Tullow Oil released its FY 2013 trading statement as well as an operational update for its Kenya operations. The statement was a mixed bag with the company downgrading guidance for daily production rate at Jubilee but announcing two further discoveries in Kenya’s Lokichar basin and significantly increasing initial resource estimates in the basin to more than 600mmboe.
<b> Production </b>– FY 2013 average daily production at 84.2k bopd was lower than our forecast of 85k bopd. This was mainly due to a lower exit production rate for Jubilee. The FY 2013 exit production rate of 100k bopd was lower than previous guidance of in excess of 120k bopd as the gas injection well did not produce the desired result. As a result, Jubilee operations will have to await the completion of the onshore gas processing plant in H2 2014 to produce at or near capacity. Tullow also downgraded its Jubilee forward production guidance from more than 120k bopd previously to 100k bopd. As a result, it is guiding FY 2014 production to a range of 79k to 85k boepd, less than our forecast of 89k boepd.
<b> Exploration </b> – Tullow announced exploration results from a further two wells in Kenya’s Lokichar basin (Amosing 1 and Ewoi 1) making it the sixth and seventh successive discoveries in the basin. The Amosing 1 well located to the south of the Ngamia discovery intersected net oil pay of between 160 and 200 metres, significantly exceeding Tullow’s pre-drill expectations. The Amosing 1 well is located along the “string of pearls” basin fault. The The Ewoi-1 well, a basin flank play, has encountered net pay of 20 to 80 metres and is the second basin flank well after the earlier announced Etuko-1 discovery. Tullow has also significantly upgraded its resource estimate for the basin to more than 600mmboe. It also announced that it has agreed with the government of Kenya to commence development studies with project sanction expected in 2015/2016. There was no further exploration news.
<b> Development </b> – There was no new information on TEN or Uganda development or farm out (though the statement indicated positive statements from the Ugandan government on the construction of an export pipeline).
<b> Financial </b>– Revenue, gross profit and capex were in line. Net debt at $1.9bn was higher than our estimate of $1.8bn. Exploration write-offs at $730 is also significantly higher than our estimate of $500m and consensus of $340m.
We have reduced our FY 2014 group production from 89k boepd to 84boepd as a result of the downgrade to Jubilee production. As a result, our FY 2014 revenue moves from $2.7bn to $2.6bn (largely flat YoY). The delayed Jubilee production has no effect on reserves and little effect on valuation. However, the further Kenya discoveries and the resource estimate upgrade is a positive for Tullow and increases our NAV based valuation by 15p per share to 1410p per share. The market reaction is likely to concentrate on the downgrade to Jubilee production especially the effect it will have on the company’s cash flow.
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