London — Africa-focused oil and gas producer Tullow Oil swung back into profit in 2017 after three years in the red, and outlined plans to begin production in Kenya by as early as 2021.
The London-listed company is targeting East Africa — Uganda and particularly Kenya — as its next major frontier after developing two large fields in Ghana earlier this decade.
The recovery in oil prices to over $60 a barrel by the end of 2017, as well as higher production from its flagship West African fields, allowed Tullow to boost revenue and sharply reduce debt. That, in turn, helped it to turn its focus to new projects and exploration for new fields around the world.
Tullow shares were up 0.8% on Wednesday morning, compared with a 0.9% rise in the sector index.
Tullow, which entered Kenya in 2010 and has more than 48,000km² of land in the country, said after appraisal drilling and well tests that it estimated the land-locked South Lokichar basin contained 560-million barrels in so-called 2C proven and probable oil reserves.
Tullow had previously estimated reserves of 750-million barrels there, according to a different metric including possible future upside potential. In terms of Kenya’s best-case future potential, Tullow increased the upper range on Wednesday from about 1-billion barrels to 1.23-billion.
Tullow said it had proposed to the Kenyan government to start developing the basin’s Amosing and Ngamia fields and construct a processing facility with a capacity of 60,000 to 80,000 barrels a day, which would be exported via pipeline to the coastal town of Lamu.
The company expects to reach a final investment decision on the project in 2019 and first oil production by 2021-22.
Discussions with the Kenyan government on the pipeline construction were under way, CEO Paul McDade said, adding 2022 was a more realistic timeframe for first oil.
"We are pretty much ready to go on two fields and ramp up production," McDade said.
Tullow, which holds 50% of the Kenyan development, would seek to reduce its stake once a final investment decision was reached, he said. Toronto-listed Africa Oil has a 25% stake in the Lokichar development.
The Kenyan project was expected to cost $1.8bn, while the pipeline construction would require $1.1bn, Tullow said.
"Tullow is in a much better position now than a year ago," Davy Research analysts said in a note. "We also think that the return of the growth function in the group is sensible and controlled," they added.
Tullow’s net debt fell 27% to $3.5bn as higher revenue allowed the company to end 2017 with $543m of free cash flow. McDade said oil prices in the high $60s would create an opportunity for Tullow to grow its free cash flow.
The company forecast 2018 capital expenditure of $460m, more than double its 2017 spending of $225m.
It reported an operating profit of $22m for the year ended December 31 versus a loss of $755m in 2016, helped by higher production and cost cuts. Analysts were expecting a loss of $103.6m, according to a company-compiled consensus.
Working interest production was 32% higher at an average of 94,700 barrels of oil equivalent a day in 2017. It forecast 2018 production of 86,000 to 95,000 barrels.
Reuters
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