Tullow Oil AGM report: Another Perspective

There was an AGM writeup regarding Tullow Oil Plc (LON:TLW) on iii this morning.  A lot of the details seem the same, so I guess we were both at the same meeting. However the reporting seemed bizarre, to me at least, so I thought I'd reply. Let's have a closer look at what Fiona Bond wrote:

Oil explorer Tullow Oil (TLW) had a lot of explaining to do to disgruntled shareholders at its annual general meeting today.

Every shareholder I spoke to afterwards was far from disgruntled - enthusiastic or happy would be more appropriate words. It seems odd that Fiona Bond didn't seem to speak to any of these shareholders.

At London's Haberdashers Hall, chief executive Adrian Heavey went on the charm offensive as he tried to convince investors that the recent downturn in share price was merely a "blip" and that great things lie ahead.

He gave a presentation about the company as is usual at AGMs.  With such a good story to tell (see below for details), Tullow has absolutely no need to mount a 'charm offensive'.

The FTSE 100 (UKX) listed oil explorer's profits plummeted by 92% in 2009 as a slump in oil and gas prices wreaked havoc - and by Heavy's own admission, the financial results "don't look good."

Oh dear. Heavey joked about the number of minus signs - and anyone with any knowledge of oil companies (which doesn't include Fiona Bond apparently) would have understood the need for massive capital investments in Ghana and Uganda which are totally transforming the company.

But the more successful you are, Heavey says, the more money you have to spend - a  fact that did little to win over investors at today's meeting. One enraged shareholder, Richard Bates, blasted the company for launching two share placements in the past two years for fear of dilution. The most recent in January 2010, raised £925 million but saw the company's share capital enlarged by 9.9%.

Various directors pointed out that the company needed to raise capital, that the placings were done very close to market price, that PIs could have bought in the market at roughly the same price as people taking part in the placing etc.  They were reasonable and patient when faced with an irrational shareholder with a large bee in his bonnet.  But 'disgruntled shareholders' obviously make good copy, because Fiona Bond for some reason didn't feel the need to report the sighs and groans from the majority of the audience. The Board didn't actually have to try hard to 'win over' investors, 98% of people at the AGM were already on-side.

Despite protestations from members of the audience, Tullow said it was more fitting to embark on share placements rather than rights issues due to the much shorter time frame required. 

The 'protestations' came from exactly 2 members of the audience, both of whom had made the same points at considerable length the previous year.  The obvious question to me is why, if you don't trust the board to make good decisions about rights issues vs placings, do you continue to be a shareholder?

The company also came under fire for agreeing a farm down deal with CNOOC and Total before receiving the green light from the Ugandan government, on the grounds that "political differences" could harm the deal. ... It was also forced to shoot down claims that it was holding back the share price, arguing that it had no control over volatile market conditions.

You had to feel sorry for the Directors, having to make polite replies to this sort of thing. Anyway, onto more interesting stuff... The AGM presentation isn't on Tullow's web-site, but it closely followed this one. The following is a mixture of snippets from Aidan's presentation and my discussions with directors afterwards.

General

All current production areas are performing better than expected this year. These will be dwarfed by Ghana and Ugandan production in years to come, but it's good to see cash coming in at the moment! Tullow currently have a list of over 200 prospects and leads - of these they only aim to drill the top 10%.  It is this huge wealth of choice that has lead to their startlingly good drilling record.

Ghana/WATM

Ghana is on track for first oil in Q4 this year. This perhaps doesn't sound like 'new news', but the speed of Jubilee development has been astonishing, since the first discovery was in June 2007. They are unconcerned about the Kosmos deal-or-no-deal situation. Kosmos are not short of money and it is not holding up capex on development or exploration. The South American drilling planned for Q4 is the ultimate bold step out from Ghana :) 

Uganda

They are now pretty close to having government approval from the Heritage pre-emption and subsequent farm-outs to CNOOC and Total - they have been told that they should have all the approvals in "the next few weeks". A question was asked about the terms of the farm-outs, Aidan said this couldn't be answered until final approvals were given, however from the answer to a question on CGT (see below) it is clear that Tullow are not making a profit on their on-sale of the Heritage acreage.

There will be no CGT liability on Block 2 - this is explicitly ruled out. On Blocks 1 & 3, they are selling on the Heritage 50% at the same price they are buying it - so there is no gain to be taxed. Heritage may or may not have to pay CGT on its sale. So that leaves the sale of 16% from their own interests in blocks 1 & 3 as the only Tullow part that could be subject to tax. It is not clear at the moment whether CGT will apply. And as Tullow are not exiting Uganda (far from it!), it is possible there may be some offset against further investment.

Tullow have found 800 million barrels of recoverable oil so far in Uganda - Aidan suggested that there could be another 1.5 billion to be discovered. Pipeline planning will depend critically on the planned daily production rates. The base plan is that the pipeline will have to be heated because of the waxy nature of the oil, but further work is on going here. The high geothermal gradient means the oil is emerging from the ground hot, and with the high ambient temperatures it may be possible to just lag the pipeline rather than heat it. 

Tanzania

I have covered this in depth here as it is more material to Aminex shareholders.

db

Disclosure of Interest: The author hold shares in Tullow.