21st Mar 2007 07:03
Tullow Oil PLC21 March 2007 Tullow Oil plc 2006 Results Another record year; exciting outlook for 2007 and beyond 21 March 2007 - Tullow Oil plc ('Tullow'), the independent oil and gas,exploration and production group, announces its results for the year ended 31December 2006. Tullow had an excellent year in 2006. Record operational and financial resultswere achieved in a favourable oil and gas pricing environment, and each corearea continued to deliver strong performances. This outcome underpinned ongoingreinvestment in exploration and development activities together with a materialincrease in dividends and helped to create the financial platform for theacquisition of Hardman Resources Limited ('Hardman'), which was effective inDecember 2006 and completed in early January 2007. Results Highlights 2006 2005 Change £ millions £ millionsSales Revenue 578.8 445.2 Up 30%Operating Profit 262.6 198.6 Up 32%Profit Before Tax 263.3 178.6 Up 47%Operating Cash Flow before Working Capital 446.7 309.5 Up 44% Stg p Stg pBasic Earnings per Share 24.23 17.50 Up 38%Final Dividend per Share 3.50 3.00 Up 17% • 11% increase in average annual production to 64,720 boepd • 89% organic reserves replacement; three year average organic reserve replacement of 98% • Total reserves and resources increased by 149 to 506 mmboe • Current production is 76,000 boepd and is expected to reach 85,000 boepd by year-end • Initial commercial reserves booked in Uganda; First production scheduled for early 2009 • Preliminary assessment of gross recoverable reserves in the Albertine Basin of 100 to 250 mmbbls • Three gas discoveries in the UK including the potentially significant K4 discovery in the CMS area • Okume, West Espoir and Bangora developments successfully on stream • Seven new African licences awarded • Completion of £595 million Hardman acquisition in January 2007 Commenting today, Pat Plunkett, Chairman, said: "The balance and diversity of Tullow's business allows us to adapt quickly andwith flexibility to opportunities as they arise and to tailor our investmentplans to the changing circumstances of the industry. Our production assets alongwith our development and exploration activities, and the Hardman business,leaves Tullow with a high-quality, opportunity-rich portfolio in each of itscore areas. Our business is healthy and growing and should remain so for theforeseeable future." Aidan Heavey, Chief Executive, said: "Tullow had another remarkable year in 2006. Our assets delivered strongproduction growth and good organic reserves replacement. Seven out of 12 of ourexploration wells were discoveries and we proved a new and significanthydrocarbon province in Uganda which is already having a material impact onreserves. We completed our largest ever acquisition and continued to attract andretain great people and acquire quality new acreage. We have an excellentportfolio managed by a top-class technical, commercial and financial team. Ourstrategy is clear, our business is growing and we are continuing to drive recordperformance throughout the business." Full details of the presentation, webcast and conference calls in conjunctionwith these results are on page 20 of this announcement and in the 2006 ResultsCentre on the Group website at www.tullowoil.com. 2006 Results For the year ended 31 December 2006 During 2006, we invested close to £1 billion in growing the business, including£332 million on capital expenditure, 70% of which was invested in our productionand development assets and £595 million on the acquisition of Hardman. The 30%increase in revenue and the Group's operating cash flow before working capitaladjustments of £446.7 million comfortably funded all our capital investment andreturns to shareholders. Record operating and financial results overall Tullow's 2006 revenue increased by 30% to £578.8 million (2005: £445.2 million)as a result of higher production, and sales prices which were on average some29% ahead of 2005. This growth was driven by strong increases in European gasproduction against a background of stable African oil output and significantlyhigher price realisations. European revenues were 60% ahead of 2005, whilstAfrican revenues increased by 9%. Underlying cash operating costs were down 2% compared with 2005, despitesignificant cost pressure within our industry. This strong cost performancereflected efficiencies arising from increased production across all assets,ongoing cost control initiatives in UK assets and the addition of lower-costAsian production during the year. Operating profit before exploration costswritten off grew by 32% to £295.1 million (2005: £224.4 million), reflectingstrong growth in production and realised oil and gas prices. Profit before tax increased by 47% to £263.3 million (2005: £178.6 million) andbasic earnings per share amounted to 24.23 pence, an increase of 38% (2005:17.50 pence). Excellent environmental performance In 2006, Tullow had no significant environment, health, safety or securityissues. The Lost Time Incident Frequency Ratio was 0.81, well within our targetof 1.0, despite a 65% increase to 6.1 million hours worked, both onshore andoffshore, during the year. Furthermore, our responsibilities also includeworking with communities in a sustainable manner and in 2006 Tullow spent US$1.5million in funding social and community projects within our core areas. Challenging external environment Whilst the commodity pricing environment has been strong, leading to increasedability to commercialise our oil and gas assets, it has been countered by atight and inflationary contractor environment. In 2006, despite significantinflationary pressures on our field operating costs we managed to maintain ourcost of production below 2005 levels. This has been achieved by strong costmanagement, but more importantly through optimal use of our infrastructure byincreasing throughput and synergies. This will continue in 2007 whereoperational synergies, especially in the Espoir and Ceiba/Okume projects, areexpected to have a greater impact. Competition also increased for new assets and licences during the year andTullow's entrepreneurial approach combined with our diverse portfolio of assetsassists us in managing this challenge. In general we are acquiring the equipmentand resources necessary for our major developments and operational programmes,although we have seen lead times for future developments significantly increase.To address this industry-wide problem we have had to enhance our skills inmedium to long-term operational planning and improve our capacity to shareresources across our global asset base. Tullow prioritises financial and operating flexibility and undertakes astructured and rigorous project and prospect evaluation process to ensureeffective allocation of funds at any point in the cycle. For 2007, this means wewill be concentrating funding and resources mainly in Africa and Asia, until theanticipated improvement in pricing and the contractor environment occurs in theUK gas market. Focused growth strategy Tullow focuses on the long-term resourcing, growth and health of the businessand invests accordingly. During 2006, £595 million was invested in theacquisition of Hardman. Hardman represents an outstanding strategic opportunityfor Tullow, enabling us to establish a material and influential footprint inMauritania, assume control of the prime block in the Albertine Rift Basin inUganda and acquire highly prospective exploration interests in South America.The transaction is a clear demonstration of the substantial financial andoperational capability of Tullow's business and team. The Hardman business hasnow been fully integrated and encouraging operational progress has already beenmade in Mauritania and Uganda. Strong positive outlook Tullow's strong cash flow and rigorous approach to the management of financialrisk allows us to continue to implement our growth plans with confidence whilstmaintaining and servicing debt of approximately £450 million. During 2007 ourfocus will be on continuing to increase production to a targeted level of 85,000boepd by year-end, and drilling over 40 exploration wells, including majorcampaigns in Uganda, Namibia and India. The oil and gas industry is as dynamicas ever and the combination of excellent knowledge of our core areas, financialand operating flexibility and continued investment in our people means theoutlook for Tullow is both positive and exciting. Operations Review Each of our core areas demonstrated substantial progress in 2006. Record UK production and gas price realisations Tullow's interests in Europe are centred on gas and infrastructure in theSouthern North Sea. Over the last six years Tullow has established a dominantposition in the Thames-Hewett and Caister Murdoch System (CMS) infrastructurehubs through a combination of acquisitions, an active development andexploration programme and participation in licensing rounds. Our most significant activity during the year was on the Schooner and Ketchfields, where effective operational management increased average uptime to 98%and achieved maximum production of over 100 mmscfd. However, the overall outcomeof the work programme, which included the non-commercial Schooner NW developmentwell, was below expectations, leading to a 45 bcf downgrade in commercialreserves attributed to the Schooner and Ketch assets at 31 December 2006.Elsewhere, the CMS and Thames-Hewett area fields continued to perform stronglydriving average UK production to 172 mmscfd, a 32% increase over 2005 levels andallowing Tullow to take maximum advantage of record gas prices, particularly inthe first half of the year. In parallel to growing production, Tullow also participated in four successfulexploration wells, including the potentially significant K4 discovery in the CMSArea. These discoveries, along with the Thurne, Kelvin and Wissey projectsalready in progress, form the basis of future development and there are afurther six exploration wells planned in 2007. In February 2007 Tullow wasawarded six exploration blocks spread across the Thames-Hewett and CMS Areas inthe 24th offshore Licensing Round. The Group plans to acquire seismic data aspart of a full evaluation of the potential of this acreage and anticipates thatexploration wells on this acreage will form part of the 2008 drilling programme. Following unprecedented gas pricing in early 2006, the recent much-neededincrease in pipeline capacity and the impact of a comparatively mild winter havecombined to drive gas prices for the first quarter of this year down to 2003levels. Looking forward, however, the overall underlying supply and demandfundamentals, allied to the gradual convergence of UK and European gas markets,mean that the long-term outlook for the UK gas business remains positive. Key objectives delivered in Africa 2006 was an outstanding year for Tullow's African assets. Production commencedfrom two major development projects, a significant new hydrocarbon province wasdiscovered in Uganda and the portfolio was enhanced through the award oflicences in Angola, Madagascar, Ghana, Congo (DRC) and Gabon. Since year end,Tullow has also acquired interests in two licences in Cote d'Ivoire. In January2007, Tullow completed the acquisition of Hardman which added materially to theGroup's assets in Mauritania, enabled Tullow to take operational control ofBlock 2 in Uganda and further high impact exploration acreage in Africa. During2006, we had a number of key objectives in Africa: • Ongoing infill drilling on producing assets; • Major developments to deliver first oil in Equatorial Guinea and Cote d'Ivoire; and • Significant exploration programmes in Gabon and Uganda. Our principal production objectives were achieved. The response to infilldrilling was positive across all fields, and our Gabon output was in line withexpectations. On the development front, both West Espoir and Okume came onstream as anticipated. In exploration, while the outcome of the Gabon programmewas disappointing, results to date from Uganda have exceeded our most optimisticexpectations and point to the potential for a world-class new hydrocarbonprovince to be delivered by the 2007 and 2008 exploration and appraisalprogrammes. Development work on existing discoveries is under way with a viewto producing first oil in early 2009. Based on the wells drilled to date,Tullow's preliminary assessment of the gross recoverable reserves in theAlbertine Basin is in the range of 100 to 250 million barrels. Encouraging progress was also achieved on the Kudu project in 2006. The Grouphas focussed on the gas sales negotiations for the gas to power project, thepreparation for two appraisal wells in 2007 to test the significant upsidepotential of this asset and the start of negotiations to bring a partner intothe project to reduce the Group's working interest to 70%. Tullow is currentlyin exclusive negotiations with a potential partner in respect of this interestand expects to conclude arrangements in advance of the commencement of the 2007appraisal programme in April 2007. In 2007, the Group expects to continue with very significant levels ofexploration, development and production activity in Africa. Exploration activitywill involve drilling at least six exploration wells with a focus on the two keycampaigns in Uganda and Namibia and the high impact Mahogany well in Ghana, inaddition to ongoing development projects in Gabon, Congo (Brazzaville), Coted'Ivoire and Equatorial Guinea. Significant progress made in South Asia 2006 was a very successful year for Tullow in South Asia, with significantprogress made across the exploration and development portfolio. The regenerationof the Group's Asian assets continues apace and the foundations are now in placefor an exciting 2007 programme. In Bangladesh, Tullow produced first gas from its Bangora project in May and,following a successful appraisal drilling programme, made a declaration ofcommerciality in December and recorded a material upgrade to reserves at yearend. In Pakistan, two development wells were drilled on the Chachar field and,with the installation of the gas plant complete, first gas will be produced inMay. On the exploration front, following a seismic programme during 2006, atwo-well programme on the potentially significant Kohat Block will spud latethis year. Perhaps most encouraging, however, has been India, where seismic undertakenduring 2005 and 2006 has led to the delineation of a number of distinct targetsin the CB-ON/1 Block in the Cambay Basin, which will be the subject of amulti-well drilling campaign in 2007. The growth challenge The recent announcement of first production from the Okume field was a majormilestone for Tullow. For the Group, bringing Okume on-stream means that over95% of our commercial reserves at the end of 2006 are now successfullyproducing. While this is a positive achievement, it also creates a challenge toaccess and create the next generation of development projects. Based on ourannual production rate, Tullow needs to find over 30 million barrels of oil peryear to maintain reserves and still keep growing. We believe our portfolio ismore than capable of achieving this objective and our exploration, developmentand new ventures activities are geared towards exceeding it. Finance Review Tullow has grown into a versatile and balanced oil and gas Exploration andProduction Group and our strategic, financial and operational objective is torun a balanced international business with a long-term perspective onperformance and growth. Within the Group we have defined a number of business units based on geographyand activity type. Each business unit is responsible for the execution of adevelopment strategy and achievement of short-term performance targets. Thesetargets are based on and support the Group's strategic objectives and KeyPerformance Indicators, which are used to assess the ongoing positioning of thebusiness. During 2006, Tullow achieved extremely strong performance across allits key indicators and this enables us to continue to invest with confidence. Key performance indicators 2006 2005 ChangeLost Time Incident Frequency Rate per million hours worked 0.81 0.82 Down 0.01Production (boepd) 64,720 58,450 Up 11%Reserve replacement (%) 89% 118% Down 29%Sales volume (boepd) 57,300 53,350 Up 7%Realised oil price per bbl ($) 52.24 43.05 Up 21%Realised gas price (pence per therm) 46.18 33.85 Up 36%Cash operating costs per boe (£)1 4.74 4.84 Down 2%Operating cash flow before working capital per boe (£) 18.76 13.50 Up 39%Net debt 122.1 140.2 Down 13%Interest cover 24.0 15.5 Up 8.5 timesGearing (%)2 15% 36% Down 21%1. Cash operating costs are cost of sales excluding depletion and amortisation and under/over lift movements2. Gearing is net debt divided by net assets Higher production and better pricing Working interest production averaged 64,720 boepd, 11% ahead of 2005. Salesvolumes averaged 57,300 boepd, representing an increase of 7%. Productionincreased most notably in Europe, which rose 21% or 5,000 boepd, and Asia whichrose 330% or 1,400 boepd. Oil production from Africa was in line with 2005,driven by strong performance in Equatorial Guinea and Cote d'Ivoire offset by amodest decline in Gabon. Prices realised for both oil and gas during 2006 showed material increases over2005. In the UK, extreme shortness in gas supply during the first half of theyear led to record prices and was the principal factor driving Tullow's realisedprices to 46.2p/therm, a 36% increase over 2005. The Group also recorded tariffincome of £16.6 million (2005: £14.7 million) from its UK infrastructureinterests. Increases in world oil prices during the first half were also a keyinfluence on realisations from Tullow's African business which rose by 21% to$52.2/bbl (2005: $43.1/bbl). Tullow's oil production sold at an average discountof 5% to Brent during the year, reflecting improved competitiveness in the WestAfrican oil trading environment and revised blending and marketing arrangementsin respect of the M'Boundi field. As a result of higher production and prices, 2006 revenue amounted to £578.8million, an increase of 30% over 2005. The mix of production also changedslightly, with UK production increasing from 41% of 2005 production to 45% ofthe 2006 total; with increased production from Asia, this meant that the Group'sproduction was relatively evenly balanced between oil and gas. Oil Gas Total % of Total Revenue analysed by Core Area £ millions £ millions £ millionsEurope - 307.0 307.0 53%Africa 268.3 - 268.3 46%Asia - 3.5 3.5 1%Total 268.3 310.5 578.8% contribution to Group 46% 54% Effective operational cost control Underlying cash operating costs, which exclude depletion and amortisation andmovements on under/over lift, amounted to £112.0 million (£4.74/boe). Thesecosts were 2% below 2005 levels, despite higher underlying oil and gas pricing,which had a direct impact on reported operating costs due to royalties inrespect of Gabonese production. Reported operating costs before depletion andamortisation for the year of £114.7 million (2005: £123.5 million) were alsoimpacted by the inclusion at market value of £2.7 million associated withoverlifted volumes at 31 December 2006, principally relating to the Group'sinterests in Gabon and Equatorial Guinea. Enlarged business, more activity and investment Depreciation, depletion and amortisation for the year amounted to £144.9 million(£6.13/boe). This represents a 21% increase over 2005, principally as a resultof a higher depreciation charge on UK assets. The increased charge was driven bymaterial investment in the Schooner and Ketch assets combined with a reductionof 45 bcf in commercial reserves attributed to the fields. The reduction inreserves followed an evaluation of the results of the 2006 redevelopmentprogramme and the drilling of the unsuccessful Schooner NW well. Tullow invested significantly in people during 2006. Average staff numbersincreased 20% to 209 people, adding strong resources to our technical,commercial and senior managerial teams. As a result, underlying general andadministrative costs have increased by 48% to £18.3 million. The total generaland administrative costs charge of £22.5 million also includes a charge of £4.2million in respect of the Group's share-based incentive schemes (2005: £1.4million). Exploration costs written-off were £32.5 million (2005: £25.8 million), inaccordance with the Group's 'successful efforts' accounting policy, whichrequires that all costs associated with unsuccessful exploration are written-offto the Income Statement. The principal write-downs during 2006 related toAngola, Gabon, UK exploration and new ventures/pre-licence costs. The Groupdrilled 12 exploration wells in 2006 and made seven discoveries, and is planningto drill over 40 wells during 2007. Operating profit increased 32% Operating profit before exploration activities amounted to £295.1 million (2005:£224.4 million), an increase of 32%, reflecting the strong growth in Groupproduction and realised oil and gas prices, somewhat offset by increaseddepreciation charges on a per barrel basis. More effective hedging At 31 December 2006 the Group's derivative instruments had a negative mark tomarket value of £21.0 million (2005: £147.8 million). Of this, £72.7 millionrelates to a negative mark to market on oil contracts, of which £74.0 millionrelates to hedges acquired as part of the acquisition of Energy Africa in 2004,which is largely offset by a positive mark to market on gas contracts of £45.6million. The Group's position also includes a positive mark to market of £5.9million in respect of foreign exchange derivative instruments entered into inrespect of the Hardman transaction and the balance relates to interest ratederivatives. While the oil and gas arrangements all qualify for hedge accounting, thevariations in crude oil discounts and gas production patterns for Tullow docause a degree of hedge ineffectiveness. During 2006, however, the steadyreduction in average discount attributable to Tullow's oil production, combinedwith lower year- end commodity prices, has resulted in an improvement in overallcumulative hedge ineffectiveness at 31 December 2006. Consequently, a credit of£9.8 million has been recognised in the Income Statement for the year in respectof oil and gas contracts. In addition a credit of £5.9 million is reflected inthe Income Statement in respect of foreign exchange derivative instruments asthey do not qualify for hedge accounting under IAS 39. Tullow continues to undertake hedging activities as part of the ongoingmanagement of its business risk and to protect the availability of cash flow forreinvestment across its asset portfolio. Hedges in respect of 2007 providedownside protection on revenue of over £280 million, representing over 75% of2007 budgeted capital investment. The Group's hedge position as at 15 March 2007can be summarised as follows: Hedge Position H1 2007 H2 2007 2008OilVolume - bopd 16,491 17,400 10,793Current Price Hedge - US$/bbl 52.67 55.47 51.80GasVolume - mmscfd 93.6 69.8 54.4Current Price Hedge - p/therm 44.35 44.98 46.11 Financing costs and interest cover Tullow's growth during 2006, and in particular the Hardman acquisition, wasgreatly facilitated by the support of the Group's banking syndicate and thebalance and diversity of our portfolio. Prudent use of debt is a core element ofthe Group's overall strategy and Tullow has a flexible financing facility whichallows non-OECD activities to be funded at an overall financing cost of circa8%. The net interest charge for the year was £15.0 million (2005: £19.8 million) andreflects reduced levels of net debt during 2006. At 31 December 2006, Tullow hadnet debt of £122.1 million, including £46.5 million of net cash attributable toHardman. Since year-end this has increased to £450 million as a result of theHardman transaction, involving payment of AS$819.5 million (£329.9 million) ofcash consideration on 10 January 2007. Interest cover is very healthy at over24.0 times (2005: 15.5 times). No increase in effective tax rate The tax charge of £105.9 million (2005: £65.4 million) relates to the Group'sNorth Sea and Gabonese activities and represents 40% of the Group's profitbefore tax (2005: 37%). After adjusting for non deductible exploration costs,hedge ineffectiveness charges and non-recurring items the Group's underlyingeffective tax rate remained unchanged at 35%, despite the introduction of anadditional 10% supplementary Corporation Tax by the UK Government on 1 January2006. Strong profit for the period and increased dividend Profit after tax amounted to £157.4 million, representing a 39% increase over2005. This profitability has allowed the Group to once again substantiallyincrease its dividend. A final dividend of 3.5 pence per share has been proposedby the Board. This brings the total payout in respect of 2006 to 5.5 pence pershare, representing an increase of 38% over 2005. While the Board plans tomaintain a progressive dividend policy future increases are unlikely to matchthose of recent years, due to the significant level of the current reinvestmentopportunities the Group has. Shareholder distribution and total shareholder returns Since Tullow initiated dividend payments in 2003, cash returned to shareholdershas exceeded £80 million. This is an important component of total shareholder return, which in 2006exceeded 49%, placing Tullow in the top quartile of its peer group. Over thefive year period from 2001 to 2006, Tullow's total shareholder return has beenin excess of 400%, while total shares in issue have doubled from 358 millionshares to the current level of approximately 717 million shares spread acrossover 10,000 shareholders. Strong balance sheet capacity and financial flexibility The excellent pricing environment, allied to increasing production and effectivecontrol of underlying operating costs, led to record operating cash flow beforeworking capital movements of £446.7 million, 44% ahead of 2005. This cash flow,allied to the positive asset performance and strong reserve replacement ofrecent years meant that the Group had access to substantial financial capacitythroughout 2006; facilitating investment of £332 million in production,development and exploration, a 38% increase in the dividend and the acquisitionof Hardman. During 2006 approximately 70% of Group capital expenditure was associated withongoing development and production enhancement projects in the UK, Gabon, Congo(Brazzaville), Equatorial Guinea and Cote d'Ivoire. The remainder of expenditurewas reinvested in exploration and appraisal activities, where the Group drilled12 wells, recording seven discoveries. The success of these multi-yearprogrammes has enabled Tullow to record average organic reserve replacement of98% for the three year period 2004 to 2006. During 2007, we plan to invest afurther £350 million in our assets, with the objective of achieving averageproduction of approximately 80,000 boepd and delivering three major explorationcampaigns in Uganda, Namibia and India. Hardman Acquisition On 25 September 2006, Tullow announced a proposal to acquire Hardman by way of aScheme of Arrangement. Following the approval of the acquisition by Hardmanshareholders and the Australian Courts, the Scheme became effective on 20December 2006 and formal completion occurred on 10 January 2007. The acquisitionof Hardman was by a cash offer, combined with a partial equity alternativeamounting to up to a maximum 65 million Tullow shares, representingapproximately 40% of the value of the transaction. The partial equity option wasfully exercised by Hardman shareholders and the balance of the acquisitionconsideration, amounting to £359.1 million, was paid in cash funded by a mixtureof existing debt and a new facility provided by Bank of Scotland Corporate.Following the transaction, Tullow has net debt totalling approximately £450million. During 2007, the Group will seek to repay a portion of this debt andadjust the terms of the remainder to match better the Group's reserve base andlong-term growth objectives. Hardman's business and assets have been consolidated in Tullow's financialstatements with effect from 31 December 2006. A preliminary fair value exercisehas been undertaken to determine the values attributable to the acquired assetsand liabilities within the Group's Balance Sheet as at 31 December 2006. Thetotal fair value attributed to the transaction amounts to £750.0 million,comprising £594.7 million of consideration and associated costs and anadditional £155.3 million of deferred tax uplift provided in accordance with theprovisions of IAS 12. Based upon this preliminary exercise, Tullow has allocateda total of £86.9 million to Tangible Assets, relating to the Chinguetti field inMauritania, and a total of £623.6 million to intangible assets reflectingHardman's interests in a variety of discoveries, potential development projectsand exploration across a total of seven countries including Uganda andMauritania. The balance of the preliminary fair value allocation, amounting to£39.5 million, is accounted for by the other net assets, including cashbalances, acquired. Due to the timing of the transaction and the wide range ofassets and interests acquired, the fair value allocated at 31 December ispreliminary in nature and will be reviewed during 2007 in accordance with theprovisions of IFRS 3 relating to Business Combinations. The reserves attributable to the Hardman assets have also been reflected inTullow's commercial reserves and contingent resources analysis at 31 December2006. In particular, Tullow has allocated a total of 9.6 mmboe to its 19%interest in Chinguetti and 17.8 mmboe to Hardman's 50% interest in the Mputa andNzizi discoveries in Block 2 in Uganda (where Tullow now holds a total interestof 100%) within the commercial reserves category. Financial Strategy and Outlook Tullow operates a business which is commercially aggressive but financiallyconservative. We recognise the financial risks inherent in our operations andmitigate them through portfolio diversity, prudent hedging and close attentionto costs. Ends Group Income Statement Year Ended 31 December 2006 Note 2006 2005 £'000 £'000Sales Revenue 578,847 445,232Cost of sales (261,268) (243,149)Gross Profit 317,579 202,083Administrative expenses (22,490) (13,793)Disposal of subsidiaries - 30,537Profit on sale of oil and gas assets - 5,524Exploration costs written off (32,494) (25,783)Operating Profit 262,595 198,568Gain/(loss) on hedging instruments 15,701 (159)Finance revenue 3,030 4,367Finance costs (17,994) (24,197)Profit from Continuing Activities before Tax 263,332 178,579Income tax expense 7 (105,894) (65,443)Profit for the Year from Continuing Activities 157,438 113,136Earnings per Ordinary Share 2 Stg p Stg p- Basic 24.23 17.50- Diluted 23.67 17.15 Group Statement of Recognised Income and Expense Year Ended 31 December 2006 2006 2005 £'000 £'000Profit for the Financial Year 157,438 113,136Currency translation adjustments (55,057) 32,447Hedge movement 68,236 (120,449)Total Recognised Income and Expense for the Year 170,617 25,134 Group Balance Sheet As at 31 December 2006 2006 2005 £'000 £'000ASSETSNon-Current AssetsIntangible exploration and evaluation assets 820,437 160,543Property, plant and equipment 934,368 736,563Investments 496 496 1,755,301 897,602Current AssetsInventories 13,735 5,141Trade receivables 74,609 66,441Other current assets 28,963 26,851Cash and cash equivalents 99,478 65,386Derivative financial instruments 16,065 - 232,850 163,819Total Assets 1,988,151 1,061,421LIABILITIESCurrent LiabilitiesTrade and other payables (161,797) (139,415)Hardman acquisition payable (333,912) -Other financial liabilities (7,516) -Income tax payable (20,549) (25,038)Derivative financial instruments - (70,639)Total Current Liabilities (523,774) (235,092)Non-Current LiabilitiesTrade and other payables (17,137) (19,118)Other financial liabilities (206,883) (198,372)Deferred tax liabilities (311,925) (51,473)Provisions (124,868) (91,139)Derivative financial instruments (37,088) (77,208)Total Non-Current Liabilities (697,901) (437,310)Total Liabilities (1,221,675) (672,402)Net Assets 766,476 389,019EQUITYEquity attributable to Equity Holders of theParentCalled up share capital 65,190 64,744Share premium 126,075 123,019Other reserves 69,791 60,589Shares to be issued 235,621 -Retained earnings 269,799 140,667Total Equity 766,476 389,019 Group Cash Flow Statement Year Ended 31 December 2006 Note 2006 2005 £'000 £'000Cash Flows from Operating ActivitiesCash generated from operations 9 404,064 273,840Income taxes paid (61,868) (25,360)Net cash from operating activities 342,196 248,480Cash Flows from Investing ActivitiesAcquisition of subsidiaries 21,336 -Disposal of subsidiaries - 57,227Disposal of oil and gas assets - 31,769Purchase of intangible exploration & evaluation (67,976) (69,766)assetsPurchase of property, plant and equipment (243,087) (298,320)Finance revenue 3,030 4,359Net cash used in investing activities (286,697) (274,731)Cash Flows from Financing ActivitiesNet proceeds from issue of share capital 3,502 1,570Debt arrangement fees (1,176) (10,481)Repayment of bank loans (27,914) (351,637)Drawdown of bank loan 59,996 390,515Finance costs (16,997) (21,483)Dividends paid (32,492) (14,555)Purchase of treasury shares (3,976) -Net cash used in financing activities (19,057) (6,071)Net Increase/(Decrease) in Cash and Cash Equivalents 36,442 (32,322)Cash and Cash Equivalents at Beginning of Period 65,386 85,070Translation Difference (2,350) 12,638Cash and Cash Equivalents at end of Period 99,478 65,386 Notes to the Preliminary Accounts Year Ended 31 December 2006 1. Basis of Accounting and Presentation of Financial Information While the financial information included in this preliminary announcement hasbeen prepared in accordance with International Financial Reporting Standards(IFRS), this announcement does not itself contain sufficient information tocomply with IFRS. The Company expects to publish full financial statements thatcomply with IFRS in April 2007. The financial information set out in the announcement does not constitute theCompany's statutory accounts for the years ended 31 December 2006 or 2005. Thefinancial information for the year ended 31 December 2005 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 s. 237(2) or (3) Companies Act 1985. Thestatutory accounts for the year ended 31 December 2006 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. 2. Earnings per Share The calculation of basic earnings per share is based on the profit for the yearafter taxation of £157,437,794 (2005 - £113,136,158) and 649,665,389 (2004 -646,637,815) ordinary shares, being the basic weighted average number of sharesin issue 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, however, is 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 15,593,396 (2005: 13,214,424) inrespect of the share option scheme, resulting in a diluted weighted averagenumber of shares of 665,258,785 (2005: 659,852,239). 3. Dividends Paid and Proposed During the year the Company paid a final 2005 dividend of 3 pence per share andan interim 2006 dividend of 2 pence per share, a total dividend of 5 pence pershare (2005: 2.25 pence per share). The Directors intend to recommend a final2006 dividend of 3.5 pence per share, which, if approved at the AGM, will bepaid on 6 June to shareholders on the register at 4 May. 4. 2006 Annual Report and Accounts The Annual Report and Accounts will be posted to all shareholders on 19 April2007, save those who have elected to receive these electronically. Investorswilling to avail themselves of this facility should visit our website(www.tullowoil.com) and follow the appropriate links. 5. The Annual General Meeting is due to be held at Haberdashers' Hall, 18West Smithfield, London, EC1 on Wednesday 30 May 2007 at 12 noon. 6. Segmental Reporting In the opinion of the Directors the operations of the Group comprise one classof business, oil and gas exploration, development and production and the sale ofhydrocarbons and related activities. The Group also operates within fourgeographical markets, Europe, Africa, Asia and South America. The following tables present revenue, profit and certain asset and liabilityinformation regarding the Group's business segments for the years ended 31December 2006 and 2005. South Europe Africa Asia America Unallocated Total £'000 £'000 £'000 £'000 £'000 £'000 2006Sales revenue by origin 307,007 268,302 3,538 - - 578,847Segment result 129,735 159,304 (3,954) - - 285,085Unallocated corporate expenses (22,490)Operating profit 262,595Gain on hedging instruments 15,701Finance revenue 3,030Finance costs (17,994)Profit before tax 263,332Income tax expense (105,894)Profit after tax 157,438Total assets 541,684 1,281,760 62,174 79,815 22,718 1,988,151Total liabilities (250,234) (356,008) (15,507) (20,315) (579,611) (1,221,675)Other segment informationCapital expenditure:Property, plant and equipment 161,675 217,693 10,567 - 3,136 393,071Intangible fixed assets 37,197 575,808 15,897 79,815 - 708,717Depletion, depreciation and (79,870) (64,068) (992) - (1,651) (146,581)amortisation Europe Africa Asia South America Unallocated Total £'000 £'000 £'000 £'000 £'000 £'0002005Sales revenue by origin 179,501 264,939 792 - - 445,232Segment result 54,066 125,428 (3,194) - - 176,300Disposal of subsidiaries 30,537Profit on sale of oil and gas 5,524assetsUnallocated corporate expenses (13,793)Operating profit 198,568Loss on hedging instruments (159)Finance revenue 4,367Finance costs (24,197)Profit before tax 178,579Income tax expense (65,443)Profit after tax 113,136Total assets 429,928 585,523 40,630 - 5,340 1,061,421Total liabilities (146,788) (235,629) (10,142) - (279,843) (672,402)Other segment informationCapital expenditure:Property, plant and equipment 262,743 103,968 1,417 - 3,701 371,829Intangible fixed assets 38,862 35,308 3,910 - - 78,080Depletion, depreciation and (56,716) (59,758) (2,238) - (985) (119,697)amortisation Unallocated expenditure and net liabilities include amounts of a corporatenature and not specifically attributable to a geographic area, including taxbalances and the Group debt. 7. Taxation on Profit on Ordinary Activities a) Analysis of charge in period The tax charge comprises: 2006 2005 £'000 £'000Current taxUK corporation tax 14,344 2,843Foreign taxation 17,434 26,173Total corporate tax 31,778 29,016UK petroleum revenue tax 21,605 9,319Total current tax 53,383 38,335Deferred taxUK corporation tax 45,585 16,002Foreign taxation 6,530 11,496Total corporate tax 52,115 27,498UK petroleum revenue tax 396 (390)Total deferred tax 52,511 27,108Total tax charge 105,894 65,443 b) Factors Affecting Tax Charge for Period As the Group earns a significant portion of its profits in the UK. the tax ratesapplied to profit on ordinary activities in preparing the reconciliation belowis the standard rate of UK corporation tax plus the rate of SCT. The difference between the total current tax charge shown above and the amountcalculated by applying the standard rate of UK corporation tax (30%) plus therate of the supplementary charge in respect of UK upstream profits (SCT) (20%)to the profit before tax is as follows. 2006 2005 £'000 £'000Group profit on ordinary activities before tax 263,332 178,579Tax on group profit on ordinary activities at a combined standard UK 131,666 71,432corporation tax and SCT rate of 50% (2005 - 40%)Effects of:Expenses not deductible for tax purposes 7,264 1,176Utilisation of tax losses not previously recognised - (589)Net losses not recognised 19,635 41,087PRT 22,001 8,929UK corporation tax deductions for current PRT (11,001) (3,728)Adjustments relating to prior years 290 354Income taxed at a different rate (63,961) (53,218)Group total tax charge for the year 105,894 65,443 The Group's profit before taxation will continue to be subject to jurisdictionswhere the effective rate of taxation differs from that in the UK. Furthermore,unsuccessful exploration expenditure is often incurred in jurisdictions wherethe Group has no taxable profits, such that no related tax benefit arises.Accordingly the Group's tax charge will continue to depend on the jurisdictionsin which pre-tax profits and exploration costs written off arise. The Group has tax losses of £124 million (2005 - £130 million) that areavailable indefinitely for offset against future taxable profits in thecompanies in which the losses arose. Deferred tax assets have not beenrecognised in respect of these losses as they may not be used to offset taxableprofits elsewhere in the Group. 8. Acquisition of Subsidiary On 25 September 2006 the Group announced a proposal to acquire 100 per cent ofthe issued share capital of Hardman Resources Limited by way of a Scheme ofArrangement. Following the approval of the acquisition by Hardman shareholdersand the Australian Courts, the Scheme became effective on 20 December 2006 andformal completion, which involved the payment of AS$819.5 million and the issueof 65 million Tullow shares, occurred on 10 January 2007. The acquisition of Hardman provides additions to the Group's production,development and exploration activities in Africa and adds exploration acreage inEurope and South America. The transaction has been accounted for by the purchasemethod of accounting with an effective date of 20 December 2006, being the datethat Tullow gained control of Hardman. For reasons of materiality andpracticality, Tullow has consolidated Hardman's results from 31 December 2006. The fair value allocation to the Hardman assets is preliminary in nature andwill be reviewed in accordance with the provisions of IFRS 3 - BusinessCombinations. Due to the inherently uncertain nature of the oil and gas industryand intangible exploration and evaluation assets in particular, the assumptionsunderlying the preliminary assigned values are highly judgemental in nature. Thepurchase consideration equals the aggregate of the fair value of theidentifiable assets and liabilities of Hardman, and therefore no goodwill hasbeen recorded on the acquisition. Deferred tax has been recognised in respect ofthe fair value adjustments as applicable. Book Value Fair Value £'000 £'000Intangible exploration and evaluation assets 58,563 623,542Property, plant and equipment 79,951 86,931Inventories 3,674 3,866Other current assets 10,790 10,790Cash and cash equivalents 46,540 46,540Trade and other payables (11,480) (11,480)Derivative financial instruments (1,147) (1,147)Deferred tax liabilities (3,605) (158,842)Provisions (5,463) (5,463) 177,823 594,737 Total Consideration 594,737Satisfied by:Cash 25,204Hardman acquisition payable 333,912Shares to be issued 235,621 594,737Net cash inflow arising on acquisitionCash consideration (25,204)Cash and cash equivalents acquired 46,540 21,336 If the acquisition of Hardman Resources Limited had been completed on the firstday of the financial year, group revenues for the year would have been£632,984,000 and Group net profit attributable to equity holders of the parentwould have been £131,304,000. 9. Cash Flows from Operating Activities 2006 2005 £'000 £'000Profit before taxation 263,332 178,579Adjustments for:Depletion, depreciation and amortisation 146,581 119,697Net foreign exchange losses 840 72Exploration costs written off 32,494 25,783Disposal of subsidiaries - (30,537)Profit on sale of oil and gas assets - (5,524)Share based payment charge 4,186 1,403Gain/(loss) on hedging instruments (15,701) 159Finance revenue (2,451) (4,367)Finance costs 17,415 24,197Operating Cash Flow before Working Capital Movements 446,696 309,462Decrease/(increase) in trade and other receivables 509 (38,538)Increase in inventories (4,729) (1,749)(Decrease)/increase in trade payables (38,412) 4,665Cash Generated from Operations 404,064 273,840 10. Group Proven and Probable Commercial Reserves and Contingent Resources Summary (Unaudited) EUROPE AFRICA ASIA TOTAL Oil Gas Oil Gas Oil Gas Oil Gas Petroleum mmbbl bcf mmbbl bcf mmbbl bcf mmbbl bcf mmboeCommercialReserves1 Jan 2006 - 356.2 113.0 23.8 - 95.3 113.0 475.2 192.2Revisions - 4.6 18.1 (1.9) - 12.2 18.1 14.9 20.6Acquisitions - 4.2 28.8 - - - 28.8 4.2 29.5Production - (62.6) (12.1) (0.7) - (3.7) (12.1) (67.0) (23.2)31 Dec 2006 - 302.4 147.8 21.2 - 103.7 147.8 427.3 219.1ContingentResources1 Jan 2006 - 191.4 0.7 781.2 - 16.2 0.7 988.8 165.5Revisions - (16.7) 20.6 4.1 - 6.3 20.6 (6.3) 19.5Acquisitions - - 34.6 405.9 - - 34.6 405.9 102.231 Dec 2006 - 174.7 55.9 1,191.2 - 22.5 55.9 1,388.4 287.3Total31 Dec 2006 - 477.1 203.7 1,212.4 - 126.2 203.7 1,815.7 506.4 1. Proven and Probable Commercial Reserves are based on a Group reservesreport produced by an independent engineer 2. Proven and Probable Contingent Resources are based on both Tullow'sestimates and the Group reserves report produced by an independent engineer 3. Tullow has classified the Ugandan discoveries Mputa and Nzizi asCommercial reserves 4. Mauritanian reserves and resources are based on Operator or RISC(independent engineer) report values as appropriate The Group provides for depletion and amortisation of tangible fixed assets on anet entitlements basis, which reflects the terms of the Production SharingContracts related to each field. Total net entitlement reserves were 145.8 mmboeat 31 December 2006 (2005: 162.2 mmboe). Contingent Resources relate to resources in respect of which development plansare in the course of preparation or further evaluation is under way with a viewto development within the foreseeable future. About Tullow Oil plcTullow Oil plc is a leading independent oil and gas, exploration and productiongroup and is quoted on the London and Irish Stock Exchanges (symbol: TLW.L). TheGroup has interests in over 100 production and exploration licences in 18countries and focuses on three core areas: North West Europe, Africa and SouthAsia. For further information please consult the Group's websitewww.tullowoil.com. Events on results day In conjunction with these results Tullow is conducting a London Presentation anda number of events for the financial community. All times are BST. 09.30 UK/European Conference Call (and simultaneous Webcast) To access the call please dial the appropriate number below shortly before thecall and ask for the Tullow Oil plc conference call. A replay facility will beavailable from approximately noon on 21 March until 27 March. The telephonenumbers and access codes are: Live Event Replay Facility available from NoonUK Participants 020 7138 0832 UK Participants 020 7806 1970Irish Participants 01 655 0486 Irish Participants 01 659 8321 Access Code 9647656# To join into the live webcast, or play the on-demand version, you will need tohave either Real Player or Windows Media Player installed on your computer. 17:30 US Conference Call To access the call please dial the appropriate number below shortly before thecall and ask for the Tullow Oil plc conference call. A replay facility will beavailable from approximately 20.30 21 March until 27 March. The telephonenumbers and access codes are: Live Event Replay Facility available from 20:30Domestic Toll Free +1 888 469 4228 Domestic Toll Free +1 800 406 7325Toll +1 480 293 1744 Toll +1 303 590 3030 Access Code 3712116 For further information contact:Tullow Oil plc Citigate Dewe Rogerson Murray Consultants+ 44 20 8996 1000 +44 20 7638 9571 +353 1 498 0300Aidan Heavey, CEO, Tom Hickey, CFO Martin Jackson Joe MurrayChris Perry, IRO Disclaimer This statement contains certain forward-looking statements that are subject tothe usual risk factors and uncertainties associated with the oil and gasexploration and production business. Whilst the Group believes the expectationsreflected herein to be reasonable in light of the information available to themat this time, the actual outcome may be materially different owing to factorsbeyond the Group's control or within the Group's control where, for example, theGroup decides on a change of plan or strategy. Accordingly no reliance may beplaced on the figures contained in such forward-looking statements. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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