Tullow Oil Case Study


 


Introduction


             (1985) states that “competitive advantage grows fundamentally out of the value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. There are two basic types of competitive advantage. These are cost leadership and differentiation.” A cost advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost. While differentiation advantage exist when the firm deliver benefits that exceed those of the competing products.


            However, the Resource-based View (1984, 1987; 1986, 1991, 1989; 1991) provides another perspective on competitive advantage. This is hailed as a possible paradigm capable of elucidating and integrating research in all areas of strategy ( 1993). The basic tenet of the resource-based view is that unique resources are the sources of sustained competitive advantage (1991). To generate such advantage, a resource must be rare, valuable, inimitable, non-tradable, and non-substitutable, as well as firm-specific (1986, 1991;  1989;  1991).


            Tullow Oil is under the oil and gas industry. According to  (2001), stock market analysts see oil and gas exploration and production as an old economy. However,  argues that oil and gas industry is the cutting edge of innumerable technological breakthroughs, such as engineering and digital technology, chemical science and the . He added that oil and gas industry will continue to dominate the global energy market despite growth in renewable energy resources.


            Tullow Oil is founded by , the Group’s Chief Executive, in 1985. Tullow is quoted on the London and Irish Stock Exchanges and is one of the largest independent exploration and production companies in Europe with production exceeding 63,000 barrels of oil equivalent per day. The Group is engaged in oil and gas exploration and production with a primary focus on gas in the UK Southern North Sea and oil in Africa, with an ongoing appraisal and development programme in South Asia.


            Particularly, this paper will be concentrating on how Tullow Oil gains the competitive advantage given its strategy of acquiring mature fields. It will be discussing on the strategies the company has implemented, the objectives of their strategy and how this will position the company to remain competitive. Current and projected finances will also be presented.


           


 


 


 


An Overview of Tullow Oil


            Tullow Oil was founded by , the Group’s Chief Executive, in 1985. Gas production and sales commenced in Senegal in which a license agreement had been signed in 1986. In 1989, Tullow Oil shares were listed on the London and Irish Stock Exchanges. In the same year, Tullow began its development initiatives with its first onshore UK licenses.


            Tullow is quoted on the London and Irish Stock Exchanges and is one of the largest independent exploration and production companies in Europe with production exceeding 63,000 barrels of oil equivalent per day. The Group is engaged in oil and gas exploration and production with a primary focus on gas in the UK Southern North Sea and oil in Africa, with an ongoing appraisal and development programme in South Asia.


            In 1990, Tullow signs its first license agreement in Pakistan, laying the foundations of Group’s South Asia core area. In the mid 1990’s Tullow discover the Sara gas field in Pakistan which was brought to stream in 1999. In addition, Tullow acquired Bangladesh and Côte d’Ivoire licenses in 1996. This included the Espoir oil and gas fields where first production was achieved in 2000.


            The year 2000 is said to be the beginning of an accelerated pace of activity for Tullow. It started with the acquisition of a ₤200 million of the producing gas fields and related infrastructure in the UK Southern North sea from BP. By 2004, Tullow has acquired 0 million of Energy Africa. It was the remarkable year for the Group since it has transformed to a more balanced oil and gas exploration and production company together with the strong cash flow and upside potential through exploration opportunities and global resource pricing. In addition, by December of the same year, the Group announced a ₤200 million of UK Schooner and Ketch producing assets and surrounding acreage. In just four short years to 2004, Tullow has followed a coherent strategy with a logical progression that has enabled the Group build a leading production and acreage position in the CMS area.


            In 2005, Tullow records a positive operating environment, delivering record profits, earnings and cash flow, with buoyant oil and gas prices. New fields are added and major increase in output and good progress in key development projects. Production increased by 44%. Current production is 69,000 boepd. Organic reserves replacement was 118% and total reserves increased by 53 mmboe to 358 mmboe. The Group has already two UK North sea gas discoveries which is in Gabon and Mauritania.


            The Group is headquartered in London and employs over 200 people worldwide. Tullow is a dynamic industry player with a diverse portfolio of 90 licenses in three core areas spread across 15 countries in NW Europe, Africa and South Asia. Production is expected to grow to over 80,000 barrels of oil equivalent per day during 2007 and our reserves are over 358 million barrels of oil equivalent.


            The Group’s primary listing is on the London Stock Exchange and Tullow’s shares are also listed on the Irish Stock Exchange. The Group is a constituent of the FTSE250 and our market capitalization is approximately £2.5 billion. Over 70% of the issued share capital is held by institutions, with a strong UK shareholder base and growing ownership in both Europe and the US.


            Tullow is founded in Ireland in 1985. It has originated in Africa. By the year 1990 became active in South Asia and in the UK gas market in 2001. Over time they have developed a balanced portfolio, with a mixture of oil and gas assets in mature and developing markets and a balance between growing production output and longer-term exploration.


            Tullow’s strategy is to build strong positions in core areas and to consolidate niche positions in developing regions. This is managed through production-led exploration and reserve enhancement, operational innovation and focused acquisitions and divestments. Tullow’s aim is to deliver superior returns to shareholders and Total Shareholder Return over the past five years was 325%.


            Tullow has a genuine commitment to our environmental and social responsibilities and we look forward to sustaining and improving our high levels of performance in this area as the Group continues to grow. The Group sponsors a wide range of social and community projects in countries where we live and work.


 


 


 


 


Production


            Tullow Oil‘s principal activities are exploring and producing oil and gas and providing technical services to its joint venture partners. Moreover, the Group has a diverse portfolio of 90 licenses in three core areas spread across 15 countries in Europe, Africa and South Asia.


            Below are the tables presenting the production of the oil and gas in the three core area, Europe, Africa, and South Asia.  


 


 


1. NW Europe

Production


 


boepd


Oil


2,168


Gas


22,246


Total


24,414


% of Group Total


42


Commercial Reserves


 


mmboe


Oil


-


Gas


59.4


Total


59.4


% of Group Total


31


  2. Africa

Production


 


boepd


Oil


33,434


Gas


189


Total


33,623


% of Group Total


57


Commercial Reserves


 


mmboe


Oil


113.0


Gas


3.9


Total


116.9


% of Group Total


61


  3. South Asia

Production


 


boepd


Oil


-


Gas


413


Total


413


% of Group Total


1


Commercial Reserves


 


mmboe


Oil


-


Gas


15.9


Total


15.9


% of Group Total


8



 


Table 1. Production of Oil and Gas in Three Core Areas (2005)


 


 


 


            From the tables, it is presented that in 2005 NW Europe has a total production of 42%, Africa has 57% and South Asia has 1%. In addition, commercial reserve is also presented showing that NW Europe total reserve is 31%, Africa has 61% and South Asia has 8%.


            In 2004, weighted average working interest production was 40,600 boepd, 62% ahead of 2003 levels, with a geographic balance between NW Europe (52%), Africa (47%) and Asia (1%) and a product balance between oil (56%) and gas (44%). Group working interest production continues to increase, current production is over 56,000 boepd.


            A press release (2006), Tullow Oil UK Business Update, states that Tullow’s NW Europe interests are primarily focused on gas in the Southern North Sea. Tullow has substantially extended and enhanced its position through exploration drilling, active development, participation in licensing rounds and a series of bolt-on acquisitions. Tullow’s interest includes the CMC and Thames/Hewett areas. Natural gas production from Horne and Wren commence on June 9, 2005 and reached a stabilized flow rate of 60mmscfd. Tullow has also gone into a 50:50 joint venture with Centrica. The development project is comprised of two horizontal wells in which Tullow has 67% interest.  


            Moreover, Horne and Wren discoveries have resulted in Tullow operating development with 50% interest. Production from Horne and Wren wells brings the throughput of the Thames infrastructure to over 190 mmscfd, a four fold increase since early 2004. This increase further reduces the unit operating cost of this regional hub and extends the life of the Thames facility, thereby enhancing the value of Tullow’s other interests in the Thames Area fields.


            In addition, the Opal exploration well has successfully encountered gas bearing reservoir in the Carboniferous section. Tullow has currently has a 46% interest in the discovery.


            In Africa, Tullow has production in Gabon, Cote d’Ivoire, Congo (Brazzaville) and Equatorial Guinea. Tullow also has exploration programs in Morocco, Mauritania, Senegal, Cameroon, and Uganda (2005).


            In an interview, Aidan Heavy states that after having acquired the Energy Africa, production has doubled to 54,000 barrels a day overnight. He admits that the deal was a gamble, however, he has a good track record of betting big and winning. The acquisition, which was completed in June, doubles group reserves to 174 million barrels (2004).


            Finally, in South Asia, Tullow has production and exploration interests in Pakistan and exploration activities in India and Bangladesh. According to the report, in 2004 the Group had exploration success in Bangladesh, where the Bangora-1 exploration well tested gas at an aggregate rate of 120 mmscfd gross, and in Equatorial Guinea with the Akom North oil prospect, a satellite to the Okume complex ( 2005). The Group drilled 16 exploration wells, of which seven were discoveries. Currently South Asia accounts for 1% of Group production.


            Group working interest production for the second half of 2005 averaged 59,550 boepd, giving a 2005 average of 58,450 boepd, which is 44% ahead of the 2004 production level.


NW Europe Core Area


            In the NW Europe core area, the principal interests of Tullow are in the Southern Gas Basin. It has acquired Schooner and Ketch assets, actively participated in the 23rd licensing round and the drilling of 3 exploration wells that has contributed to the production growth in this core area enabling UK production to reach to 200 mmscfd.


 


 


 


 


 


 


 


 


 


 


 


Personnel







































 


 


 


 


 


 


 


 


 


Financial Analysis


Table 2. Five Year Financial Summary of Tullow Oil


 


IFRS


 


UK GAAP1


Group Profit and Loss Account


2005
£’000


2004
£’000


2004
£’000


2003
£’000


2002
£’000


2001
£’000


Sales Revenue


445,232


225,256


225,256


129,625


110,610


76,633


Cost of Sales


(243,149)


(141,228)


(131,071)


(82,249)


(75,350)


(46,480)


Gross Profit


202,083


84,028


94,185


47,376


35,260


30,153


Administrative Expenses


(13,793)


(11,573)


(11,017)


(3,059)


(3,925)


(3,859)


Profit/(Loss) on Disposal of Oil and Gas Assets


36,061


2,292


2,292


(952)


914



Exploration Costs Written Off


(25,783)


(17,961)


(17,961)


(12,772)


(4,169)


(3,945)


Operating Profit


198,568


56,786


67,499


30,593


28,080


22,349


Loss on Hedging Instruments


(159)







Finance Revenue


4,367


3,458


3,458


2,016


1,409


1,371


Finance Costs


(24,197)


(13,449)


(12,960)


(8,730)


(9,044)


(7,708)


Profit from Continuing Activities before Taxation


178,579


46,795


57,997


23,879


20,445


16,012


Taxation Charge on Profit on Ordinary Activities


(65,443)


(15,460)


(25,048)


(12,958)


(7,649)


(6,702)


Profit for the Year from Continuing Activities


113,136


31,335


32,949


10,921


12,796


9,310


Dividends Paid


(14,555)


(6,995)


(6,995)


(3,782)




Retained Profit for the Financial Year


98,581


24,340


25,954


7,139


12,796


9,310


Earnings per Share


 


 


 


 


 


 


Basic – Stg p


17.50


5.88


6.18


2.92


3.56


2.61


Diluted – Stg p


17.20


5.81


6.11


2.90


3.51


2.56


Group Balance Sheet


Fixed Assets


897,602


649,967


599,728


193,263


195,886


207,659


Net Current (Liabilities)/Assets


(71,273)


21,394


23,353


32,521


15,771


8,685


Total Assets less Current Liabilities


826,329


671,361


623,081


225,784


211,657


216,344


Long Term Liabilities


(437,310)


(295,894)


(243,997)


(109,863)


(111,357)


(124,344)


Net Assets


389,019


375,467


379,084


115,921


100,300


92,000


Called Up Equity Share Capital


64,744


64,537


64,537


37,784


35,981


35,847


Share Premium Account


123,019


121,656


121,656


14,198


2,485


1,993


Other Reserves


60,589


148,591


148,591


45,593


69,213


69,213


Profit and Loss Account


140,667


40,683


44,300


18,346


(7,379)


(15,053)


Equity Shareholders’ Funds


389,019


375,467


379,084


115,921


100,300


92,000


 


 



 



 


 


 


 


 


Table 3. Comparative Financial Statement for the year 2004 and 2005


 


2005


2004


Change


 


£ millions


£ millions


 


Sales Revenue


445.2


225.3


Up 98%


Operating Profit


198.6


56.8


Up 250%


Profit Before Tax


178.6


46.8


Up 282%


Operating Cash Flow before Working Capital


288.1


139.5


Up 106%


 


Stg p


Stg p


 


Basic Earnings per Share


17.50


5.88


Up 198%


Final Dividend per Share


3.00


1.25


Up 140%


 


Strategic Management


Company’s Objective


          Tullow’s vision is to be a leading independent oil and gas Group, with a balanced portfolio of exploration and production assets. This vision is underpinned by a consistent growth strategy, the cornerstones of which are a focus on gas in the UK Southern North Sea and oil in West Africa, with an ongoing appraisal and development programme in South Asia. Tullow’s key objective is to maintain consistent growth over the long term.


 


Company’s Strategy


            Tullow’s strategy is to build strong positions in core areas and to consolidate niche positions in developing regions. This is managed through production-led exploration and reserve enhancement, operational innovation and focused acquisitions and divestments. Tullow’s vision is to be the leading independent oil and gas Group with a balanced portfolio of exploration and production assets. Tullow has a consistent growth strategy. With this strategy, Tullow work hard to exploit and expand their current reserve base. They combine development and near infrastructure exploration with high impact, higher risk exploration. They make selective acquisitions to complement our existing asset base and we drive their performance with operational innovation and active portfolio management.


            Tullow has seen a positive outlook on the performance and growth of the business in the next year of operation. The next year is seen to be a year of consolidation and delivery from Tullow’s enlarged portfolio of assets. The Group has an active programme of development and exploration that will continue to grow and develop the business. The exploration risk-reward profile will be enhanced by farm-outs of licenses where value has been added through geological and geophysical surveys.


            At a global level, the market environment and oil and gas prices are expected to remain strong. In particular, the fine balance between gas supply and demand in the UK underpins the Group’s view that the current favorable gas pricing environment in the UK will continue over the coming years.


            The 4 million realized from the disposal of non core assets, combined with a planned consolidation of Group banking facilities during 2005, leaves Tullow conservatively funded and well placed to continue to pursue its growth strategy.


            Business Wire reported that Tullow continued to have a positive outlook of the future. Tullow has steadily developed a balanced portfolio of international exploration and production assets. The performance of these assets during 2005 and the organic growth expected in 2006 provide a solid base for further growth. Projects such as the development of the Kudu field in Namibia and the exploration programme in Uganda provide possibilities for significant changes in the Group’s scale, while the Group’s cash flow and modest gearing create the flexibility to accelerate programs and take advantage of development and acquisition opportunities as they arise.


            Moreover, by the following year, Tullow will be able to have six UK exploration wells. In Namibia, 2006 will be an important year both for the gas sales negotiations for the gas-to-power. In Uganda, Tullow and its partners plan a minimum of four further onshore wells in 2006 and two additional wells in Lake Albert in 2007 as part of an extensive exploration and appraisal programme across its Albertine Basin acreage. In Bangladesh, extensive 3D seismic, appraisal drilling and the initiation of production on a long-term test basis to help supply much needed gas to the Dhaka region. The introduction of Total as a partner in offshore Blocks 17&18 brought a renewal of activity with the recent commencement of an offshore seismic survey. In Pakistan, work on the development of Chachar field continues, with first gas forecast for the final quarter of 2006. Drilling has commenced on the Shahpur Chakar well in the Nawabshah block. In India, joint venture is integrating information from significant regional discoveries to the South and the North, and the companies anticipate a multi-well drilling programme in 2007.


            According to , “their production is growing strongly and is expected to reach 75,000 boepd by the end of the year. On the exploration front they plan to drill over 20 wells, including further wells in Uganda, where they have scheduled an extensive exploration and appraisal program to build on the recent M’Puta and Waraga discoveries. The outlook for Tullow is very positive. Oil and gas prices are strong and forecast to remain so. Their existing assets and work programs are expected to deliver robust organic growth and our new ventures program and other development opportunities offer compelling upside potential.”


 


 


 


 


 


 


         


 


 


 


 


 



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