more than half of that production coming from producing assets spread across five African countries. The rest of Tullow's production is in the UK section of the North Sea, now overshadowed by the company's ambitions in Africa.

Tullow is the only UK listed exploration and production company to have a big name in Africa, says Mr Hickey.

With a presence in roughly a dozen African countries, the company strategy has been to diversify its risk. It has shrugged off the disappointments of its exploration campaign in Namibia, while eyeing a new drilling campaign off the coast of Ivory Coast, adjacent to its Ghanaian play.

"Yes, you can say that we have been lucky, but the luck is in having a portfolio that can absorb disappointment," says Mr Hickey.

A strong cash position has also allowed Tullow to sink a high number of wells in areas that have showed a good track record. In Uganda, the company has struck oil in all eight of its wells drilled, an unheard of strike rate, and has discovered 250m barrels of recoverable reserves with ambitions to add on hundreds more in new drilling campaigns.

Last year's discovery of a large field off the coast of Ghana, in which Tullow holds a 37 per cent interest, could hold anywhere between 480m to over 1.3bn barrels of oil, the company says, although only two wells have been drilled there.

The company expects its production profile to eventually rise to 200,000 b/d over the coming years, largely as a result of the the Ugandan and Ghanaian discoveries. But before investors swallow this figure, they will eagerly await news of an export pipeline from landlocked Uganda, which otherwise would not be able to absorb all of Tullow's production on its own, as well as news of further appraisal drilling in the Ghanaian find.

As the company intensifies its search for more African oil, it expects to deepen the proportion of funds earmarked for exploration and development on the continent. In 2006, more than 60 per cent of Tullow's £400m of capital expenditure was earmarked for African projects. This year, that figure is expected to rise to 70 per cent, says Mr Hickey, with Ghana and Uganda taking the largest share.

That will mean toning down emphasis on the North Sea. "We have not turned the North Sea off, we are just turning it down," he says.

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