Tullow takes 1.5 billion writedown as oil reserves shrink

London — Tullow Oil said a reduction of its reserves due to operational issues at a flagship field in Ghana and a lower price outlook meant it will take a $1.5 billion hit.

Tullow said Wednesday it will take impairments and an exploration write-off of around $1.5 billion, primarily due to a $10/b reduction in the group's long-term accounting oil price assumption and lower reserves at its TEN development in Ghana.

Tullow has suffered a tumultuous few months due to a string of bad news. On December 9, its shares fell more than 70% on the day after CEO Paul McDade and Chief Exploration Officer Angus McCoss both resigned due to a series of disappointing exploration and production results at its key assets.

The company's executive chair, Dorothy Thompson, said the board has been working hard on a major review since.

"The fundamentals of our business remain intact: recent reserves audits demonstrate that we have a solid underlying reserves and resources base in West and East Africa, our producing assets continue to generate good cash flow and we retain a high-quality exploration portfolio," Thompson said.

Reserves, production setbacks

Tullow said its proven and probable reserves at the end of 2019 stood at 245 million barrels of oil equivalent, down from 280 million boe a year earlier.

However, Tullow said its contingent reserves had increased to 1.1 billion boe, largely driven by additions in Ghana, from 874 million boe at end-2018.

Tullow's oil production in 2019 averaged 86,700 b/d, in line with expectations, and output will average 70,000-80,000 b/d due to technical issues at its Ghana oil fields.

That will be significantly lower than its previous production expectations, which until recently had been forecast to average more than 100,000 b/d in 2020 and beyond.

The Jubilee field will undergo maintenance at the end of January for water injection operations to increase its gas processing capacity.

At the TEN development in Ghana, the drilling of a production well on the Ntomme field has commenced and the well is expected to be tied-in by the end of the first quarter, Tullow said.

East Africa delays

Tullow's key assets in Kenya and Uganda continue to face setbacks.

In Kenya, the early oil pilot scheme remains suspended due to severe damage to roads caused by adverse weather in the fourth quarter of last year.

"Trucking remains on hold until all roads are repaired to a safe standard," it said. Kenya exported its maiden crude cargo in late-August, marking the East African country's foray into oil sales.

Final investment decisions for the Turkana development have been repeatedly delayed due to issues obtaining approval for use of the land and water rights.

In Uganda, Tullow said it remained committed to reducing its equity stake in the project ahead of FID.

The sale of its assets to Total and CNOOC for $900 million have been halted due to a capital gains tax dispute, pushing the final investment decision further back.

Tullow also said it expected to generate underlying free cash flow of at least $150 million from 75,000 b/d at $60/b. That compares to a cash flow estimate of $350 million in 2019 with net debt reduced to around $2.8 billion.