Tullow buoyant despite profit fall

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Tullow Oil’s “transformational year”, which saw the exploration group join the FTSE 100 index and discover new oil fields in Africa, ended with a slump in profits because of falling gas prices closer to home.

The price of realised gas in the UK fell 19 per cent last year, leading to a 57 per cent fall in annual pre-tax profits to £114m. Gas production still represents 40 per cent of turnover despite rising oil production from Africa.

The company’s operations in Ghana and Uganda each have the potential to double Tullow’s size, said Tom Hickey, finance director, although Aidan Heavey, chief executive, conceded that until the new reserves began producing, profits were likely to be flat.

Last month, Tullow said first oil from the Jubilee discoveries was planned for 2010. On Wednesday it confirmed the nearby Odum discovery was commercial and said two other prospects to be drilled over the next 12 months could each hold half a billion barrels of recoverable oil.

Tullow expects production in Uganda to start in the second half of 2009 at a rate of 4,000 barrels a day. More important is the ongoing campaign to establish whether the Lake Albert basin is prolific enough to justify the expense of an export pipeline.

Africa now represents 55 per cent of Tullow’s output, which rose 13 per cent to over 73,000 barrels of oil equivalent a day in the year to December 31, and 58 per cent of revenue.

In 2008 the company will continue to ramp up capital expenditure in Africa. In its results statement on Wednesday it reiterated that Africa would account for 75 per cent of total expenditure, now put at £440m which is 10 per cent up on January’s estimates.

As it gears up for the major development spends in Ghana and Uganda, some assets have been earmarked for disposal. The sale of its stake in the M’boundi field in Congo Brazzaville was announced a month ago and a permit in Cameroon has also been sold, bringing in £240m. The proceeds will halve net debt even before possible disposals of assets in Pakistan.

The rise in production volumes and a 10 per cent increase in revenue to £639m nonetheless left Tullow with a 28 per cent fall in annual operating profit to £189m and a 71 per cent drop in earnings per share to 7.1p. Depreciation, depletion and amortisation charges grew 24 per cent to £203m, largely on depreciation of UK and Mauritanian assets. Exploration write-offs doubled to £64.2m, higher than forecast in January.

Richard Rose at Oriel Securities said the headline results were somewhat weaker than expected but, more importantly, cashflow held up.

The board proposed a final dividend of 4p taking the total to 6p, against 5.5p last year. The shares rose 16p to 646p

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