News of production levels “significantly below expectations” at the flagship Tullow Oil projects in Ghana is “difficult to stomach” for investors, say financial analysts.

Share prices in the UK-based, Africa-focused firm nosedived after a trading update yesterday, in which it was revealed the production outlook for the year ahead is expected to be almost a third lower than forecast — and that plans for a shareholder dividend have been scrapped.

In the day’s trading following the update, share values in Tullow Oil fell from 141.10 pence to as low as 40.47 pence.

To add further complexity to the situation, chief executive Paul McDade has resigned “by mutual agreement and with immediate effect” – along with exploration director Angus McCoss.

Tullow executive Dorothy Thompson, a former CEO of UK power plant Drax, has been appointed temporary executive chairwoman, while Mark MacFarlane – previously an executive vice president – has become chief operating officer.

The company’s core assets – the TEN and Jubilee fields in Ghana – account for around 70% of its overall production, but operational “performance issues” at these sites have prompted the company to lower its 2020 guidance to between 70,000 and 80,000 barrels of oil per day (bopd).

It added that group production for the following three years is expected to average around 70,000 bopd.


Investors warned over Tullow Oil dependence on Ghana production

The announcement follows a November update in which Tullow warned on the value of two much-touted discoveries in Guyana – the presence of heavy crude oil making them much more difficult to commercialise than anticipated – and revised down its 2019 production guidance to 87,000 bopd.

Financial analysts at Hargreaves Lansdowne warned of Tullow’s dependence on the underperforming assets in Ghana, saying the onus is on them to “produce enough profit to shift the substantial debts, fund future projects and hopefully reinstate a dividend”.

Hargreaves Lansdown research editor Nadeem Umar noted: “The recent news of production problems in Ghana is difficult to stomach.

“That’s because these are Tullow’s strongest assets, with the TEN and Jubilee fields accounting for around 70% of production.

“The group has prices of more than $56 a barrel locked in for a significant portion of its anticipated production in the next two years – but reduced production volumes will make it difficult to achieve the low operating costs per barrel investors hoped for.

“Consequently, free cash flow expectations have been slashed.

“It takes time for new wells to come online, so we were always a long way from Guyana being a profit driver, and the group remains optimistic about the larger basin. But a secure source of future cash flows would have been welcome.

“Tullow does have early-stage projects in Argentina, Cote d’Ivoire and Peru, and is still generating free cash flow, but the group was hoping to sustainably return $100m a year to shareholders. News the group has decided to suspend the dividend changes the investment story.

“The money saved should give a new CEO some headroom, but they’ll have to work hard to get Tullow back on track.”


Executive reshuffle will accompany cost-cutting measures

The executive reshuffle has been made pending the appointment of a new CEO, and the company says it will now undertake a “thorough reassessment” of its cost base and future investment plans – with sweeping cost cuts expected as part of the process.

Tullow’s new executive chairwoman said: “The board has been disappointed by the performance of the business and now needs time to complete its thorough review of operations.

“A full financial and operational update will be provided on 12 February 2020, with an update on progress to be given in the group’s trading statement on 15 January 2020.

“The board strongly believes that Tullow has good assets and excellent people capable of delivering value for shareholders. We are taking decisive action to restore performance, reduce our cost base and deliver sustainable free cash flow.”