Tullow Oil Cuts Exploration Budget -- Update

By Selina Williams 

LONDON-- Tullow Oil PLC said Thursday it was making its largest ever write off of $2.7 billion before tax, another sign of the impact of plunging oil prices on exploration and production companies.

The U.K.-listed company known for its discoveries in East and West Africa, blamed unsuccessful drilling and cheap oil for a $600 million write-off of all its assets, as well as for $1.2 billion related to ventures that now have no prospect of commercialization.

The move comes as oil fell to less than $48 a barrel in London Thursday morning--down more than half since last June. The rout has posed particularly difficult challenges for smaller exploration and production companies don't have other parts of their business to fall back on when prices are low, like the refining arms of major corporations like BP PLC and Royal Dutch Shell PLC.

Earlier this week, for example, U.K.-listed explorer Premier Oil PLC wrote down the value of its assets by $300 million on the back of lower oil prices.

Tullow Chief Executive Aidan Heavey said Thursday that the company reviewed every single asset in the portfolio before making its decision.

"[We] wrote virtually everything off that we felt was either not commercial at $50 a barrel oil or where the [license] terms needed to be adjusted to make them commercial in the future," he said.

The company's shares were down about 1% Thursday morning. Westhouse Securities analyst Mark Henderson said Tullow's "fundamental long-term production/cash flow growth story remains intact."

For Tullow, which made its name opening up major hydrocarbon basins in Ghana, Uganda and Kenya, declining oil prices are having stark consequence on new and old ventures.

For example, the company made a discovery in French Guiana in 2011 that is no longer commercially viable at current oil prices, it said.

Mr. Heavey said Tullow was further cutting its 2015 exploration budget by 30% to $200 million. Last year it slashed its budget as part of cost cuts. In previous years, it had spent around $1 billion a year.

More cost cuts are coming this year, including job cuts, operating costs and streamlining the business, Mr. Heavey added.

The company is also reducing capital expenditure for this year to a maximum of $1.9 billion from $2 billion. Around half of the capital expenditure will be allocated to the development of Tweneboa-Enyenra-Ntomme oil fields offshore Ghana, which are due to come onstream next year.

Tullow said it expects 2014 revenue to be $2.2 billion and pretax operating cash flow of $1.5 billion, underpinned by strong performance of its West Africa oil production.

"These results versus the prior year, have been impacted by the oil price decline and lower gas production following asset sales in Europe and Asia," the company said in a statement.

Tullow said $500 million of the $2.7 billion total write off included a loss on disposal mainly relating to the partial sale of the U.K. Schooner and Ketch gas fields as well as in Uganda.

There could be further difficulties for other oil companies in the coming weeks as fourth-quarter earnings are reported.

Write to Selina Williams at [e-mail]

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