Tullow Oil plc
Tullow Oil plc
Sales: $433.9 million (2005)
Stock Exchanges: Irish London
Ticker Symbol: TLW
NAIC: 211111 Crude Petroleum and Natural Gas Extraction
With its headquarters in London, England, Tullow Oil plc is one of Europe's largest independent oil and gas, exploration, development, and production companies. The company is involved in three core regions of the world: the Southern North Sea of the United Kingdom, Africa, and South Asia. All told, Tullow's portfolio contains 90 licenses in 15 countries. Most of the company's growth has taken place since the early 2000s when it picked up North Sea fields from BP, followed by the acquisition of Energy Africa, a move that in a single stroke doubled its reserves. Tullow is a public company, listed on both the Irish and the London Stock Exchanges.
FOUNDING IN 1985
Tullow Oil was founded by its longtime Chief Executive Aidan Heavey. Born in Ireland and educated at University College Dublin, Heavey became a chartered accountant and went to work for the Dublin accounting firm of RJ Kidney & Co. He told the Irish Independent in a 2003 interview that he held no love for accounting beyond the business opportunities it could create. "You're a jack of all trades, it allows you to get into anything," he commented. In 1981 he joined Tullow Engineering, becoming financial controller, and it was here that his accounting position led to a chance to launch a business. In 1985 he was in London having a business lunch with some Barclays Bank executives. They told him about the oil and gas fields in the African nation of Senegal that were being abandoned by the major oil companies despite the amount of reserves they still held. He also learned that the Senegalese government in conjunction with The World Bank was looking for someone to develop the fields. Heavey, just 31, was interested despite knowing little more about the oil business than what he picked up watching the popular American television program Dallas. However, he boned up on the subject, flew to Senegal, and convinced the government to award a contract to him to take over one of the country's oil and gas fields.
He turned to his boss at Tullow Engineering for backing and they set up a subsidiary called Tullow Oil. Heavey also mortgaged his house and took a bank loan to fund the venture. The company signed a license agreement in 1986, and in that same year made an initial public offering of stock. Heavey located a geologist through the Yellow Pages and bought a used Texas oil rig that he had shipped, along with its crew, to Senegal. Unfortunately none of the men had passports and replacements had to be rounded up. The venture got off to an inauspicious start in 1987: The first well the crew drilled came up empty. "A hell of a shock," Heavey told Business Week.
Heavey soon enjoyed better success, however, and within three years Tullow was working 40 percent of Senegal's oil and gas fields. By happenstance the company also became involved in maintaining power plants. The gas it produced was earmarked for a Senegal power plant, but because of ineffective maintenance at the plant, machinery broke down and the facility consumed less gas than it should have. With the engineering capabilities of its parent company, Tullow stepped in to provide maintenance and ultimately became the plant's operator as well. Back home Tullow Engineering, on the other hand, had not been faring well and went out of business, leaving Tullow Oil to carry on as an independent company. In 1989 it gained a listing on the Irish and London Stock Exchanges and began obtaining licenses to mature onshore fields in the United Kingdom to continue the pursuit of a gas-to-power strategy, while deliberately shying away from the riskier offshore fields. Tullow worked fields in Lincoln and Yorkshire that produced gas supplying the Knapton Electricity Generation plant, which Tullow also began to manage on behalf of Scottish Power.
SARA GAS FIELD
Tullow's success in Senegal opened the way for the company to work neglected fields in other small countries elsewhere in the world. In 1990, for example, Tullow received a license in Pakistan, gaining a toehold in the Indian Subcontinent, which in the mid-1990s emerged as the company's core area. In 1994 Tullow discovered the Sara gas field in Pakistan and five years later it came online. In the meantime, Tullow expanded into India and Bangladesh, as well as Syria and the Czech Republic. It also continued to operate in Africa, picking up a lease to the Espoir oil and gas fields in the Ivory Coast in 1996.
The Bangladesh venture proved problematic, however. Tullow acquired a license to some offshore blocks in Bangladesh in 1996, followed by the procurement of a highly desirable onshore property, Block 9, in which Tullow beat out such notable competitors as Chevron, Mobil, Royal Dutch/Shell, and Texaco. In a 2000 interview with the Scotsman, Heavey admitted, "That license has been the bane of our lives." The drilling of a dry well in the offshore blocks was disappointing enough, but Block 9 turned into a political football and a nightmare for Heavey. In order to win the license he had promised the government of Bangladesh that Tullow would bring in a partner as long as it served as the operator and retained at least a 50 percent interest.
The matter became complicated when the U.S. government put pressure on Bangladesh to favor a U.S. company. Heavey met with Chevron and Texaco, but neither company was satisfied with a minority stake. After a number of trips to Bangladesh, Heavey finally reached an agreement with Texaco, only to have Texaco attempt to turn over its interest to Chevron, a company that was unacceptable to Heavey. The matter was further complicated when Texaco and Chevron began talking about a merger. Finally in 2000 a production sharing contract was signed that provided 30 percent interests to Tullow, Texaco, and Chevron, and 10 percent to the state company, Bapex. Despite receiving a smaller stake than desired, Tullow was at least awarded operatorship.
In the late 1990s, Tullow sold its interests in the Czech Republic and Syria, and dabbled in Egypt and Romania. Production levels in Senegal, meanwhile, dropped off. After a dip in energy prices in 1998, Tullow benefited as oil prices tripled over the next two years and gas prices improved as well. Investors, however, did not favor the company. By the fall of 2000 Tullow stock was worth less than half as much as it was in early 1998. The perception of Tullow began to change in 2000, however.
Tullow's strategy is to build strong positions in core areas and to consolidate niche positions in developing regions. This is managed through production-led exploration and reserve enhancement, operational innovation and focused acquisitions and divestments.
Heavey had been on the lookout for opportunities, interested in making three or four acquisitions in the next few years in the $50 million range. He was especially interested in the North Sea, anticipating that consolidation among the major oil companies might free up some properties. His instincts proved correct. In 2000 Tullow announced a £200 million acquisition of 16 producing gas fields in the southern North Sea from BP, which was selling in order to gain regulatory approval for its takeover of Atlantic Richfield, following an earlier acquisition of Amoco. Thus, in one stroke Heavey achieved his acquisition goals. After the deal was consummated in August 2001, Tullow achieved both balance in its portfolio and credibility with investors. The deal was so large that it exceeded Tullow's market value, requiring that it be classified as a reverse merger.
While the BP deal was being finalized, Tullow redomiciled to the United Kingdom from Ireland and relocated its headquarters to London to gain favor with investors. To help finance the BP acquisition, Tullow was able to raise approximately $44 million. The balance came from debt, but with the cash flow provided by the new North Sea assets—in 2001 the company's revenues increased 800 percent (from £7.8 million in 2000 to £76.6 million in 2001) and operating profitability soared by more than 3,000 percent—Tullow was able to pay off the debt without incurring pain. Revenues increased another 47 percent to £112.6 million in 2002, 80 percent of which came from the North Sea gas fields. Unlike the major companies that had long worked the North Sea fields, Tullow proved to be a more nimble operator, applying lessons learned in other parts of the world and cutting expenses. "In the old days," Heavey told Oil & Gas Investor, "fields were being shut down for a month for maintenance while it is now an ongoing process achieved without any shutdown." The year 2002 also saw the Espoir Field off the Ivory Coast, in which Tullow held a 21 percent interest, come onstream.
FOCUS ON CORE AREAS: 2003
Sales improved to £132 million in 2003 while operating cash flow improved 35 percent to £85 million. As a result the company was able to reinvest in the United Kingdom and the Ivory Coast. In addition, Tullow trimmed its sails in 2003, selling or farming out some properties that were no longer considered core concerns, in order to focus more resources on the core areas of the North Sea, West Africa, (primarily the Ivory Coast), and South Asia (Bangladesh). West Africa was also singled out as a region in which Tullow wanted to further expand its presence and become a diversified pan-African oil and gas company. That goal was to be realized in 2004 with the £328 million stock and cash acquisition of South Africa-based Energy Africa Limited, Africa's only independent oil company, in a deal that closed in June 2004. To help pay for Energy Africa, Tullow made a secondary offering of stock, raising £123.5 million. Less than three months after the acquisition, Energy Africa and Tullow joined forces with the National Petroleum Corporation of Namibia to develop the offshore Kudu natural gas fields that Chevron had discovered 30 years earlier. It then worked the field with the Royal Dutch Shell Group, and Energy Africa had been brought in as a minority partner.
Shell sold out in 2002 because it determined that the 1.3 trillion cubic feet of reserves were not large enough to justify further investment. Chevron Texaco Corporation then pulled up stakes as well in November 2003 to concentrate on other West African assets. Growing out of an 18-month feasibility study, the new $800 million effort between Energy Africa and National Petroleum represented the largest investment ever made in Namibia. In light of rising energy prices and tight supply, the investment made sense for the country. The gas was earmarked for the government-owned electricity utility, NamPower, which planned to generate electricity for both domestic use and export to South Africa. It was estimated that the Kudu reserves were adequate enough to fuel a gas-fired power station for more than 20 years.
With Energy Africa making a contribution to the balance sheet for part of the year, Tullow increased revenues by 74 percent to £225.3 million in 2004. The company's European operations, which aside from a pair of minor licenses in Romania comprised the North Atlantic gas fields, contributed 52 percent of the revenues. With Energy Africa making a full-year contribution, Tullow almost doubled revenues in 2005 to £445.2 million. In the first half of 2006, with the continued rise in energy prices, the company experienced a further increase in sales of 54 percent. Prospects for continued growth appeared bright. In 2006 the company began to operate wells on gas discoveries in the North Sea. In Africa, in the meantime, Tullow was working on a field in Uganda that was so promising that Tullow signed an agreement with the neighboring Democratic Republic of Congo to develop a block next to the Ugandan property. Although operations in South Asia had taken a backseat, wells in Bangladesh and Pakistan came onstream in 2006 and a multi-well drilling program in India was being planned for 2007.
- Company is founded in Ireland to do business in Senegal.
- Initial public offering of stock is completed.
- United Kingdom gas fields are acquired.
- Sara gas field is discovered in Pakistan.
- Southern North Sea gas field is acquired.
- Energy Africa is acquired.
Energy Africa Limited; Tullow Oil Limited; Tullow Oil SNS Limited.
Cairn Energy PLC; Chevron Corporation; Murphy Oil Corporation.
Brown, John Murphy, "Tullow Benefits from Rising Output and Prices," Financial Times, September 7, 2006, p. 22.
Capell, Kerry, "Feasting on Leftovers," Business Week, March 28, 2005, p. 24.
Gorman, Brian, "Forget Foreign Lands, There's No Place Like Home for Aidan," Scotsman, October 26, 2000, p. 6.
"Independent Oil Producer Knows the Drill," Irish Independent, April 24, 2003.
Klinger, Peter, "Key Deals That Put Tullow on the Global Oil Map," Times (London), September 5, 2005, p. 45.
McGrath, Brendan, "Tullow Joins the Oil Business Big Boys," Sunday Times (London), January 12, 2003, p. 8.
O'Brien, Daire, "Tullow Founder Strikes Black Gold Again," Sunday Times (London), October 2, 2005, p. 7.
"Safe Hands," Petroleum Economist, April 2005, p. 1.
"Tullow Gushes Oil As Heavey Mans the Pumps," Irish Independent, December 31, 2005.