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Tullow Oil: What does boardroom blitz mean for small cap partners?

A shockingly bad trading update, including key senior management departures, sent shares spiralling - but, what does it mean for Tullow's small-cap partners?

Tullow Oil: What does boardroom blitz mean for small cap partners?

Big questions are emerging for a number of small cap oilers hitched to Tullow Oil plc (LON:TLW).

It comes as Tullow’s interim executive team threw the ‘kitchen-sink’ at the FTSE 350 firm’s guidance alongside the surprise exit of chief executive Paul McDade and exploration director Angus McCoss.

Tullow’s news sent investors reeling, with shares losing close to 60% as it downgraded production guidance, suspended dividend payments and took a cleaver to growth spending budgets.

READ: Tullow Oil shares crash on CEO exit and production downgrades

Significantly, Tullow warned of a near 60% plunge in cash flow with 2020 guidance of US$200mln from prior guidance that it would generate US$350mln in 2019.

It triggers commensurate axing of Tullow’s capital expenditure budget which shrinks by around US$200mln, to US$350mln in 2020 from around US$540mln this year.

Tullow said its board was disappointed by the performance of Tullow’s business and it would now take time to conduct a thorough review of operations.

It is not clear what this will mean precisely, though it probably doesn’t require much analysis to draw a few quick presumptions.

  • Preservation of profitability will be key, given US$2.9bn debt pile at the end of H1
  • Spending on growth and exploration will be de-prioritised
  • Asset divestments may be sought to balance the books

By reputation, Tullow has arguably been among the more expansive and future looking firms among London’s mid-tier independents.

It has a deep exploration and development portfolio, including substantial undeveloped discoveries in Kenya, Uganda and Guyana along with earlier stage exploration across east and west Africa, South America, and the Caribbean.

Tullow has been the senior partner and steer to several projects to which multiple small-cap explorers have hitched their futures.

The outcome of Tullow’s “thorough reassessment of cost base and future investment plans” may have important implications in the small cap market.

Executive chair Dorothy Thompson told Tullow investors that a further update on the company’s plans will come in February, alongside the full year results for 2019.

In the meantime, the market will be left to speculate.

Eco Oil & Gas

High promise, high risk exploration offshore Guyana arguably presented the most exciting project among Tullow’s exploration portfolio.

The proposition was as simple as it was attractive – drill large targets in the vicinity of Exxon’s prolific Stabroek block (which is host to fourteen consecutive discoveries, unearthing over 6bn barrels of crude).

Eco holds 15% of the Tullow operated Orinduik block, alongside fellow partner Total.

Initial results were indeed very exciting, with two wells confirming two new discoveries.

Tullow also has a non-operated stake in Repsol’s nearby Kanuku where drilling is underway on the Carapa-1 well, with a result due before year’s end.

Recent analysis of the Orinduik discovery poured water on Tullow’s campfire, however, as disappointingly the crude in the Jethro and Joe wells was found not to be premium light crude as seen in Exxon’s acreage, but, instead, heavy oil with high sulphur content.

News of that the discoveries comprised this commercially sub-optimal version of crude significantly dented the market valuations of both Eco and Tullow.

For Tullow, this was further compounded because it coincided with the November downgrade to production guidance.

Under McDade and McCoss, in 2016, Tullow entered the partnership taking a 60% stake and operatorship and this November the partners said they were ‘high grading’ prospects for a new drill campaign slated for 2020.

Eco is funded sufficiently to participate in multiple follow up wells at Orinduik.

Key questions now linger for Eco, however.

Quite where Guyana now sits in Tullow’s pecking order is somewhat up in the air.

Eco, and its investors, will be keen to know how much (if any) of Tullow’s reduced capex budget will be available for Guyana and Orinduik.

Similarly, the pace of future plans may also be in question – this year’s drilling satisfied the minimum licence commitments which demanded at least one well in the first three-year renewal period.

United Oil & Gas

United Oil & Gas’ team is itself largely comprised of former Tullow staff, most of which come from the Dublin-rooted firm’s new ventures teams.

Chief executive Brian Larkin, chief operating officer Jonathan Leather and chairman Graham Martin all held positions at Tullow.

Cultural and sentimental connections aside, the AIM-quoted company also has very tangible ties that were central to what was a compelling growth story.

Offshore Jamaica, United is a non-operated minority stakeholder in a massive – geographically – project where Tullow has the right to explore an area around the same size as the whole of the North Sea.

This package of assets includes the Walton Morant/Colibri prospect that is estimated to contain 229mln barrels of prospective resources.

A successful 2019 seismic exploration campaign was said to have de-risked multiple exploration targets.

Under McDade and McCoss, Tullow had plans to drill the project’s first exploration well in 2020.

Tullow slicing US$200mln off the capital budget next year and, presumably, cutting back ambitions for future periods too, there’s perhaps some less than favourable read across for the early stage / frontier-style Jamaica exploration project.

Nonetheless, changing priorities at Tullow could potentially throw up new opportunities for United – given their apparent connections into Tullow’s idea factory, especially if the forthcoming business review leads to full or partial divestments from what is a deep exploration portfolio.

In the meantime, United is very much focussed on its acquisition of Rockhopper Exploration’s Egypt business, which will deliver meaningful new production operations.

Coincidentally, United’s shares resumed trading on Monday as it raised US$6.25mln of new funds and it counts down to completion of the transaction, which has an effective date of 1 January 2020, subject to shareholder approval at a 23 December AGM.

Providence Resources PLC

Tullow Oil and Providence Resources both have their roots in Dublin, and whilst their respective scale, profile and stature are quite different they have something else in common …

Both firms have ‘lost’ their long-standing chief executives in recent days.

Something else they had in common, until today, was Angus McCoss.

Tullow’s now departed exploration director was one of only two remaining board members at Providence following the resignation of Tony O’Reilly on Friday.

Providence is very much at a crossroads. It has a substantial undeveloped oil field with a currently uncertain future following recent problems getting Chinese funding to completion.

The AIM-quoted Irish firm has just launched a process to identify and recruit new leadership for “its next phase of development” – if only the company knew of any out-of-work executives with proven track records delivering discoveries into development and subsequently production.

Now, this is arguably the laziest of lazy speculation – and we certainly couldn’t claim a recruiter’s fee for the suggestion – but, one could imagine that Providence chair Pat Plunkett may check the availability of his non-executive director.

Really, though, the only concrete thing to say here is the next appointments at Tullow and Providence will be decisive in the future of the two very different companies.

Quick facts: Tullow Oil PLC

Price: 16.92 GBX

Market: LSE
Market Cap: £238.88 m

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