This article was first published in the September 2017 Africa edition of Accounting and Business magazine.

It was a busy start to the year for Africa’s leading independent energy exploration business, Tullow Oil. In the space of just a few days in January and February, the company announced that its CFO was too ill to work, its founding CEO was stepping down – oh, and that it had made a full-year loss of US$600m.

Back in 1986 almost no one believed that an oil industry outsider focused on Africa and operating from a small town in Ireland could set up an exploration company. But Aidan Heavey did. Today that business, Tullow Oil, is at the forefront of finding development opportunities in parts of Africa that others ignore. Tullow Oil’s approach was a simple and highly profitable one – when the oil price was US$100 a barrel. While the energy majors focused on the big oil and gas fields, Tullow explored smaller African fields – including those in politically volatile countries. Often it derisked early stage developments and then sold them on to the big companies.

The credit for Tullow Oil’s success must lie with Heavey as its founder and CEO for more than 30 years. Which is why Heavey’s announcement that he was stepping down as CEO represents a key point in the company’s history. But he did not leave, moving sideways instead to the role of non-executive chairman (for a maximum of two years). This is in breach of what is regarded as good corporate governance practice. The company says that its dependence on Heavey’s experience led to investor demands that he retain a central role as an interim measure.

Paul McDade, Tullow Oil’s chief operating officer, took over as CEO following the company’s AGM on 26 April. McDade, who is 53, is an engineer with more than 25 years in the energy industry. He is a former Centrica executive who has also worked for Conoco and has had operational, commercial and management roles in developments in Africa, Asia, Latin America and the North Sea.

McDade, says Heavey, is thus well placed to lead Tullow Oil into the next stage of its development. ‘Paul has run our business as COO since 2004 and has two major deep-water developments to his credit,’ he says.

Yet it will be a tough transition for McDade and Tullow, made tougher by the lack of a long-standing CFO by their side. Oil industry veteran Ian Springett left as CFO because of illness. Les Wood, who joined Tullow in 2014, has now taken over as CFO. Both are former BP executives.

McDade is also taking on the CEO role at a difficult time for the company. While its 2016 revenues were strong, its bottom line was poor. The company posted an after-tax loss of US$600m (down from US$1bn in 2015) on revenues of US$1.3bn (down from US$1.6bn). This was after write-offs and impairments of more than US$1bn.

Last year was a significant challenge for the company – its debt rose in the period from US$4bn to nearly US$4.8bn (although with a significant additional debt facility), while its capital investment fell from more than US$1.7bn to US$857m. Cash generated from its operations slipped from US$967m in 2015 to US$774m.

Despite the results, Tullow Oil’s share price initially remained steady at around £3, but slipped badly in the following months to around £1.60. This was similar to the weak prices of a year earlier when the company announced its first loss in 15 years and was also hit by a ratings downgrade by Moody’s. The company’s value is substantially below its high point in 2011, when shares traded at around £16.

World price collapse

Unsurprisingly, Tullow Oil has been badly affected by the collapse in world oil prices. In addition, its strategy of exploring in areas of political instability can create uncertainty about the development of some of its potential fields. There have been disputes about access rights in Ghana, for example.

Both HSBC and Goldman Sachs downgraded Tullow Oil’s stocks in the run-up to the results announcement in February, anxious not only about the continuing low oil price, but also the level of debt that Tullow Oil is carrying.

According to Heavey – quoted in The Sunday Business Post – the company is now firmly on recovery trajectory. ‘Last year was quite a good year,’ he said, ‘even though we had major issues. But it was a year when we got all the costs under control and we got the business in a state when it was profitable even at low oil prices. We wrote off a huge amount of stuff that was on the balance sheet and if you look at the results there’s about US$1bn of non-cash [items], which we wrote off in the last 12 months and that created the loss. But it left the balance sheet in good shape.’

Africa the key

Africa remains the key development region for Tullow Oil. At the beginning of this year Tullow Oil confirmed an oil field discovery in northern Kenya, the development of which is going well, says the company. It has also announced the sale of most of its interests in one of its Ugandan projects to Total. The major success for the company last year, Heavey says, was delivering the TEN fields in Ghana, the country’s second major oil and gas development. Heavey is also positive about progress on the Lake Albert development in Uganda, which he says will generate secure future cashflow for the group ‘from one of the industry’s few truly low-cost development projects’.

Heavey is also upbeat about the prospects for Tullow Oil’s explorations looking beyond Africa. It regards a field in Suriname in South America, where it owns 30%, as a major opportunity. ‘Probably the best prospect we’ve ever seen,’ he says, predicting an output of over half a billion barrels ‘if it comes in’. The company is also involved in new activity in Zambia and Guyana, and looking at Mauritania, Kenya, Ghana, Jamaica and Uruguay for possible future drilling.

George Cazenove, Tullow Oil’s head of communications, says it is right that the company is positive about its future. ‘Tullow Oil is a disciplined, flexible, low-cost, full-cycle business that is very well positioned for the year ahead, having reset the business and with deleveraging under way. Deleveraging remains our key strategic focus and we have made a good start through TEN cashflow and asset disposals. Looking to the future, Tullow has a solid base of low-cost production in West Africa with additional production coming on stream in Uganda over the medium term.’

Yet in a financial update in June, the company announced that it was taking a $600m impairment on property, plant and equipment values because of the still low oil prices. Investors in Tullow Oil look set to continue their difficult journey.   

Paul Gosling, journalist