Preliminary Results
Tullow Oil PLC
21 March 2007
Tullow Oil plc
2006 Results
Another record year; exciting outlook for 2007 and beyond
21 March 2007 - Tullow Oil plc ('Tullow'), the independent oil and gas,
exploration and production group, announces its results for the year ended 31
December 2006.
Tullow had an excellent year in 2006. Record operational and financial results
were achieved in a favourable oil and gas pricing environment, and each core
area continued to deliver strong performances. This outcome underpinned ongoing
reinvestment in exploration and development activities together with a material
increase in dividends and helped to create the financial platform for the
acquisition of Hardman Resources Limited ('Hardman'), which was effective in
December 2006 and completed in early January 2007.
Results Highlights
2006 2005 Change
£ millions £ millions
Sales Revenue 578.8 445.2 Up 30%
Operating Profit 262.6 198.6 Up 32%
Profit Before Tax 263.3 178.6 Up 47%
Operating Cash Flow before Working Capital 446.7 309.5 Up 44%
Stg p Stg p
Basic Earnings per Share 24.23 17.50 Up 38%
Final Dividend per Share 3.50 3.00 Up 17%
• 11% increase in average annual production to 64,720 boepd
• 89% organic reserves replacement; three year average organic reserve
replacement of 98%
• Total reserves and resources increased by 149 to 506 mmboe
• Current production is 76,000 boepd and is expected to reach 85,000
boepd by year-end
• Initial commercial reserves booked in Uganda; First production
scheduled for early 2009
• Preliminary assessment of gross recoverable reserves in the Albertine
Basin of 100 to 250 mmbbls
• Three gas discoveries in the UK including the potentially significant
K4 discovery in the CMS area
• Okume, West Espoir and Bangora developments successfully on stream
• Seven new African licences awarded
• Completion of £595 million Hardman acquisition in January 2007
Commenting today, Pat Plunkett, Chairman, said:
'The balance and diversity of Tullow's business allows us to adapt quickly and
with flexibility to opportunities as they arise and to tailor our investment
plans to the changing circumstances of the industry. Our production assets along
with our development and exploration activities, and the Hardman business,
leaves Tullow with a high-quality, opportunity-rich portfolio in each of its
core areas. Our business is healthy and growing and should remain so for the
foreseeable future.'
Aidan Heavey, Chief Executive, said:
'Tullow had another remarkable year in 2006. Our assets delivered strong
production growth and good organic reserves replacement. Seven out of 12 of our
exploration wells were discoveries and we proved a new and significant
hydrocarbon province in Uganda which is already having a material impact on
reserves. We completed our largest ever acquisition and continued to attract and
retain great people and acquire quality new acreage. We have an excellent
portfolio managed by a top-class technical, commercial and financial team. Our
strategy is clear, our business is growing and we are continuing to drive record
performance throughout the business.'
Full details of the presentation, webcast and conference calls in conjunction
with these results are on page 20 of this announcement and in the 2006 Results
Centre on the Group website at www.tullowoil.com.
2006 Results
For the year ended 31 December 2006
During 2006, we invested close to £1 billion in growing the business, including
£332 million on capital expenditure, 70% of which was invested in our production
and development assets and £595 million on the acquisition of Hardman. The 30%
increase in revenue and the Group's operating cash flow before working capital
adjustments of £446.7 million comfortably funded all our capital investment and
returns to shareholders.
Record operating and financial results overall
Tullow's 2006 revenue increased by 30% to £578.8 million (2005: £445.2 million)
as a result of higher production, and sales prices which were on average some
29% ahead of 2005. This growth was driven by strong increases in European gas
production against a background of stable African oil output and significantly
higher price realisations. European revenues were 60% ahead of 2005, whilst
African revenues increased by 9%.
Underlying cash operating costs were down 2% compared with 2005, despite
significant cost pressure within our industry. This strong cost performance
reflected efficiencies arising from increased production across all assets,
ongoing cost control initiatives in UK assets and the addition of lower-cost
Asian production during the year. Operating profit before exploration costs
written off grew by 32% to £295.1 million (2005: £224.4 million), reflecting
strong growth in production and realised oil and gas prices.
Profit before tax increased by 47% to £263.3 million (2005: £178.6 million) and
basic earnings per share amounted to 24.23 pence, an increase of 38% (2005:
17.50 pence).
Excellent environmental performance
In 2006, Tullow had no significant environment, health, safety or security
issues. The Lost Time Incident Frequency Ratio was 0.81, well within our target
of 1.0, despite a 65% increase to 6.1 million hours worked, both onshore and
offshore, during the year. Furthermore, our responsibilities also include
working with communities in a sustainable manner and in 2006 Tullow spent US$1.5
million in funding social and community projects within our core areas.
Challenging external environment
Whilst the commodity pricing environment has been strong, leading to increased
ability to commercialise our oil and gas assets, it has been countered by a
tight and inflationary contractor environment. In 2006, despite significant
inflationary pressures on our field operating costs we managed to maintain our
cost of production below 2005 levels. This has been achieved by strong cost
management, but more importantly through optimal use of our infrastructure by
increasing throughput and synergies. This will continue in 2007 where
operational synergies, especially in the Espoir and Ceiba/Okume projects, are
expected to have a greater impact.
Competition also increased for new assets and licences during the year and
Tullow's entrepreneurial approach combined with our diverse portfolio of assets
assists us in managing this challenge. In general we are acquiring the equipment
and resources necessary for our major developments and operational programmes,
although we have seen lead times for future developments significantly increase.
To address this industry-wide problem we have had to enhance our skills in
medium to long-term operational planning and improve our capacity to share
resources across our global asset base.
Tullow prioritises financial and operating flexibility and undertakes a
structured and rigorous project and prospect evaluation process to ensure
effective allocation of funds at any point in the cycle. For 2007, this means we
will be concentrating funding and resources mainly in Africa and Asia, until the
anticipated improvement in pricing and the contractor environment occurs in the
UK gas market.
Focused growth strategy
Tullow focuses on the long-term resourcing, growth and health of the business
and invests accordingly. During 2006, £595 million was invested in the
acquisition of Hardman. Hardman represents an outstanding strategic opportunity
for Tullow, enabling us to establish a material and influential footprint in
Mauritania, assume control of the prime block in the Albertine Rift Basin in
Uganda and acquire highly prospective exploration interests in South America.
The transaction is a clear demonstration of the substantial financial and
operational capability of Tullow's business and team. The Hardman business has
now been fully integrated and encouraging operational progress has already been
made in Mauritania and Uganda.
Strong positive outlook
Tullow's strong cash flow and rigorous approach to the management of financial
risk allows us to continue to implement our growth plans with confidence whilst
maintaining and servicing debt of approximately £450 million. During 2007 our
focus will be on continuing to increase production to a targeted level of 85,000
boepd by year-end, and drilling over 40 exploration wells, including major
campaigns in Uganda, Namibia and India. The oil and gas industry is as dynamic
as ever and the combination of excellent knowledge of our core areas, financial
and operating flexibility and continued investment in our people means the
outlook for Tullow is both positive and exciting.
Operations Review
Each of our core areas demonstrated substantial progress in 2006.
Record UK production and gas price realisations
Tullow's interests in Europe are centred on gas and infrastructure in the
Southern North Sea. Over the last six years Tullow has established a dominant
position in the Thames-Hewett and Caister Murdoch System (CMS) infrastructure
hubs through a combination of acquisitions, an active development and
exploration programme and participation in licensing rounds.
Our most significant activity during the year was on the Schooner and Ketch
fields, where effective operational management increased average uptime to 98%
and achieved maximum production of over 100 mmscfd. However, the overall outcome
of the work programme, which included the non-commercial Schooner NW development
well, was below expectations, leading to a 45 bcf downgrade in commercial
reserves attributed to the Schooner and Ketch assets at 31 December 2006.
Elsewhere, the CMS and Thames-Hewett area fields continued to perform strongly
driving average UK production to 172 mmscfd, a 32% increase over 2005 levels and
allowing Tullow to take maximum advantage of record gas prices, particularly in
the first half of the year.
In parallel to growing production, Tullow also participated in four successful
exploration wells, including the potentially significant K4 discovery in the CMS
Area. These discoveries, along with the Thurne, Kelvin and Wissey projects
already in progress, form the basis of future development and there are a
further six exploration wells planned in 2007. In February 2007 Tullow was
awarded six exploration blocks spread across the Thames-Hewett and CMS Areas in
the 24th offshore Licensing Round. The Group plans to acquire seismic data as
part of a full evaluation of the potential of this acreage and anticipates that
exploration wells on this acreage will form part of the 2008 drilling programme.
Following unprecedented gas pricing in early 2006, the recent much-needed
increase in pipeline capacity and the impact of a comparatively mild winter have
combined to drive gas prices for the first quarter of this year down to 2003
levels. Looking forward, however, the overall underlying supply and demand
fundamentals, allied to the gradual convergence of UK and European gas markets,
mean that the long-term outlook for the UK gas business remains positive.
Key objectives delivered in Africa
2006 was an outstanding year for Tullow's African assets. Production commenced
from two major development projects, a significant new hydrocarbon province was
discovered in Uganda and the portfolio was enhanced through the award of
licences in Angola, Madagascar, Ghana, Congo (DRC) and Gabon. Since year end,
Tullow has also acquired interests in two licences in Cote d'Ivoire. In January
2007, Tullow completed the acquisition of Hardman which added materially to the
Group's assets in Mauritania, enabled Tullow to take operational control of
Block 2 in Uganda and further high impact exploration acreage in Africa. During
2006, we had a number of key objectives in Africa:
• Ongoing infill drilling on producing assets;
• Major developments to deliver first oil in Equatorial Guinea and Cote
d'Ivoire; and
• Significant exploration programmes in Gabon and Uganda.
Our principal production objectives were achieved. The response to infill
drilling was positive across all fields, and our Gabon output was in line with
expectations. On the development front, both West Espoir and Okume came on
stream as anticipated. In exploration, while the outcome of the Gabon programme
was disappointing, results to date from Uganda have exceeded our most optimistic
expectations and point to the potential for a world-class new hydrocarbon
province to be delivered by the 2007 and 2008 exploration and appraisal
programmes. Development work on existing discoveries is under way with a view
to producing first oil in early 2009. Based on the wells drilled to date,
Tullow's preliminary assessment of the gross recoverable reserves in the
Albertine Basin is in the range of 100 to 250 million barrels.
Encouraging progress was also achieved on the Kudu project in 2006. The Group
has focussed on the gas sales negotiations for the gas to power project, the
preparation for two appraisal wells in 2007 to test the significant upside
potential of this asset and the start of negotiations to bring a partner into
the project to reduce the Group's working interest to 70%. Tullow is currently
in exclusive negotiations with a potential partner in respect of this interest
and expects to conclude arrangements in advance of the commencement of the 2007
appraisal programme in April 2007.
In 2007, the Group expects to continue with very significant levels of
exploration, development and production activity in Africa. Exploration activity
will involve drilling at least six exploration wells with a focus on the two key
campaigns in Uganda and Namibia and the high impact Mahogany well in Ghana, in
addition to ongoing development projects in Gabon, Congo (Brazzaville), Cote
d'Ivoire and Equatorial Guinea.
Significant progress made in South Asia
2006 was a very successful year for Tullow in South Asia, with significant
progress made across the exploration and development portfolio. The regeneration
of the Group's Asian assets continues apace and the foundations are now in place
for an exciting 2007 programme.
In Bangladesh, Tullow produced first gas from its Bangora project in May and,
following a successful appraisal drilling programme, made a declaration of
commerciality in December and recorded a material upgrade to reserves at year
end. In Pakistan, two development wells were drilled on the Chachar field and,
with the installation of the gas plant complete, first gas will be produced in
May. On the exploration front, following a seismic programme during 2006, a
two-well programme on the potentially significant Kohat Block will spud late
this year.
Perhaps most encouraging, however, has been India, where seismic undertaken
during 2005 and 2006 has led to the delineation of a number of distinct targets
in the CB-ON/1 Block in the Cambay Basin, which will be the subject of a
multi-well drilling campaign in 2007.
The growth challenge
The recent announcement of first production from the Okume field was a major
milestone for Tullow. For the Group, bringing Okume on-stream means that over
95% of our commercial reserves at the end of 2006 are now successfully
producing. While this is a positive achievement, it also creates a challenge to
access and create the next generation of development projects. Based on our
annual production rate, Tullow needs to find over 30 million barrels of oil per
year to maintain reserves and still keep growing. We believe our portfolio is
more than capable of achieving this objective and our exploration, development
and new ventures activities are geared towards exceeding it.
Finance Review
Tullow has grown into a versatile and balanced oil and gas Exploration and
Production Group and our strategic, financial and operational objective is to
run a balanced international business with a long-term perspective on
performance and growth.
Within the Group we have defined a number of business units based on geography
and activity type. Each business unit is responsible for the execution of a
development strategy and achievement of short-term performance targets. These
targets are based on and support the Group's strategic objectives and Key
Performance Indicators, which are used to assess the ongoing positioning of the
business. During 2006, Tullow achieved extremely strong performance across all
its key indicators and this enables us to continue to invest with confidence.
Key performance indicators 2006 2005 Change
Lost Time Incident Frequency Rate per million hours worked 0.81 0.82 Down 0.01
Production (boepd) 64,720 58,450 Up 11%
Reserve replacement (%) 89% 118% Down 29%
Sales volume (boepd) 57,300 53,350 Up 7%
Realised oil price per bbl ($) 52.24 43.05 Up 21%
Realised gas price (pence per therm) 46.18 33.85 Up 36%
Cash operating costs per boe (£)1 4.74 4.84 Down 2%
Operating cash flow before working capital per boe (£) 18.76 13.50 Up 39%
Net debt 122.1 140.2 Down 13%
Interest cover 24.0 15.5 Up 8.5 times
Gearing (%)2 15% 36% Down 21%
1. Cash operating costs are cost of sales excluding depletion and amortisation and under/over lift movements
2. Gearing is net debt divided by net assets
Higher production and better pricing
Working interest production averaged 64,720 boepd, 11% ahead of 2005. Sales
volumes averaged 57,300 boepd, representing an increase of 7%. Production
increased most notably in Europe, which rose 21% or 5,000 boepd, and Asia which
rose 330% or 1,400 boepd. Oil production from Africa was in line with 2005,
driven by strong performance in Equatorial Guinea and Cote d'Ivoire offset by a
modest decline in Gabon.
Prices realised for both oil and gas during 2006 showed material increases over
2005. In the UK, extreme shortness in gas supply during the first half of the
year led to record prices and was the principal factor driving Tullow's realised
prices to 46.2p/therm, a 36% increase over 2005. The Group also recorded tariff
income of £16.6 million (2005: £14.7 million) from its UK infrastructure
interests. Increases in world oil prices during the first half were also a key
influence on realisations from Tullow's African business which rose by 21% to
$52.2/bbl (2005: $43.1/bbl). Tullow's oil production sold at an average discount
of 5% to Brent during the year, reflecting improved competitiveness in the West
African oil trading environment and revised blending and marketing arrangements
in respect of the M'Boundi field.
As a result of higher production and prices, 2006 revenue amounted to £578.8
million, an increase of 30% over 2005. The mix of production also changed
slightly, with UK production increasing from 41% of 2005 production to 45% of
the 2006 total; with increased production from Asia, this meant that the Group's
production was relatively evenly balanced between oil and gas.
Oil Gas Total % of Total
Revenue analysed by Core Area
£ millions £ millions £ millions
Europe - 307.0 307.0 53%
Africa 268.3 - 268.3 46%
Asia - 3.5 3.5 1%
Total 268.3 310.5 578.8
% contribution to Group 46% 54%
Effective operational cost control
Underlying cash operating costs, which exclude depletion and amortisation and
movements on under/over lift, amounted to £112.0 million (£4.74/boe). These
costs were 2% below 2005 levels, despite higher underlying oil and gas pricing,
which had a direct impact on reported operating costs due to royalties in
respect of Gabonese production. Reported operating costs before depletion and
amortisation for the year of £114.7 million (2005: £123.5 million) were also
impacted by the inclusion at market value of £2.7 million associated with
overlifted volumes at 31 December 2006, principally relating to the Group's
interests in Gabon and Equatorial Guinea.
Enlarged business, more activity and investment
Depreciation, depletion and amortisation for the year amounted to £144.9 million
(£6.13/boe). This represents a 21% increase over 2005, principally as a result
of a higher depreciation charge on UK assets. The increased charge was driven by
material investment in the Schooner and Ketch assets combined with a reduction
of 45 bcf in commercial reserves attributed to the fields. The reduction in
reserves followed an evaluation of the results of the 2006 redevelopment
programme and the drilling of the unsuccessful Schooner NW well.
Tullow invested significantly in people during 2006. Average staff numbers
increased 20% to 209 people, adding strong resources to our technical,
commercial and senior managerial teams. As a result, underlying general and
administrative costs have increased by 48% to £18.3 million. The total general
and administrative costs charge of £22.5 million also includes a charge of £4.2
million in respect of the Group's share-based incentive schemes (2005: £1.4
million).
Exploration costs written-off were £32.5 million (2005: £25.8 million), in
accordance with the Group's 'successful efforts' accounting policy, which
requires that all costs associated with unsuccessful exploration are written-off
to the Income Statement. The principal write-downs during 2006 related to
Angola, Gabon, UK exploration and new ventures/pre-licence costs. The Group
drilled 12 exploration wells in 2006 and made seven discoveries, and is planning
to drill over 40 wells during 2007.
Operating profit increased 32%
Operating profit before exploration activities amounted to £295.1 million (2005:
£224.4 million), an increase of 32%, reflecting the strong growth in Group
production and realised oil and gas prices, somewhat offset by increased
depreciation charges on a per barrel basis.
More effective hedging
At 31 December 2006 the Group's derivative instruments had a negative mark to
market value of £21.0 million (2005: £147.8 million). Of this, £72.7 million
relates to a negative mark to market on oil contracts, of which £74.0 million
relates to hedges acquired as part of the acquisition of Energy Africa in 2004,
which is largely offset by a positive mark to market on gas contracts of £45.6
million. The Group's position also includes a positive mark to market of £5.9
million in respect of foreign exchange derivative instruments entered into in
respect of the Hardman transaction and the balance relates to interest rate
derivatives.
While the oil and gas arrangements all qualify for hedge accounting, the
variations in crude oil discounts and gas production patterns for Tullow do
cause a degree of hedge ineffectiveness. During 2006, however, the steady
reduction in average discount attributable to Tullow's oil production, combined
with lower year- end commodity prices, has resulted in an improvement in overall
cumulative hedge ineffectiveness at 31 December 2006. Consequently, a credit of
£9.8 million has been recognised in the Income Statement for the year in respect
of oil and gas contracts. In addition a credit of £5.9 million is reflected in
the Income Statement in respect of foreign exchange derivative instruments as
they do not qualify for hedge accounting under IAS 39.
Tullow continues to undertake hedging activities as part of the ongoing
management of its business risk and to protect the availability of cash flow for
reinvestment across its asset portfolio. Hedges in respect of 2007 provide
downside protection on revenue of over £280 million, representing over 75% of
2007 budgeted capital investment. The Group's hedge position as at 15 March 2007
can be summarised as follows:
Hedge Position H1 2007 H2 2007 2008
Oil
Volume - bopd 16,491 17,400 10,793
Current Price Hedge - US$/bbl 52.67 55.47 51.80
Gas
Volume - mmscfd 93.6 69.8 54.4
Current Price Hedge - p/therm 44.35 44.98 46.11
Financing costs and interest cover
Tullow's growth during 2006, and in particular the Hardman acquisition, was
greatly facilitated by the support of the Group's banking syndicate and the
balance and diversity of our portfolio. Prudent use of debt is a core element of
the Group's overall strategy and Tullow has a flexible financing facility which
allows non-OECD activities to be funded at an overall financing cost of circa
8%.
The net interest charge for the year was £15.0 million (2005: £19.8 million) and
reflects reduced levels of net debt during 2006. At 31 December 2006, Tullow had
net debt of £122.1 million, including £46.5 million of net cash attributable to
Hardman. Since year-end this has increased to £450 million as a result of the
Hardman transaction, involving payment of AS$819.5 million (£329.9 million) of
cash consideration on 10 January 2007. Interest cover is very healthy at over
24.0 times (2005: 15.5 times).
No increase in effective tax rate
The tax charge of £105.9 million (2005: £65.4 million) relates to the Group's
North Sea and Gabonese activities and represents 40% of the Group's profit
before tax (2005: 37%). After adjusting for non deductible exploration costs,
hedge ineffectiveness charges and non-recurring items the Group's underlying
effective tax rate remained unchanged at 35%, despite the introduction of an
additional 10% supplementary Corporation Tax by the UK Government on 1 January
2006.
Strong profit for the period and increased dividend
Profit after tax amounted to £157.4 million, representing a 39% increase over
2005. This profitability has allowed the Group to once again substantially
increase its dividend. A final dividend of 3.5 pence per share has been proposed
by the Board. This brings the total payout in respect of 2006 to 5.5 pence per
share, representing an increase of 38% over 2005. While the Board plans to
maintain a progressive dividend policy future increases are unlikely to match
those of recent years, due to the significant level of the current reinvestment
opportunities the Group has.
Shareholder distribution and total shareholder returns
Since Tullow initiated dividend payments in 2003, cash returned to shareholders
has exceeded £80 million.
This is an important component of total shareholder return, which in 2006
exceeded 49%, placing Tullow in the top quartile of its peer group. Over the
five year period from 2001 to 2006, Tullow's total shareholder return has been
in excess of 400%, while total shares in issue have doubled from 358 million
shares to the current level of approximately 717 million shares spread across
over 10,000 shareholders.
Strong balance sheet capacity and financial flexibility
The excellent pricing environment, allied to increasing production and effective
control of underlying operating costs, led to record operating cash flow before
working capital movements of £446.7 million, 44% ahead of 2005. This cash flow,
allied to the positive asset performance and strong reserve replacement of
recent years meant that the Group had access to substantial financial capacity
throughout 2006; facilitating investment of £332 million in production,
development and exploration, a 38% increase in the dividend and the acquisition
of Hardman.
During 2006 approximately 70% of Group capital expenditure was associated with
ongoing development and production enhancement projects in the UK, Gabon, Congo
(Brazzaville), Equatorial Guinea and Cote d'Ivoire. The remainder of expenditure
was reinvested in exploration and appraisal activities, where the Group drilled
12 wells, recording seven discoveries. The success of these multi-year
programmes has enabled Tullow to record average organic reserve replacement of
98% for the three year period 2004 to 2006. During 2007, we plan to invest a
further £350 million in our assets, with the objective of achieving average
production of approximately 80,000 boepd and delivering three major exploration
campaigns in Uganda, Namibia and India.
Hardman Acquisition
On 25 September 2006, Tullow announced a proposal to acquire Hardman by way of a
Scheme of Arrangement. Following the approval of the acquisition by Hardman
shareholders and the Australian Courts, the Scheme became effective on 20
December 2006 and formal completion occurred on 10 January 2007. The acquisition
of Hardman was by a cash offer, combined with a partial equity alternative
amounting to up to a maximum 65 million Tullow shares, representing
approximately 40% of the value of the transaction. The partial equity option was
fully exercised by Hardman shareholders and the balance of the acquisition
consideration, amounting to £359.1 million, was paid in cash funded by a mixture
of existing debt and a new facility provided by Bank of Scotland Corporate.
Following the transaction, Tullow has net debt totalling approximately £450
million. During 2007, the Group will seek to repay a portion of this debt and
adjust the terms of the remainder to match better the Group's reserve base and
long-term growth objectives.
Hardman's business and assets have been consolidated in Tullow's financial
statements with effect from 31 December 2006. A preliminary fair value exercise
has been undertaken to determine the values attributable to the acquired assets
and liabilities within the Group's Balance Sheet as at 31 December 2006. The
total fair value attributed to the transaction amounts to £750.0 million,
comprising £594.7 million of consideration and associated costs and an
additional £155.3 million of deferred tax uplift provided in accordance with the
provisions of IAS 12. Based upon this preliminary exercise, Tullow has allocated
a total of £86.9 million to Tangible Assets, relating to the Chinguetti field in
Mauritania, and a total of £623.6 million to intangible assets reflecting
Hardman's interests in a variety of discoveries, potential development projects
and exploration across a total of seven countries including Uganda and
Mauritania. The balance of the preliminary fair value allocation, amounting to
£39.5 million, is accounted for by the other net assets, including cash
balances, acquired. Due to the timing of the transaction and the wide range of
assets and interests acquired, the fair value allocated at 31 December is
preliminary in nature and will be reviewed during 2007 in accordance with the
provisions of IFRS 3 relating to Business Combinations.
The reserves attributable to the Hardman assets have also been reflected in
Tullow's commercial reserves and contingent resources analysis at 31 December
2006. In particular, Tullow has allocated a total of 9.6 mmboe to its 19%
interest in Chinguetti and 17.8 mmboe to Hardman's 50% interest in the Mputa and
Nzizi discoveries in Block 2 in Uganda (where Tullow now holds a total interest
of 100%) within the commercial reserves category.
Financial Strategy and Outlook
Tullow operates a business which is commercially aggressive but financially
conservative. We recognise the financial risks inherent in our operations and
mitigate them through portfolio diversity, prudent hedging and close attention
to costs.
Ends
Group Income Statement
Year Ended 31 December 2006
Note 2006 2005
£'000 £'000
Sales Revenue 578,847 445,232
Cost of sales (261,268) (243,149)
Gross Profit 317,579 202,083
Administrative expenses (22,490) (13,793)
Disposal of subsidiaries - 30,537
Profit on sale of oil and gas assets - 5,524
Exploration costs written off (32,494) (25,783)
Operating Profit 262,595 198,568
Gain/(loss) on hedging instruments 15,701 (159)
Finance revenue 3,030 4,367
Finance costs (17,994) (24,197)
Profit from Continuing Activities before Tax 263,332 178,579
Income tax expense 7 (105,894) (65,443)
Profit for the Year from Continuing Activities 157,438 113,136
Earnings per Ordinary Share 2 Stg p Stg p
- Basic 24.23 17.50
- Diluted 23.67 17.15
Group Statement of Recognised Income and Expense
Year Ended 31 December 2006
2006 2005
£'000 £'000
Profit for the Financial Year 157,438 113,136
Currency translation adjustments (55,057) 32,447
Hedge movement 68,236 (120,449)
Total Recognised Income and Expense for the Year 170,617 25,134
Group Balance Sheet
As at 31 December 2006
2006 2005
£'000 £'000
ASSETS
Non-Current Assets
Intangible exploration and evaluation assets 820,437 160,543
Property, plant and equipment 934,368 736,563
Investments 496 496
1,755,301 897,602
Current Assets
Inventories 13,735 5,141
Trade receivables 74,609 66,441
Other current assets 28,963 26,851
Cash and cash equivalents 99,478 65,386
Derivative financial instruments 16,065 -
232,850 163,819
Total Assets 1,988,151 1,061,421
LIABILITIES
Current Liabilities
Trade and other payables (161,797) (139,415)
Hardman acquisition payable (333,912) -
Other financial liabilities (7,516) -
Income tax payable (20,549) (25,038)
Derivative financial instruments - (70,639)
Total Current Liabilities (523,774) (235,092)
Non-Current Liabilities
Trade and other payables (17,137) (19,118)
Other financial liabilities (206,883) (198,372)
Deferred tax liabilities (311,925) (51,473)
Provisions (124,868) (91,139)
Derivative financial instruments (37,088) (77,208)
Total Non-Current Liabilities (697,901) (437,310)
Total Liabilities (1,221,675) (672,402)
Net Assets 766,476 389,019
EQUITY
Equity attributable to Equity Holders of the
Parent
Called up share capital 65,190 64,744
Share premium 126,075 123,019
Other reserves 69,791 60,589
Shares to be issued 235,621 -
Retained earnings 269,799 140,667
Total Equity 766,476 389,019
Group Cash Flow Statement
Year Ended 31 December 2006
Note 2006 2005
£'000 £'000
Cash Flows from Operating Activities
Cash generated from operations 9 404,064 273,840
Income taxes paid (61,868) (25,360)
Net cash from operating activities 342,196 248,480
Cash Flows from Investing Activities
Acquisition of subsidiaries 21,336 -
Disposal of subsidiaries - 57,227
Disposal of oil and gas assets - 31,769
Purchase of intangible exploration & evaluation (67,976) (69,766)
assets
Purchase of property, plant and equipment (243,087) (298,320)
Finance revenue 3,030 4,359
Net cash used in investing activities (286,697) (274,731)
Cash Flows from Financing Activities
Net proceeds from issue of share capital 3,502 1,570
Debt arrangement fees (1,176) (10,481)
Repayment of bank loans (27,914) (351,637)
Drawdown of bank loan 59,996 390,515
Finance costs (16,997) (21,483)
Dividends paid (32,492) (14,555)
Purchase of treasury shares (3,976) -
Net cash used in financing activities (19,057) (6,071)
Net Increase/(Decrease) in Cash and Cash Equivalents 36,442 (32,322)
Cash and Cash Equivalents at Beginning of Period 65,386 85,070
Translation Difference (2,350) 12,638
Cash and Cash Equivalents at end of Period 99,478 65,386
Notes to the Preliminary Accounts
Year Ended 31 December 2006
1. Basis of Accounting and Presentation of Financial Information
While the financial information included in this preliminary announcement has
been prepared in accordance with International Financial Reporting Standards
(IFRS), this announcement does not itself contain sufficient information to
comply with IFRS. The Company expects to publish full financial statements that
comply with IFRS in April 2007.
The financial information set out in the announcement does not constitute the
Company's statutory accounts for the years ended 31 December 2006 or 2005. The
financial information for the year ended 31 December 2005 is derived from the
statutory accounts for that year which have been delivered to the Registrar of
Companies. The auditors reported on those accounts; their report was unqualified
and did not contain a statement under s. 237(2) or (3) Companies Act 1985. The
statutory accounts for the year ended 31 December 2006 will be finalised on the
basis of the financial information presented by the Directors in this
preliminary announcement and will be delivered to the Registrar of Companies
following the Company's annual general meeting.
2. Earnings per Share
The calculation of basic earnings per share is based on the profit for the year
after taxation of £157,437,794 (2005 - £113,136,158) and 649,665,389 (2004 -
646,637,815) ordinary shares, being the basic weighted average number of shares
in issue for the year.
The calculation of diluted earnings per share is based on the profit for the
year after taxation as for basic earnings per share. The number of shares
outstanding, however, is adjusted to show the potential dilution if employee and
other share options are converted into ordinary shares. The weighted average
number of ordinary shares is increased by 15,593,396 (2005: 13,214,424) in
respect of the share option scheme, resulting in a diluted weighted average
number of shares of 665,258,785 (2005: 659,852,239).
3. Dividends Paid and Proposed
During the year the Company paid a final 2005 dividend of 3 pence per share and
an interim 2006 dividend of 2 pence per share, a total dividend of 5 pence per
share (2005: 2.25 pence per share). The Directors intend to recommend a final
2006 dividend of 3.5 pence per share, which, if approved at the AGM, will be
paid on 6 June to shareholders on the register at 4 May.
4. 2006 Annual Report and Accounts
The Annual Report and Accounts will be posted to all shareholders on 19 April
2007, save those who have elected to receive these electronically. Investors
willing to avail themselves of this facility should visit our website
(www.tullowoil.com) and follow the appropriate links.
5. The Annual General Meeting is due to be held at Haberdashers' Hall, 18
West Smithfield, London, EC1 on Wednesday 30 May 2007 at 12 noon.
6. Segmental Reporting
In the opinion of the Directors the operations of the Group comprise one class
of business, oil and gas exploration, development and production and the sale of
hydrocarbons and related activities. The Group also operates within four
geographical markets, Europe, Africa, Asia and South America.
The following tables present revenue, profit and certain asset and liability
information regarding the Group's business segments for the years ended 31
December 2006 and 2005.
South
Europe Africa Asia America Unallocated Total
£'000 £'000 £'000 £'000 £'000 £'000
2006
Sales revenue by origin 307,007 268,302 3,538 - - 578,847
Segment result 129,735 159,304 (3,954) - - 285,085
Unallocated corporate expenses (22,490)
Operating profit 262,595
Gain on hedging instruments 15,701
Finance revenue 3,030
Finance costs (17,994)
Profit before tax 263,332
Income tax expense (105,894)
Profit after tax 157,438
Total assets 541,684 1,281,760 62,174 79,815 22,718 1,988,151
Total liabilities (250,234) (356,008) (15,507) (20,315) (579,611) (1,221,675)
Other segment information
Capital expenditure:
Property, plant and equipment 161,675 217,693 10,567 - 3,136 393,071
Intangible fixed assets 37,197 575,808 15,897 79,815 - 708,717
Depletion, depreciation and (79,870) (64,068) (992) - (1,651) (146,581)
amortisation
Europe Africa Asia South America Unallocated Total
£'000 £'000 £'000 £'000 £'000 £'000
2005
Sales revenue by origin 179,501 264,939 792 - - 445,232
Segment result 54,066 125,428 (3,194) - - 176,300
Disposal of subsidiaries 30,537
Profit on sale of oil and gas 5,524
assets
Unallocated corporate expenses (13,793)
Operating profit 198,568
Loss on hedging instruments (159)
Finance revenue 4,367
Finance costs (24,197)
Profit before tax 178,579
Income tax expense (65,443)
Profit after tax 113,136
Total assets 429,928 585,523 40,630 - 5,340 1,061,421
Total liabilities (146,788) (235,629) (10,142) - (279,843) (672,402)
Other segment information
Capital expenditure:
Property, plant and equipment 262,743 103,968 1,417 - 3,701 371,829
Intangible fixed assets 38,862 35,308 3,910 - - 78,080
Depletion, depreciation and (56,716) (59,758) (2,238) - (985) (119,697)
amortisation
Unallocated expenditure and net liabilities include amounts of a corporate
nature and not specifically attributable to a geographic area, including tax
balances and the Group debt.
7. Taxation on Profit on Ordinary Activities
a) Analysis of charge in period
The tax charge comprises:
2006 2005
£'000 £'000
Current tax
UK corporation tax 14,344 2,843
Foreign taxation 17,434 26,173
Total corporate tax 31,778 29,016
UK petroleum revenue tax 21,605 9,319
Total current tax 53,383 38,335
Deferred tax
UK corporation tax 45,585 16,002
Foreign taxation 6,530 11,496
Total corporate tax 52,115 27,498
UK petroleum revenue tax 396 (390)
Total deferred tax 52,511 27,108
Total tax charge 105,894 65,443
b) Factors Affecting Tax Charge for Period
As the Group earns a significant portion of its profits in the UK. the tax rates
applied to profit on ordinary activities in preparing the reconciliation below
is the standard rate of UK corporation tax plus the rate of SCT.
The difference between the total current tax charge shown above and the amount
calculated by applying the standard rate of UK corporation tax (30%) plus the
rate of the supplementary charge in respect of UK upstream profits (SCT) (20%)
to the profit before tax is as follows.
2006 2005
£'000 £'000
Group profit on ordinary activities before tax 263,332 178,579
Tax on group profit on ordinary activities at a combined standard UK 131,666 71,432
corporation tax and SCT rate of 50% (2005 - 40%)
Effects of:
Expenses not deductible for tax purposes 7,264 1,176
Utilisation of tax losses not previously recognised - (589)
Net losses not recognised 19,635 41,087
PRT 22,001 8,929
UK corporation tax deductions for current PRT (11,001) (3,728)
Adjustments relating to prior years 290 354
Income taxed at a different rate (63,961) (53,218)
Group total tax charge for the year 105,894 65,443
The Group's profit before taxation will continue to be subject to jurisdictions
where the effective rate of taxation differs from that in the UK. Furthermore,
unsuccessful exploration expenditure is often incurred in jurisdictions where
the Group has no taxable profits, such that no related tax benefit arises.
Accordingly the Group's tax charge will continue to depend on the jurisdictions
in which pre-tax profits and exploration costs written off arise.
The Group has tax losses of £124 million (2005 - £130 million) that are
available indefinitely for offset against future taxable profits in the
companies in which the losses arose. Deferred tax assets have not been
recognised in respect of these losses as they may not be used to offset taxable
profits elsewhere in the Group.
8. Acquisition of Subsidiary
On 25 September 2006 the Group announced a proposal to acquire 100 per cent of
the issued share capital of Hardman Resources Limited by way of a Scheme of
Arrangement. Following the approval of the acquisition by Hardman shareholders
and the Australian Courts, the Scheme became effective on 20 December 2006 and
formal completion, which involved the payment of AS$819.5 million and the issue
of 65 million Tullow shares, occurred on 10 January 2007.
The acquisition of Hardman provides additions to the Group's production,
development and exploration activities in Africa and adds exploration acreage in
Europe and South America. The transaction has been accounted for by the purchase
method of accounting with an effective date of 20 December 2006, being the date
that Tullow gained control of Hardman. For reasons of materiality and
practicality, Tullow has consolidated Hardman's results from 31 December 2006.
The fair value allocation to the Hardman assets is preliminary in nature and
will be reviewed in accordance with the provisions of IFRS 3 - Business
Combinations. Due to the inherently uncertain nature of the oil and gas industry
and intangible exploration and evaluation assets in particular, the assumptions
underlying the preliminary assigned values are highly judgemental in nature. The
purchase consideration equals the aggregate of the fair value of the
identifiable assets and liabilities of Hardman, and therefore no goodwill has
been recorded on the acquisition. Deferred tax has been recognised in respect of
the fair value adjustments as applicable.
Book Value Fair Value
£'000 £'000
Intangible exploration and evaluation assets 58,563 623,542
Property, plant and equipment 79,951 86,931
Inventories 3,674 3,866
Other current assets 10,790 10,790
Cash and cash equivalents 46,540 46,540
Trade and other payables (11,480) (11,480)
Derivative financial instruments (1,147) (1,147)
Deferred tax liabilities (3,605) (158,842)
Provisions (5,463) (5,463)
177,823 594,737
Total Consideration 594,737
Satisfied by:
Cash 25,204
Hardman acquisition payable 333,912
Shares to be issued 235,621
594,737
Net cash inflow arising on acquisition
Cash consideration (25,204)
Cash and cash equivalents acquired 46,540
21,336
If the acquisition of Hardman Resources Limited had been completed on the first
day of the financial year, group revenues for the year would have been
£632,984,000 and Group net profit attributable to equity holders of the parent
would have been £131,304,000.
9. Cash Flows from Operating Activities
2006 2005
£'000 £'000
Profit before taxation 263,332 178,579
Adjustments for:
Depletion, depreciation and amortisation 146,581 119,697
Net foreign exchange losses 840 72
Exploration costs written off 32,494 25,783
Disposal of subsidiaries - (30,537)
Profit on sale of oil and gas assets - (5,524)
Share based payment charge 4,186 1,403
Gain/(loss) on hedging instruments (15,701) 159
Finance revenue (2,451) (4,367)
Finance costs 17,415 24,197
Operating Cash Flow before Working Capital Movements 446,696 309,462
Decrease/(increase) in trade and other receivables 509 (38,538)
Increase in inventories (4,729) (1,749)
(Decrease)/increase in trade payables (38,412) 4,665
Cash Generated from Operations 404,064 273,840
10. Group Proven and Probable Commercial Reserves and Contingent Resources Summary (Unaudited)
EUROPE AFRICA ASIA TOTAL
Oil Gas Oil Gas Oil Gas Oil Gas Petroleum
mmbbl bcf mmbbl bcf mmbbl bcf mmbbl bcf mmboe
Commercial
Reserves
1 Jan 2006 - 356.2 113.0 23.8 - 95.3 113.0 475.2 192.2
Revisions - 4.6 18.1 (1.9) - 12.2 18.1 14.9 20.6
Acquisitions - 4.2 28.8 - - - 28.8 4.2 29.5
Production - (62.6) (12.1) (0.7) - (3.7) (12.1) (67.0) (23.2)
31 Dec 2006 - 302.4 147.8 21.2 - 103.7 147.8 427.3 219.1
Contingent
Resources
1 Jan 2006 - 191.4 0.7 781.2 - 16.2 0.7 988.8 165.5
Revisions - (16.7) 20.6 4.1 - 6.3 20.6 (6.3) 19.5
Acquisitions - - 34.6 405.9 - - 34.6 405.9 102.2
31 Dec 2006 - 174.7 55.9 1,191.2 - 22.5 55.9 1,388.4 287.3
Total
31 Dec 2006 - 477.1 203.7 1,212.4 - 126.2 203.7 1,815.7 506.4
1. Proven and Probable Commercial Reserves are based on a Group reserves
report produced by an independent engineer
2. Proven and Probable Contingent Resources are based on both Tullow's
estimates and the Group reserves report produced by an independent engineer
3. Tullow has classified the Ugandan discoveries Mputa and Nzizi as
Commercial reserves
4. Mauritanian reserves and resources are based on Operator or RISC
(independent engineer) report values as appropriate
The Group provides for depletion and amortisation of tangible fixed assets on a
net entitlements basis, which reflects the terms of the Production Sharing
Contracts related to each field. Total net entitlement reserves were 145.8 mmboe
at 31 December 2006 (2005: 162.2 mmboe).
Contingent Resources relate to resources in respect of which development plans
are in the course of preparation or further evaluation is under way with a view
to development within the foreseeable future.
About Tullow Oil plc
Tullow Oil plc is a leading independent oil and gas, exploration and production
group and is quoted on the London and Irish Stock Exchanges (symbol: TLW.L). The
Group has interests in over 100 production and exploration licences in 18
countries and focuses on three core areas: North West Europe, Africa and South
Asia. For further information please consult the Group's website
www.tullowoil.com.
Events on results day
In conjunction with these results Tullow is conducting a London Presentation and
a number of events for the financial community. All times are BST.
09.30 UK/European Conference Call (and simultaneous Webcast)
To access the call please dial the appropriate number below shortly before the
call and ask for the Tullow Oil plc conference call. A replay facility will be
available from approximately noon on 21 March until 27 March. The telephone
numbers and access codes are:
Live Event Replay Facility available from Noon
UK Participants 020 7138 0832 UK Participants 020 7806 1970
Irish Participants 01 655 0486 Irish Participants 01 659 8321
Access Code 9647656#
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have either Real Player or Windows Media Player installed on your computer.
17:30 US Conference Call
To access the call please dial the appropriate number below shortly before the
call and ask for the Tullow Oil plc conference call. A replay facility will be
available from approximately 20.30 21 March until 27 March. The telephone
numbers and access codes are:
Live Event Replay Facility available from 20:30
Domestic Toll Free +1 888 469 4228 Domestic Toll Free +1 800 406 7325
Toll +1 480 293 1744 Toll +1 303 590 3030
Access Code 3712116
For further information contact:
Tullow Oil plc Citigate Dewe Rogerson Murray Consultants
+ 44 20 8996 1000 +44 20 7638 9571 +353 1 498 0300
Aidan Heavey, CEO, Tom Hickey, CFO Martin Jackson Joe Murray
Chris Perry, IRO
Disclaimer
This statement contains certain forward-looking statements that are subject to
the usual risk factors and uncertainties associated with the oil and gas
exploration and production business. Whilst the Group believes the expectations
reflected herein to be reasonable in light of the information available to them
at this time, the actual outcome may be materially different owing to factors
beyond the Group's control or within the Group's control where, for example, the
Group decides on a change of plan or strategy. Accordingly no reliance may be
placed on the figures contained in such forward-looking statements.
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