* Exploration delivers again
Although production hiccups at the Jubilee field in Ghana are likely to result in an average production for the group marginally down in FY14, Tullow’s trading statement highlights how the company’s exploration effort during 2013 has once again delivered over 200MMbl of new resources net to the group through the drillbit. We believe this is further evidence of the breadth of company’s exploration portfolio, which comes with a well-funded balance sheet, and also underpins our valuation. Kenya is an important part of the company’ portfolio. Here, the group also reported positive news on the Amosing-1 and Ewoi-1 wells. This increases the number of consecutive oil finds to seven in the South Lokichar basin and the discovered resources tally to over 600m bl (TLW 50%), underscoring the potential of this region. With a programme that currently includes over 40 exploration and appraisal wells and material opportunities in Kenya, West Africa and Norway, we reiterate our Overweight rating with a Price Target up by 1% to £15/sh.
Kenya, a double- strike: In Kenya, Tullow announced two new oil discoveries in two different plays in South Lokichar. Amosing -1, which sits South of Ngamia along the “String of Pearls”, found 160-200m of net pay, significantly exceeding pre-drill expectations of c.100m of net pay. Ewoi-1 was drilled on basin flank up-dip from Etuko and encountered between 20-80m of net pay. As a result, we increase our discovered resources estimate by 150m bl to over 600m bl (TLW 50%) in-line with the company’s guidance. This is worth £1 risked (£1.40 unrisked) on our numbers. The company now believes that South Lokichar could hold in excess of 1bn bl of resources.
Well-funded balance sheet: 2013 y/e net debt was US$1.9bn in line with our forecasts. In addition, Tullow has undrawn facilities of up to US$2.4bn. We believe this, coupled with a pre-tax cash-flow of $1.9bn, provides sufficient flexibility to maintain an exploration spend of US$1bn pa and sustain ongoing development capital expenditures on the TEN development in Ghana, where farm-out negotiations are still ongoing.
Exploration momentum continues: Over the next 18 months, the company intends to drill over 40 wells. Half of them are located onshore Kenya, where the company is looking to further derisk the exploration potential of the South Lokichar basin, which on our numbers could be worth £4 unrisked under a blue-sky scenario, and test at least three new basins. In due course, we also expect the results of the Fregate well in Mauritania that could also have a material impact on our NAV, if successful.