Tullow Oil (TLW LN; TLW.L)
Apparently, Jubilee is not delivering according to management's own projections
*Please read the disclaimers at the base of this report. The author has a short position in Tullow. Does not constitute a recommendation to buy or sell the securities mentioned herein. Do your own due diligence.
As we’ve written before, we believe Jubilee production peaked in September 2023. We now have the confirmation of that in the Petroleum Commission of Ghana data for the year, which shows that in December 2023 production at Jubilee dropped below 90kbd, a steady decline which we believe is continuing into 2024. On that basis we believe Tullow’s forecasts for Jubilee and its overall production in 2024 are not conservative enough.
Given the rapid decline from peak (more than 10% in 3 months since September) it seems unlikely that the company will be able to meet its projected gross target of 100,000 barrels of oil a day for 2024 (annual average) even if it brings on stream, 3 more producers and 2 water injectors in the year (2023 was 4 and 3, respectively). While the company blames issues with its water injectors (which it said were resolved in December) for the shortfall of second half production, if we extrapolate from recent lifting data it would appear that production is at or below 90,000 bod at Jubilee early in 2024. Meanwhile as we can see above, along with (presumably) rising water production and injection, gas production or GOR continues to rise, now at approx 2700scf/bl vs 2500scf/bl in January 2023. Rising GOR and increased water injection/production in the short term create a beneficial squeeze in production, however, eventually gas production and water production preferentially “cut through” oil production as water and gas cuts rise faster than wells can be re-completed, while maintaining pressure downhole becomes more challenging.
It is notable that when new wells are not being “plugged in” to Jubilee, oil declines appear quite rapid. Monthly declines prior to the most recent well completions were approx 3.5% per month, which saw production fall 27% between July 2022 and April 2023 - that’s an annual decline of a third (there was a similar 9 month decline in 2020-21). In the most recent months since the conclusion of completions of the JSE wells, monthly decline has averaged approx 3%, assuming January production is approximately the same as December at around 89.5 kboed.
If we assume a similar level of base decline in 2024, from say approx 89.5kbod in January, we have Jubilee’s base production (before new wells) exiting the year (without new wells) at 60.5kbod and averaging 74kbod for the year or 28.8kbod net to Tullow. However the company plans to complete 3 new producers and 2 injectors in 2024. Conservatively given timings of completions and decline curves of new wells, I would estimate about 4,000 barrels a day of incremental production per production well. So. 12kbod in total. That gives an annual Jubilee production figure of 86kbod, or 33.5kbod net to Tullow. That is materially lower than Tullow’s forecast for 2024 of 39kbod net, or 100kbod gross. To make the numbers work, Tullow’s new wells would have to average 6.5kbod per well for the year (ie significantly higher than that from the date they come on stream, the later in the year they come onstream) or that 3.5% per month decline rate has to come down materially. Or a bit of both. While not impossible, given Tullow’s previous struggles with delivering on guidance, it does appear to be a heroic stretch.
Why does this matter? Well the difference of 5.5kbopd marginal production net to Tullow at Jubilee, at $80 oil is approx $150m of operating cashflow or over half of the middle of Tullow’s free cashflow guidance range for the year ($200-300m depending on liftings timing). Assume a modest shortfall elsewhere (eg TEN or non-Op), or even unplanned maintenance at Jubilee (note there is no FPSO shutdown planned for 2024 - the last one came nearly 2 years ago in May 2022) and, further, throw in unplanned for expense (eg a mandatory tax settlement with the GRA following the ICC arbitration, or the around the extension of the TEN FPSO) and you are suddenly in a situation where you need to increase your debt burden. And then things can go south very quickly indeed, with $1.6bn of net debt outstanding at year end. Particularly if these sort of weaker production numbers get factored into reserves, which then rolls into the company’s RBL and RCF capacity.
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I can't see how Tullow can refi the 2026s into unsecured paper without paying well into the double digits, no creditor will want to be behind Glencore in priority without enormous compensation. If they do another secured deal and production stays on its current decline path (as you have been correctly flagging for a few years!) then value is likely breaking around the Glencore debt unless oil can stay high enough to offset, which seems a heroic assumption. My base case then would be that Glencore ends up with majority equity and current shareholders will get a Nostrum-style token amount...
Thinking end-game here - do you see Glencore taking equity if (or when) Tullow ends up in distress?