Tullow counters claims it is exiting Uganda

29 Jan 2015 – Tullow [LON:TLW], an Africa-focused exploration and production firm, has reaffirmed its intention to stay in Uganda, despite a government official stating the contrary.

“Tullow has already started relocating [its] staff from Uganda to London,” the official told Mergermarket. “We are not surprised. There are large capex requirement attached to the project and the pipeline that needs to be built.”

A person with knowledge of the situation acknowledged that head count in Uganda has been reduced, but said that it was a normal part of the process leading up to the project’s final investment decision.

Tullow holds three licenses in the Lake Albert Rift Basin, which equates to a 33% equity stake in the basin. Total and CNOOC also hold 33% stakes in the prospect. To transport crude from the landlocked country requires the construction of an 850km pipeline to the Kenyan coast. Its construction is expected to cost USD 2bn.

Reducing personnel in Uganda could be related to cost savings, and the slowdown of exploration activity in the country, a Ugandan banker said.

Despite weak oil prices, there remains interest from majors looking to enter Uganda, the official added. He named Italy’s ENI as a firm that has expressed such an appetite. ENI did not respond to a request for comment.

In its operational statement earlier this month, Tullow said it had re-allocated capital to focus on delivering oil production in West Africa, which it considers to have a higher margin than its activities elsewhere. The exploration programmes in East Africa have been reduced, it added.

January also saw Tullow register a write-off of USD 2.7bn – its largest to-date. This was attributed to unprofitable exploration programmes in French Guiana, Mauritania and Norway, as well as lost value on assets due to declining oil prices.

The company also has activities in Ghana, including the producing Jubilee Field and the deepwater Tweneboa-Enyenra-Ntomme (TEN) project. In Kenya, Tullow has 50% interests in five onshore licenses in the Lokichar basin. In Ethiopia, it has a 50% interest in the South Omo Block.

“Tullow has too much on its plate. Something has to go, and Uganda is on top of the list – the capex requirements for the project are huge,” a lawyer said.

A 28 January research report on Tullow by RBC stated: “Given significant debt and development commitments, and faced with a drawn out repayment schedule, we expect management to lay out a stall with assets in Ghana, Uganda and Kenya labelled as ‘For Sale’.”

An exit of Uganda, however, may not be favourable, as a full sale would be subject to hefty capital gains taxes, an analyst told Mergermarket.

“Why not retain a smaller, carried stake? That way the company would not have to pay the capital gains tax that it would have to pay if it completely exited,” he added. “This will dictate whether the company sells out completely or reduces its stake.”

by Katie McQue

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