Tullow Oil has predicted that the acquisition of two offshore oilfield stakes could pay for itself by the end of the year due to high oil prices.
The energy exploration company spent £89.7m to acquire Occidental Petroleum’s stake in the Jubilee and TEN fields in Ghana, increasing its stake in the pair to 39 and 54 per cent respectively.
If oil prices remain at current levels, around $98 a barrel for Brent as of Wednesday, the London-based group believes it will be able to pay for the acquisition by the end of the year.
Acquisition: Energy exploration company Tullow Oil spent £89.7m to acquire Occidental Petroleum’s stake in Ghana’s Jubilee and TEN offshore fields earlier this year.
Along with this, the company maintained its annual production forecast at the level of 59-65,000 barrels of oil equivalent per day (one thousand barrels of oil per day), producing 60.9 thousand barrels of oil per day in the first half of 2022.
Production at the Jubilee field was in line with expectations, an achievement which Tallow attributed to the commissioning of three new wells, as well as production from the undeveloped portfolio in Gabon and Ivory Coast.
The company also continues to expect annual free cash flow of about $380 million, with about $30 million coming from the additional stake it acquired in Ghana.
It also expects to generate about $200 million in free cash flow at an average oil price of $95 a barrel — well above what it has been in recent years.
Crude oil prices fell in the early stages of the Covid-19 pandemic after severe travel restrictions imposed by governments around the world and plant shutdowns severely reduced demand for oil.
This led to massive financial turmoil for Tullow, which posted a $1.3 billion loss in the first half of 2020 as it wrote down more than $900 million of exploration assets and incurred huge impairment charges.
Link: Tullow Oil agreed a £1.4bn merger with Capricorn Energy earlier this year in a deal that will give its shareholders a 53 per cent stake in the newly enlarged group.
However, after the easing of lockdown laws and the successful roll-out of Covid-19 vaccination programs, oil prices began to recover strongly, leading to a turnaround in the firm’s financial performance.
In addition, thanks to significantly lower impairment charges on property, plant and equipment, Tullow reversed an after-tax loss of $81 million last year, compared with $1.2 billion in the previous 12 months.
Its chief executive Rahul Dhir noted today: “It’s been two years since I joined Tullow and today we are in a very different place. Relentless attention to costs, capital discipline and operating performance ensure the execution of our business plan.”
As part of the plan, the company has agreed a £1.4bn merger with gas-focused Capricorn Energy, with Tullow shareholders owning 53 per cent of the newly enlarged group.
Dhir said his firm is preparing a circular and prospectus for shareholders that should be available in the fourth quarter, followed by a vote on the proposed merger later this year.
The boards of both companies recommended that investors approve the deal, but one prominent shareholder, Legal & General Investment Management, raised serious objections on economic and environmental grounds.
The asset manager said last month there was “no clear strategic rationale” for the deal, adding that it would dilute Capricorn’s exposure to oil and was unlikely to deliver significant cost savings.
Allegra Dawes, senior analyst at global consultancy Third Bridge, also suggested uncertainty about future oil prices and the lack of similarity between the two exploration companies as possible problems with the deal.
She said: “Capricorn’s partnership with Shell for onshore gas production in the Western Desert is a very different business to Tullow Oil’s deep offshore in Ghana. Capricorn’s portfolio is very rich in gas and Tullow’s in oil.
“The merger gives Tallow more time to deal with its debt because Capricorn is a cash-flow-rich business. However, the current high oil price may not help as much as one would think, thanks to the hedges introduced during the 2021 refinancing.”
Tullow Oil shares closed 2.8 percent lower at 42.6 pence on Wednesday, meaning it has fallen more than 29 percent in value over the past three months.
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