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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