12th Apr 2005 07:01
Tullow Oil PLC12 April 2005 Tullow Oil plc Results for the year ended 31 December, 2004 For further information please contact: Tullow Oil plc Citigate Dewe Rogerson Murray Consultants+ 44 20 7333 6800 + 44 20 7638 9571 +353 1 498 0300Aidan Heavey, CEO Martin Jackson Joe MurrayTom Hickey, CFO Tullow Oil plc announces record levels of production, turnover, operating profitability, cash flow and net profit 12 April, 2005: 2004 was, by any measure, a remarkable year for Tullow Oil.The Group more than doubled in size, driven largely by the acquisition of EnergyAfrica in May. Combined with sustained high oil and gas prices and goodoperational performance throughout the business, the Group delivered a strongset of results in terms of growth, profits and development. Tullow Oil plc (symbol: TLW) is an independent oil and gas, exploration andproduction Group, quoted on the London and Irish Stock Exchanges and a member ofthe FTSE 250. The Group has interests in over 90 production and explorationlicences in 16 countries worldwide focusing on three core areas of NW Europe,Africa and South Asia. 2004 HIGHLIGHTS • Turnover up 74% to £225.3 m (2003: £129.6 m) • Operating profit before exploration activities up 88% to £83.2 m (2003: £44.3 m) • Basic earning per share up 112% to 6.18p per share (2003: 2.92p per share) • Dividend per share up 75% to 1.75p per share (2003: 1.0p per share) • Operating cash flow up 82% to £154.3 m (2003: £85.0 m) • Working interest reserves amounted to 173 mmboe (2003: 70 mmboe) Acquisitions/disposals • Energy Africa, acquired at a cost of US$570 million (£311 million), has been successfully integrated and consolidated with effect from 28 May 2004. Had these assets been included for the full year, pro-forma turnover for 2004 would have been in the order of £310 million. • The acquisition of the Schooner and Ketch producing assets and surrounding acreage for £200 million was announced on 20 December 2004. This transaction was completed on 31 March 2005 and the focus is now on integration of these assets and initiation of the redevelopment of the fields. • Since year end the Group has reached agreements to sell the non core Alba/Caledonia and offshore Congo assets for a combined headline consideration of $184 million (£97 million). This is in line with the Group's strategy of actively managing its portfolio of assets. Production and Reserves • Weighted average working interest production for 2004 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. • Energy Resource Consultants Ltd (ERC) performed an independent reserves review on Tullow's entire portfolio of assets as at 31 December 2004. The results of this review attributed commercial proven and probable reserves of 173 mmboe on a working interest basis. In addition, a further 153 mmboe are recognised as contingent reserves resulting in Group total reserves of 326 mmboe. Production and Development • The UK Gas market remains a key area of focus for the Group which, in 2004, made a number of notable advances in exploration, development, acquisitions and third party activity. Tullow now has a portfolio of over 50 North Sea Blocks and, post the integration of the Schooner and Ketch fields and the start up of Horne & Wren, will operate over 60% of its forecast 2005 UK gas production. • The combination of the Energy Africa portfolio with Tullow's existing African interests has created a diversified pan-African business. Tullow now has production of over 30,000 boepd in Africa and holds interests in over 40 blocks across 11 countries, including high impact exploration acreage. • 2004 was a year of transition for Tullow's South Asian portfolio as this core area was repositioned in line with the enlarged Group. Pakistan in particular has been an area of renewed focus. The aim of the Group is to establish a larger exploration portfolio in South Asia, targeting high impact prospects. • During 2005 Tullow will actively participate in development activity in the UK, Gabon, Congo, Equatorial Guinea, Cote d'Ivoire, Namibia and Pakistan. Planned expenditure is £100 million, with the primary focus on the UK and West Africa. Exploration and Appraisal • 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. The Group drilled 16 exploration wells, of which seven were discoveries. The exploration write-off was £18.0 million for the year. • Tullow has approved a total exploration budget of £40 million for 2005 with the objective of participating in up to 15 wells. Of those wells, a number remain subject to further technical review and partner approval. Corporate Social Responsibility • Tullow is committed to sustaining environmental and social performance. In 2004, an enhanced Environmental, Health and Safety Policy was implemented across the organisation. A CSR Committee with dedicated funding that will report to the Board regularly was established. 2005 OUTLOOK Looking forward, 2005 will be a year of consolidation and delivery from Tullow'senlarged portfolio of assets. The Group has an active programme of developmentand exploration that will continue to grow and develop the business. Theexploration risk-reward profile will be enhanced by farm-outs of licences wherevalue has been added through geological and geophysical surveys. At a global level, the market environment and oil and gas prices are expected toremain strong. In particular, the fine balance between gas supply and demand inthe UK underpins the Group's view that the current favourable gas pricingenvironment in the UK will continue over the coming years. The $184 million (£97 million) realised 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 itsgrowth strategy. GROWTH STRATEGY Our vision is to be a leading independent oil and gas Group, with a balancedportfolio of exploration and production assets. This vision is underpinned by aconsistent growth strategy, the cornerstones of which are a focus on gas in theUK Southern North Sea and oil in West Africa, with an ongoing appraisal anddevelopment programme in South Asia. Commenting today, Pat Plunkett, Chairman, Tullow Oil, said: "In four short years Tullow has increased its production from 2,500 boepd toover 56,000 boepd. The significant achievements of 2004 would not have beenpossible without the dedication and commitment of our staff, ably led by AidanHeavey, and the support and confidence of our shareholders and bankers. Thechallenges and opportunities facing Tullow and our industry in 2005 are excitingones and I look forward to reporting further progress to shareholders as theyear unfolds." Commenting today, Aidan Heavey, Chief Executive, Tullow Oil plc, said: "With over $1 billion spent on acquisitions and investments in 2004, the Grouphas created a strong portfolio of international exploration, production anddevelopment assets with opportunities for future growth. Today Tullow has morethan 90 exploration and production licences in 16 countries and the Group'sreserves are over 320 mmboe. Quality assets, the current expectation ofcontinued strength in oil and gas pricing and our unique characteristics will, Ibelieve, continue to deliver long term growth and superior performance." CONFERENCE CALLS AND WEBCAST In conjunction with the Group's results presentation there will be conferencecalls and a Webcast today, hosted by Aidan Heavey, Chief Executive of Tullow Oilplc. Other senior management participating will be Tom Hickey, Chief FinancialOfficer, Paul McDade, Chief Operating Officer and Adrian Nel, ExplorationDirector. 9.00 am (BST): Conference Call and Webcast In the UK/Europe please call +44 20 7365 1843 and in Ireland please call +353 1659 8311. A replay facility will be available one hour after the conferencecall for seven days. To access the replay facility in the UK/Europe please call+44 20 7784 1024 and in Ireland please call +353 1 659 8321. The passcode is4693758. 9.00 am (BST): Webcast For further information on the Group, these results, and to view the Webcast,please visit www.tullowoil.com. An archive of this Webcast will be availablefrom this afternoon. 2.30 pm (BST): Conference Call In the US please call +1 913 981 5571 and in the UK please call +44 20 79847566. A replay facility will be available one hour after the conference call forseven days. To access the replay facility, please call + 1 719 457 0820. Thepasscode: 5564780. 2004 RESULTSFor the year ended 31 December 2004 In 2004 the Group reported record levels of production, turnover, operatingprofitability, cash flow and net profit. This was principally due to theacquisition of Energy Africa, combined with sustained high oil and gas pricesduring the year. 2004 weighted average working interest production was 40,600 boepd, 64% ahead of2003 levels. The average realised oil price for the year was $36.99/bbl,excluding the cost of hedging. Against the background of net imports of gasinto the UK market, UK gas prices were strong and the average price realisationfor gas was 22.9p/therm (2003: 20.7p/therm). Record turnover and profitability Turnover increased 74% to £225.3 million (2003: £129.6 million), reflecting theEnergy Africa acquisition contribution which was consolidated with effect from28 May 2004. Despite increased UK gas prices turnover of existing operations wasbroadly flat as a result of a modest decline in UK production. Turnover wasreduced by £10.7 million by the realisation of hedge liabilities, including £7.4million relating to payments in excess of the fair value recognised in thebalance sheet at the Energy Africa acquisition date. Pro forma turnover for 2004would have been in the order of £310 million had Energy Africa been included forthe full year. Operating profit before exploration activities increased 88% to £83.2 million(2003: £44.3 million), benefiting from the increased levels of production andreduced unit operating costs in the UK and Africa. This was partly offset bythe write-down of £2.2 million, included in the depreciation, depletion andamortisation (DD&A) charge, associated with a reserves downgrade in relation tothe Sara and Suri gas fields in Pakistan. Operating profit increased 107% to £65.2 million (2003: £31.5 million) andprofit before tax increased 143% to £58.0 million (2003: £23.9 million),including the profit of £2.3 million on the partial sale of licence interests inHorne & Wren as part of an initiative to balance equity participation andintroduce new partners into the project. Basic earnings per share amounted to 6.18 pence, an increase of 112% comparedwith 2.92 pence in 2003. Operating cashflow amounted to £154.3 million, anincrease of 82% over 2003, reflecting the quality of the Group's producing assetbase. Progressive dividend policy Tullow paid a dividend of 1.0 pence per share for 2003. The Group's policy is tomaintain a progressive dividend, that reflects both the cash generated by thebusiness and the capital investment and acquisition opportunities available. Afinal dividend of 1.25 pence per share is being recommended by the Board which,following an interim dividend of 0.5 pence per share, brings the total dividendfor the year to 1.75 pence per share. Clear and effective corporate governance The Tullow Board and management are committed to achieving and maintaining highstandards of corporate governance. This approach ensures that the Board andmanagement operate within a clear and effective governance framework thatbalances all stakeholder interests, including those of shareholders.Communication and interaction with shareholders, who have provided the Groupwith great support this year, is given a high priority and in 2005 Tullow iscreating a dedicated Investor Relations function and undertaking a number ofinitiatives to enhance Investor Relations activities overall. Strengthened Board and Management In July 2004 David Bamford was appointed to the Board as a non-ExecutiveDirector and in September Adrian Nel of Energy Africa was appointed as anExecutive Director with specific responsibility for Exploration. Between them,David and Adrian have over 60 years international exploration experience andthey are instrumental in evolving the exploration strategy and performance ofthe Group. As part of the Group's reorganisation of operations during the year, Paul McDadewas appointed Chief Operating Officer and has responsibility for the managementof the Group's production and development interests worldwide. During the year, as previously announced in 2003, John Lander and EskandarMaleki retired from the Board. Both John and Eskandar have made significantcontributions to the Group with their dedicated service and commitment. Consistent growth strategy The Group's overall growth strategy comprises four principal drivers: • Exploitation and expansion of Tullow's current reserve base • A combination of developments and "snuggle" exploration close to Tullow's existing infrastructure, balanced with high impact and higher risk prospects • Selective acquisitions to complement the Group's existing strong footprint within the three core areas of operation in NW Europe (mainly the UK), Africa and South Asia • Maximisation and consolidation of Tullow's existing asset base through operational innovation and active portfolio management. Exciting development opportunities In the UK the Group intends to continue to develop its positions as a producerand operator in the gas market through a combination of bolt-on acquisitions,development of fallow fields, "snuggle" exploration and the expansion of thirdparty business. Tullow has the technical and operational expertise to improveefficiency, returns and overall production. In addition, to exert materialinfluence the Group targets significant equity participation and aligned jointventure partnerships. To enhance performance and cash flow, Tullow aims tomaximise exposure to uncontracted gas production. This allows the Group themaximum flexibility in its UK gas marketing activities. In the Africa core area there are important development opportunities forTullow. Within the region there are significant under-explored areas, majorcompanies are starting to exit the more mature fields and licencing of someareas and countries has only just begun. The combined Tullow and Energy Africaportfolio of assets provides the building blocks to implement and accelerate theGroup's growth strategy in the region. This strategy is underpinned by strongrelationships with partners and governments and extensive management andtechnical know how. The Group also has a material competitive advantage with itsexpansive portfolio across a number of countries, giving Tullow a broad and deepreach to participate where opportunities arise. In 2004 a review of the South Asia core area determined the future options fordevelopment of this region, within the context of the newly enlarged Group andthe major gas discoveries in Bangladesh during the year. Given the Group'shistory and knowledge of the area, Tullow believes that significantopportunities exist in South Asia and that further growth can be achieved, interalia, by leveraging the Group's extensive acreage where there is majorexploration potential and establishing a larger exploration portfolio with theobjective of drilling high impact prospects. Active portfolio management One of the key aspects of the Group's strategy is to actively manage itsportfolio of assets. Following the Energy Africa transaction, Tullow identifiedcertain assets as being peripheral to its long term strategy. Agreements haveconsequently been reached to sell Alba & Caledonia to Itochu Corporation for aheadline consideration of $112 million (£58 million) and the Groups offshoreCongo assets to Total for a headline consideration of US$72 million (£39million). Strong pipeline of activity Overall, the significant level of achievement in all operations in 2004,combined with the new organisational structure, delivered increased productionand reserves and provides a strong platform for future growth and development ofthe Group. At year end, the production portfolio comprised 25 fields located in6 countries, with working interest production of over 56,000 boepd. Looking forward, 2005 will be a year of further consolidation and delivery onthe Group's enlarged portfolio of assets, while continuing to grow and developthe business. Tullow has approved a total exploration budget of approximately£40 million with plans to participate in up to 15 wells. During 2005 Tullow willalso actively participate in development activities in the UK, Gabon, Congo,Equatorial Guinea, Cote d'Ivoire, Namibia and Pakistan, with planned expenditureof approximately £100 million. The operational focus of the production anddevelopment team for the year will be on: • Integration of the Schooner and Ketch assets and initiation of the field redevelopments planned for the end of the third quarter 2005; • Effective and timely execution of key developments of Horne & Wren and Munro in the UK, West Espoir in Cote d'Ivoire, Okume Complex in Equatorial Guinea and M'Boundi in the Congo; • Completion of the Kudu FEED in Namibia in preparation for project sanction; • Appraisal of the Bangora and Lalmai discoveries in Bangladesh and the sanction of the Chachar development in Pakistan and • Continuing to build and diversify Tullow's operating activities both organically and through acquisition. Tullow clearly recognises the risks associated with an increase in operationalactivity and the growing diversification of the Group's asset portfolio.Throughout the organisation there is an ongoing programme aimed at achievingexcellence in the Environmental, Health and Safety aspects of Tullow'sbusinesses, that considers staff and contractors, local communities and allexternal stakeholders. Positive 2005 outlook At a global level, the market environment and oil and gas prices are expected toremain strong. In particular, the fine balance between gas supply and demand inthe UK underpins the Group's view that the current favourable gas pricingenvironment will continue over the coming years. The $184 million (£97 million) realised 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 itsgrowth strategy. The challenges and opportunities facing Tullow and the industry in 2005 areexciting ones and the Board looks forward to reporting further progress toshareholders as the year unfolds. OPERATIONS REVIEW In addition to the major acquisition programme undertaken in 2004 Tullowcontinued to invest for the future in existing assets with expenditure of £97million on a wide range of operational enhancement and development projects. Strong platform for growth and development In 2004 Tullow reorganised and strengthened the Group's operational structure,integrating the Energy Africa assets and building a strong platform for futuregrowth and development. The Group is now structured on a regional basis to runthe enlarged business efficiently and to enhance operational reporting andaccountability. The new production and development structure has five businessunits - UK, Gabon, West African Joint Ventures, Kudu and South Asia - alignedwith the Group's three core areas of operation in NW Europe, Africa and SouthAsia. NW Europe: leading producer and operator in the UK gas market The Group's interests in NW Europe are almost exclusively in gas in the UKSouthern North Sea. Tullow also operates two licences in Romania. Overall NWEurope accounts for 52% of Group turnover and 51% of Group production. The UK Gas market is a key area of focus for Tullow and the Group intends tocontinue to grow as a producer and operator there. While UK gas productiondeclined modestly during the year, Tullow made a number of notable advances inexploration, development, acquisitions and third party activity. The Group alsocompleted its first year as operator of the Bacton/Hewett assets and obtainedsanction of its first offshore development, Horne & Wren. Tullow's entire UKoperations are ISO 14001 certified following certification of the Bacton GasTerminal in 2004. In March, Tullow announced first production from Boulton H, the finaldevelopment well in the CMS III project. In April, the Munro field wasdiscovered and development is already under way, targeting first gas in 2005.Tullow was awarded nine Blocks in the UK 22nd Licensing Round and in Novemberthe Department of Trade and Industry sanctioned the development of the Tullowoperated Horne & Wren fields. In December, the announcement of the agreement toacquire the Schooner and Ketch producing assets and surrounding acreagerepresented a strong finish to the year and a major step in Tullow's strategy ofbuilding a substantial operated UK gas business. Tullow now has a portfolio of over 50 North Sea Blocks and, post the integrationof the Schooner and Ketch fields and the start up of Horne & Wren, will operateover 60% of its forecast 2005 UK gas production. Africa: diversified pan-African oil and gas business The combination of the Energy Africa portfolio and Tullow's existing Africaninterests has created a diversified pan-African oil and gas business. Tullownow has production of over 30,000 boepd in Africa and holds interests in over 40blocks across 11 countries, including prospective acreage in Mauritania, Namibiaand Uganda, each of which could add materially to reserves and production overthe coming years. Overall Africa accounted for 47% of Group turnover and 47% ofGroup production in 2004. Within the producing assets progress is particularly encouraging, highlighted byrecent field performance in Gabon, where production has increased substantiallysince the Energy Africa acquisition and reserves have also seen a significantupgrade. Elsewhere, the M'Boundi field in Congo, the West Espoir field in Coted'Ivoire and the Group's acreage in Equatorial Guinea have important ongoingdevelopments and will show a rising production profile over the coming years. Major progress has also been made in relation to the commercialisation of thegiant Kudu gas field offshore Namibia via a power generation project. The jointdevelopment agreement for this field was signed in July 2004 and the partnersare currently focused on financing options and commercial structures tofacilitate a final investment decision. In addition to the Group's existing interests, the synergy from the combinedknowledge, experience and technical databases of Tullow and Energy Africa hasled to a number of exciting new venture opportunities which are currently underevaluation. South Asia: refocused and targeting high impact prospects 2004 was a year of transition for Tullow's South Asian portfolio as the Grouprepositioned this core area in line with its enlarged portfolio of assets.Pakistan in particular has been an area of renewed focus. The aim of the Groupthis year is to establish a larger exploration portfolio in South Asia,targeting high impact prospects. Currently South Asia accounts for 1% of Groupturnover and 2% of Group production. The South Asia highlight of 2004 was the discovery of gas by the Lalmai andBangora exploration wells in Block 9 onshore Bangladesh. Tullow has been activein Bangladesh since 1997, during which time the local gas market has evolvedsignificantly and there is now considerable regional demand. As a result, inconsultation with Petrobangla the state gas company, Tullow plans to deliver gasfrom Bangora into the market during 2005, while at the same time appraising theoverall reserve potential of the Lalmai-Bangora anticline. An appraisal of the Group's assets in Pakistan has resulted in the followingdecisions: 1) to review the potential for infill drilling in the Sara and Surigas fields; 2) not to extend the Sara West licence under the current terms; and3) to continue the development of the Chachar discovery, where first gas isexpected by early 2006. The Group has also recently been awarded a material newexploration licence in the Potwar basin. While there was limited activity in India during 2004, exploration activity willcommence in 2005 on the prospective CB-ON-1 Block in the Cambay basin, which ison geological trend with a number of regional oil and gas discoveries. Strength and diversity in reserves During 2004 Tullow appointed ERC to undertake an independent review of theGroup's oil and gas reserves. This review attributed 173 mmboe of commercial proven and probable workinginterest reserves to Tullow and 150 mmboe net entitlement reserves. Inaddition, ERC also reviewed projects under the contingent category. Tullow has153 mmboe in this category, dominated by the Kudu gas project offshore Namibia,where work on commercialisation is progressing. This clearly shows the strengthand diversity of the Group's portfolio of assets. In the UK, production during the year was substantially offset by the additionof reserves associated with the Horne & Wren and Munro developments. In Africadue to the strong development programme undertaken during 2004, reservesreplacement as a whole was over 250%. In South Asia a reserves downgrade on Saraand Suri gas fields and Sara West reserves resulted in a £4 million charge toprofits in 2004. However the reserves reduction is significantly offset by thefirst recognition of reserves associated with the Bangora-1 discovery inBangladesh, on which further appraisal is planned in 2005. Coherent exploration and appraisal programme Tullow's exploration strategy is to achieve significant growth in its reservebase at a finding cost appropriate to the various fiscal regimes in whichprojects are located and operated. This strategy has three primary components: 1) To grow prospect inventories in areas of relatively low risk whereTullow enjoys a competitive advantage. These are currently the Southern GasBasin of the UK North Sea and Gabon, which account for more than 60% of theGroup's 2004 total production. 2) To expand prospect inventory in areas with the possibility to deliversignificant reserve growth in the medium term. Tullow will seek equity levelsthat could provide net reserves of over 20 mmbbls for individual prospects, inacreage with upside potential. Outside of the UK and Gabon the drillingprogramme will target higher risk-reward prospects with significant reservepotential. 3) To maintain an active new ventures programme and to build a portfoliocapable of yielding significant additional reserves in the future. To achievethis, Tullow is aggressively pursuing new opportunities and accelerating workprogrammes in currently held acreage in Gabon and Cote d'Ivoire. The Group isalso targeting further licence agreements in Pakistan and new acreage in theIvorian-Ghanaian basin and other countries on the West African margin. During 2004 Tullow participated in successful exploration wells in the UK NorthSea, Gabon, Congo, Equatorial Guinea and Bangladesh. However there were alsonine unsuccessful wells. The exploration write-off cost associated with thosewells was £18.0 million (2003: £12.7 million). The Group has approved a totalexploration budget of £40 million for 2005 with the objective of participatingin up to 15 wells during the year. Exploration, by its very nature, carries risk and, in addition to the primarystrategies outlined above, Tullow actively manages its exploration risk byfarming out interests in licences where value has been added through geologicaland geophysical surveys. In 2004 there were various farm- outs which reducedthe Group's financial exposure to exploration in Gabon, Romania and Morocco.Tullow also balanced its UK portfolio through the partial sale of the Horne &Wren fields to Centrica plc, for a profit of £2.3 million. In Africa an assetswap in Gabon improved the production balance and enhanced Tullow's tax positionin that country. FINANCIAL REVIEW As outlined above the Group delivered a strong performance in 2004 withincreases across all key performance metrics of production, turnover, operatingprofitability, cash flow, net profit and earnings per share. This wasprincipally as a result of the Energy Africa acquisition, a steady performancefrom the Group's existing operations and the positive global resource and UK gasprice environment. The Group balance sheet also remains strong, with low levelsof net debt. A strong performance Turnover grew 74% to a record £225.3 million (£236.0 million before hedging),compared with £129.6 million in 2003. Operating profit before exploration costsincreased 88% to £83.2 million, compared with £44.3 million in 2003. Profitbefore tax was up 143% to £58.0 million, compared with £23.9 million theprevious year and net profit grew to £32.9 million up 202% from £10.9 million in2003. Improved operating costs of £4.40/bbl (2003 - £4.70/bbl), on a working interestbasis, reflect the continuing drive for operational performance, the shift of UKproduction to the lower operating costs CMS area and the lower operating costsof the Energy Africa portfolio of assets. The DD&A charge of £4.68/bbl (2003 - £4.37/bbl), on a working interest basis,was materially affected by the fair value allocation exercise undertaken postthe Energy Africa acquisition and the write-down associated with the assetdowngrade in Pakistan, which was partly offset by reserve upgrades in relationto the Group's Gabon and Congo interests. In line with Tullow's "successful efforts" accounting policy in relation to theGroup's exploration and development activities a total charge of £18.0 millionwas incurred in 2004 (2003: £12.7 million) in relation to nine unsuccessfulwells, along with certain additional costs associated with relinquished acreageand new ventures. A lower effective tax rate The Group's overall effective tax charge, amounting to £25.0 million, was 33.0%of profit before tax and exploration write-off (2003: 35.3%). The decrease inthe effective tax rate is due to the fact that the majority of Energy Africa'sproduction activities are under Production Sharing Contracts, where a portion ofproduction is shared with the host Government instead of tax. The value ofsuch production is no longer reflected in the Profit and Loss Account under theGroup's revised accounting policy for Taxation and Turnover for sucharrangements. Robust cash flow and financial capacity Tullow generated £154.3 million in operating cash flow during the year (2003:£85.0 million) principally driven by the Energy Africa acquisition and strongeroil and gas pricing. During the year the Group invested a total of over $1billion in acquisitions, £69 million on development projects and £28 million onexploration activities. Net debt increased to £113.5 million (2003: £62.4million) reflecting the strength of the Group's financial capacity. During the year the Group concluded a $300 million Acquisition Bridge FinancingFacility, arranged by ABN AMRO, BNP Paribas and Bank of Scotland. This facilitywas principally used to finance the cash component of the consideration paid toacquire Energy Africa. In addition the Group raised £123.5 million beforeexpenses through placing 130 million shares at 95p per share. Following theacquisitions and growth of recent years, Tullow currently has a variety offinancing facilities in place. During 2005 it is the Group's intention toundertake a refinancing to substantially replace all of the Group's existingdebt facilities. Total cash balances at year end were £85.1 million (2003: £66.7 million). The net interest charge for the year was £9.6 million comprising £8.3 millioninterest and fees payable on Group debt, £3.5 million of interest income and£4.8 million of non cash costs. A prudent hedging policy Tullow's policy is to mitigate the Group's exposure to oil and gas price riskfor a portion of its production using a range of financial instruments. Themain objectives of the hedging programme are to reduce exposure to pricevolatility and particularly downside risk, and to provide substantial assuranceof appropriate levels of liquidity for the Group's various investmentopportunities. Due to the natural hedge between assets in the UK and Sterlingborrowings and the denomination and funding of the Group's internationalbusiness in US Dollars, Tullow does not undertake active currency hedging. At 31 March 2005 the Group's hedge position to the end of 2005 is as follows: Oil Hedges 1H 05 2H 05 2006 Volume - bopd 12,983 9,946 7,731 Average Price - $/bbl* 36.7 36.0 32.8 Downside Price - $/bbl** 34.6 31.4 28.5 Gas Hedges Volume - mmscfd 46 43 20 Average Price - p/therm* 28.4 29.2 36.4 Downside Price - p/therm** 26.9 27.0 33.1 * Average hedge prices are based on market prices as at 31/03/05 and represent the current value of hedged volumes** Downside hedge prices reflect floor price protection Completed all aspects of the Energy Africa transaction The Energy Africa transaction, announced in March 2004, was completed with theconsolidation of those assets from 28 May 2004. Under FRS7 Tullow is requiredto undertake a fair value exercise to determine the values attributed to theacquired assets within the Group's Balance Sheet. A provisional estimate offair value allocation was provided at the 2004 interims. Under the FRS Tulloware permitted to review this allocation within 12 months, and accordingly thefinal fair value allocated to the acquisition of Energy Africa may be summarizedas follows: $ million £ millionBook value of oil and gas fixed assets 343.9 187.6Market value of hedge contracts (51.8) (28.3)Fair value of other net liabilities (82.4) (45.0)Fair value adjustment to book values of oil and gas fixed 391.4 213.6assetsTotal acquisition cost 601.1 327.9 Based on the fair value exercise and current production and reserves mix, theaverage DD&A rate for the Energy Africa assets is approximately $8.70/bbl, on aworking interest basis. On track to be fully prepared for IFRS The Group will adopt IFRS with effect from 1 January 2005 and the 2005 interimfigures will be prepared on the new basis. Comparative figures for 2004 willalso be restated in accordance with IFRS. Tullow has established a project teamthat is managing the transition to IFRS and the exercise to restate the 2004figures has commenced. A restatement of the 2004 balance sheet, including areconciliation between UK GAAP and IFRS, will be issued to shareholders inadvance of the interim results which will be published in September 2005. Theproject team is also considering the presentation of the Group's results,systems impacts and the wider business issues that arise from such a fundamentalchange. Tullow's current understanding is that the major effects of changing from theGroup's existing accounting practices to IFRS are likely to be in the areas ofdeferred taxation related to business combinations, oil and gas hedges and sharebased payments. As Tullow adopts the successful efforts method of accounting forexploration and appraisal costs it is anticipated that changes in accounting forfixed assets costs will be comparatively minor. Tullow is monitoring theapproach adopted by the industry and the Group expects to be fully prepared foradoption of IFRS. -oOo- TULLOW OIL PLCPRELIMINARY RESULTS FOR YEAR ENDED 31ST DECEMBER 2004 GROUP PROFIT AND LOSS ACCOUNT Acquisitions Existing Operations Total 2004 2004 2004 2003 Restated £'000 £'000 £'000 £'000 Turnover 98,915 126,341 225,256 129,625 Cost of SalesOperating Costs (23,781) (39,719) (63,500) (42,621)Depletion and Amortisation (31,010) (36,561) (67,571) (39,628) (54,791) (76,280) (131,071) (82,249) Gross Profit 44,124 50,061 94,185 47,376 Administrative Expenses (3,268) (7,102) (10,370) (2,727) Depreciation (272) (375) (647) (332) (3,540) (7,477) (11,017) (3,059) Operating Profit Before Exploration Activities 40,584 42,584 83,168 44,317Exploration Costs Written Off (8,622) (9,339) (17,961) (12,772)Operating Profit 31,962 33,245 65,207 31,545Profit/(Loss) on Disposal of Producing Assets 2,292 (952)Profit on Ordinary Activities before Interest 67,499 30,593Interest Receivable and Similar Income 3,458 2,016Interest Payable and Similar Charges (12,960) (8,730) Profit on Ordinary Activities before Taxation 57,997 23,879 Taxation on Profit on Ordinary ActivitiesCurrent and Deferred Petroleum Revenue Taxation (10,956) (9,025)Current Corporation Taxation (9,863) (6,675)Deferred Corporation Taxation (4,229) 2,742 (25,048) (12,958) Profit for the Financial Year 32,949 10,921 Dividends (6,995) (3,782) Retained Profit for the Financial Year 25,954 7,139 Earnings per Ordinary Share (Note 3) Stg p Stg p- Basic 6.18 2.92- Diluted 6.11 2.90 TULLOW OIL PLCPRELIMINARY RESULTS FOR YEAR ENDED 31ST DECEMBER 2004 GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 2004 2003 £'000 £'000 Profit for the Financial Year 32,949 10,921Currency Translation Adjustments (19,338) (5,034) Total Recognised Gains and Losses for the Financial Year 13,611 5,887 RECONCILIATION OF MOVEMENTS IN GROUP EQUITY SHAREHOLDERS' FUNDS 2004 2003 £'000 £'000 Retained Profit for the Financial Year 25,954 7,139Currency Translation Adjustments (19,338) (5,034)Equity Shares Issued 256,547 13,516 Net Increase in Equity Shareholders' Funds 263,163 15,621Equity Shareholders' Funds - At 1st January 115,921 100,300 Equity Shareholders' Funds - At 31st December 379,084 115,921 TULLOW OIL PLCPRELIMINARY RESULTS FOR YEAR ENDED 31ST DECEMBER 2004 GROUP BALANCE SHEET 2004 2003 £'000 £'000Fixed AssetsIntangible Assets 103,312 48,434Tangible Assets 495,920 144,333Investments 496 496 599,728 193,263Current AssetsStock 3,392 437Debtors 54,207 26,115Cash at Bank and in Hand 85,070 66,686 142,669 93,238Creditors - Amounts falling due within one yearBank Loans and Overdrafts (5,302) (27,544)Trade and Other Creditors (114,014) (33,173) (119,316) (60,717) Net Current Assets 23,353 32,521 Total Assets Less Current Liabilities 623,081 225,784 Creditors - Amounts falling due after more than one yearBank Loans (143,398) (59,458) Provisions for Liabilities and ChargesDecommissioning Costs (70,679) (47,524)Deferred Taxation (29,920) (2,881) Net Assets 379,084 115,921 Capital and ReservesCalled Up Equity Share Capital 64,537 37,784Share Premium Account 121,656 14,198Merger Reserve 178,953 56,617Foreign Currency Translation Reserve (30,362) (11,024)Profit and Loss Account (Note 4) 44,300 18,346 Equity Shareholders' Funds 379,084 115,921 TULLOW OIL PLCPRELIMINARY RESULTS FOR YEAR ENDED 31ST DECEMBER 2004 GROUP CASH FLOW STATEMENT 2004 2003 Notes £'000 £'000 Net Cash Inflow from Operating Activities 5 154,307 84,960 Returns on Investments and Servicing of Finance 6 (13,053) (7,533)Taxation (14,497) (12,261) Acquisition of Subsidiaries (166,055) - Disposal of Subsidiary 4,730 - Capital Expenditure and Financial Investment 7 (95,105) (42,044) Net Cash (Outflow)/Inflow before Management of Liquid (129,673) 23,122Resources and Financing Management of Liquid Resources - Term Deposits (10,299) 4,143 Financing 8 143,045 (6,399) Increase in Cash for the Year 3,073 20,866 Reconciliation of Net Cash Flow to Movement in Net DebtIncrease in Cash for the Year 3,073 20,866Cash (Inflow)/Outflow from Movement in Debt (65,182) 14,802Cash Outflow/(Inflow) from Management of Liquid Resources 10,299 (4,143) Change in Net (Debt)/Funds resulting from Cashflows (51,810) 31,525Currency Translation Adjustment 710 1,507Net Debt at 1st January (62,368) (95,400) Net Debt at 31st December (113,468) (62,368) TULLOW OIL PLCPRELIMINARY RESULTS FOR YEAR ENDED 31ST DECEMBER 2004 GROUP CASH FLOW STATEMENT (continued) Analysis of Changes in Net Debt 01.01.04 Cash Flow Exchange 31.12.04 £'000 £'000 £'000 £'000 Cash at Bank and in Hand 24,618 2,015 (112) 26,521Overdrafts (1,055) 1,058 (3) - 23,563 3,073 (115) 26,521 Bank loans due within one year (26,769) 20,619 848 (5,302)Bank loans due after one year (61,090) (85,801) (29) (146,920) (87,859) (65,182) 819 (152,222) Term Deposits 1,928 10,299 6 12,233 Net Debt (62,368) (51,810) 710 (113,468) Cash at Bank and in Hand at 31 December 2004 per the Group Balance Sheetincludes £26,520,796 of Cash, £12,233,337 of Term Deposits, £36,236,529 on fixeddeposit in support of future decommissioning costs and £10,079,815 on fixed termdeposit under the terms of the debt facility. Cash at Bank and in Hand at 31 December 2003 per the Group Balance Sheetincludes £24,617,585 of Cash, £1,927,857 of Term Deposits, £29,750,854 on fixeddeposit in support of future decommissioning costs and £10,389,324 on fixed termdeposit under the terms of the debt facility. Bank Loans are stated in the Group Balance Sheet net of related unamortisedarrangement fees of £3,521,511 (2003 - £1,911,573). TULLOW OIL PLCPRELIMINARY RESULTS FOR YEAR ENDED 31ST DECEMBER 2004 NOTES TO THE PRELIMINARY ACCOUNTS Note 1 Basis of accounting and Presentation of Financial Information The financial information set out in the announcement does not constitute theCompany's statutory accounts for the years ended 31 December 2004 or 2003. Thefinancial information for the year ended 31 December 2003 is derived from thestatutory accounts for that year, which have been delivered to the Registrar ofCompanies. The auditors reported on those accounts; their report was unqualifiedand did not contain a statement under s237(2) or (3) Companies Act 1985. Thestatutory accounts for the year ended 31 December 2004 will be finalised on thebasis of the financial information presented by the directors in thispreliminary announcement and will be delivered to the Registrar of Companiesfollowing the Company's annual general meeting. The Group has revised its previous accounting policy for Taxation and Turnoverin relation to notional Cote d'Ivoire corporation tax levied under the terms ofthe Espoir field Production Sharing Contract (PSC) and deemed settled out of theCote d'Ivoire state's share of Espoir production. Previously, the amount ofCote d'Ivoire corporation tax settled out of production was treated as Taxationand also included in Turnover. Under the revised treatment, this component ofstate profit oil is not included in Turnover and consequently is not includedwith other taxes, principally cash settled, under the Taxation heading.Turnover and Taxation for 2003 have been restated to comply with the revisedaccounting policy and have been reduced by £2,739,830. There has been no effecton net assets or net profit in any period as a result of the change. Save as discussed above there are no changes to the accounting policies as setout on pages 51 to 53 of the Annual Report and Statement of Accounts for theyear ended 31st December 2003. Note 2 Acquisitions The Energy Africa Limited (Energy Africa) and Energy Africa Gabon HoldingsLimited (EAGHL) acquisition is accounted for under the 'acquisition method' inaccordance with FRS 7 "Fair values in acquisition accounting", whereby theassets and liabilities acquired are restated to fair value, with any excess ofthe purchase consideration over the fair values of the net assets acquiredallocated to goodwill. The fair value of the purchase consideration of £327,911,243 comprised132,987,442 Tullow shares issued valued at £135,632,816, using the market priceat the date of acquisition, plus cash consideration and acquisition expensesamounting to £192,278,427. The merger provisions of Section 131 of the Companies Act, 1985 applies to theshare consideration amount and results therefore in a transfer of £122,335,483to the Merger Reserve. After restating the acquirees' balance sheets at the acquisition date to complywith the Group's accounting policies, fair value adjustments were applied torestate oil and gas tangible and intangible fixed assets, stock, and the hedginginstruments acquired to estimated fair values of £402,355,701, £643,356 and aliability of £28,283,011 respectively. The fair values of other net liabilities of £45,593,109 materially approximatetheir book values, such that no fair value adjustments were necessary. The totalof the fair values of the assets and liabilities acquired matches the purchaseconsideration, such that no goodwill arises on the acquisition. TULLOW OIL PLCPRELIMINARY RESULTS FOR YEAR ENDED 31ST DECEMBER 2004 NOTES TO THE PRELIMINARY ACCOUNTS (continued) Note 3 Earnings per Ordinary Share The calculation of basic earnings per share is based on the profit for the yearafter taxation of £32,949,297 (2003 - £10,920,541) and 532,980,261 (2003 -374,427,152) ordinary shares, being the weighted average number of shares inissue for the year. The calculation of diluted earnings per share is based on the profit for theyear after taxation as for basic earnings per share. The number of sharesoutstanding is however adjusted to show the potential dilution if employee andother share options are converted into ordinary shares. The weighted averagenumber of ordinary shares is increased by 6,042,545 (2003 - 2,071,203) inrespect of the share option scheme, resulting in a diluted weighted averagenumber of shares of 539,022,806 (2003 - 376,498,355). Note 4 Profit and Loss Account 2004 2003 £'000 £'000 At 1st January 18,346 (7,379)Profit Retained for Financial Year 25,954 7,139Transfer from Merger Reserve - 12,596Transfer to Foreign Currency Translation Reserve - 5,990 At 31st December 44,300 18,346 Note 5 Reconciliation of Operating Profit to Operating Cash Flows 2004 2003 £'000 £'000 Operating Profit for the Year (Restated) 65,207 31,545Depletion and Amortisation 67,571 39,628Depreciation of Other Fixed Assets 647 332Exploration Costs 17,961 12,772Hedging Contracts 6,997 -Increase in Stock (1,721) (437)Increase in Operating Debtors (34,215) (1,992)Increase in Operating Creditors 35,349 3,589Currency Translation Adjustment (3,489) (477) Net Cash Inflow from Operating Activities 154,307 84,960 TULLOW OIL PLCPRELIMINARY RESULTS FOR YEAR ENDED 31ST DECEMBER 2004 NOTES TO THE PRELIMINARY ACCOUNTS (continued) Note 6 Returns on Investments and Servicing of Finance 2004 2003 £'000 £'000 Interest Received 3,436 2,016Interest Paid (9,494) (5,767)Dividend Paid (6,995) (3,782)Net Cash Outflow from Returns on Investments andServicing of Finance (13,053) (7,533) Note 7 Capital Expenditure and Financial Investment 2004 2003 £'000 £'000Purchase of Tangible & Intangible Exploration Assets (96,592) (45,951)Purchase of Tangible Fixed Assets - Other (132) (235)Disposal of Tangible Fixed Assets - 4,339Disposal of Intangible Exploration Assets 1,619 -Purchase of Investments (197) Net Cash Outflow from Investing Activities (95,105) (42,044) Note 8 Financing 2004 2003 £'000 £'000 Issues of Ordinary Shares 126,500 14,404Costs of Share Issues (5,586) (888)Repayment of Loans (33,437) (17,334)Drawdown of Loan 98,620 2,531Acquisition of Subsidiary - Bank Loans Acquired (33,824) -Transfer to Restricted Funds Deposit Account (6,176) (5,027)Debt Arrangement Fees (3,052) (85) 143,045 (6,399) TULLOW OIL PLCPRELIMINARY RESULTS FOR YEAR ENDED 31ST DECEMBER 2004 NOTES TO THE PRELIMINARY ACCOUNTS (continued) Note 9 Subsequent Events Since the balance sheet date Tullow has continued to progress its exploration,development and business growth strategies. On 1 April 2005, the Company announced the completion of the acquisition, fromShell U.K. Limited and Esso Exploration and Production UK Limited, of theirRelated Shares:
Tullow Oil