Tullow Oil has gushed up nearly 2% in a falling market after cutting exploration costs to counter the fall in crude prices.
The company said given falling prices, reduced success from offshore drilling and the lack of asset transactions, returns from drilling deepwater wells were currently less attractive. So it plans to focus exploration expenditure on East Africa, defer activity outside Kenya and reduce its Norwegian campaign. It will reduce the amount it spends on explorationg to $300m from previous guidance of $600m to $1bn. Chief executive Aidan Heavey said:
In light of the current oil and gas sector challenges including the commodity price environment, we are reviewing our capital expenditure and our cost base to ensure that Tullow is well-positioned for future success.
In 2015 we will be focusing our capital spend on producing and development assets, particularly in West Africa.
Our overall expenditure spend will be significantly reduced and will focus primarily on East Africa where we have major basin-opening potential.
The strategy was well received, and Tullow’s shares are up 9p at 491.2p. Analyst James Hosie at Barclays said:
We believe Tullow’s third quarter IMS could be a watershed moment for the company in its efforts to rebuild investor’s confidence in the business outlook. Management has responded to the lower oil price outlook and concerns over the scale of its exploration ambitions by presenting a reduced exploration budget of $300m a year (post-tax) and a focus on maximising value from its existing resource base. The overall impact is an increase in our tangible net asset value to 704p a share (from 687p) and increased conviction in our overweight rating and 750p price target.
In a hold note Canaccord Genuity said:
The statement recognises the challenges facing Tullow and focuses on reducing costs, principally by reducing exploration spend, whilst sustaining development activity in its key regions. The announcement looks eminently sensible to us, but also recognises that there is no quick fix for the challenges facing Tullow (for example a farm-out/sale of a stake in the TEN development offshore Ghana).
