Tullow continues shift from legacy gas production with Spring acquisition

This morning, London-based global oil and gas exploration company Tullow Oil plc (TLW) made a series of moves as part of an ongoing process to refocus the company by monetizing non-core assets and reinvesting proceeds in high potential oil exploration. The transactions include buying into Norway, putting its UK/Dutch assets up for sale, providing an update on Ghana, and quitting Guyana altogether.

“The Europe offshore moves fit into TLW's recent strategic shift, divesting from legacy gas production assets (the South Asia portfolio has been on the block for a while) and moving into a more oil-rich, exploration-focused portfolio,” said Global Hunter Securities (GHS) analysts in a note to investors Tuesday.

Tullow Oil plc

Spring Energy acquisition
Following Tullow’s pre-qualification as an operator on the Norwegian Continental Shelf earlier this year, Tullow Oil plc has entered into an agreement to acquire Spring Energy Norway AS, a Norwegian exploration company, for a purchase price of $372.3 million which will be adjusted for working capital.

The move wasn’t surprising to the GHS analysts, who noted that with $417 million in cash and $2.5 billion in unused debt capacity, the purchase price ($15.50 for 2P boes  - ignoring the upside), “shouldn't tax the balance sheet.”

Jefferies & Co. analysts view the move positively as Norway is an attractive place to explore. "Norwegian fiscal terms provide a cash rebate of 78% of unsuccessful expenditure in the year following. Looking at Spring's success to date, Spring has drilled 10 wells and discovered 70 mmboe with a c.60% hit rate. Spring’s exposure is currently across 18,000 sq kms of acreage, 31 licenses spanning the North Sea (18 licenses), Norwegian Sea (8) and Barents Sea (5)," said the analysts Tuesday.

Spring has made six commercial discoveries out of 12 wells drilled since 2008. In 2013-14, Spring has plans to drill up to 16 exploration wells of which three are operated.

Tullow’s assessment of Spring’s exploration portfolio is that it contains in excess of 230 mmboe of risked prospective resources and has existing reserves and resources of 24 mmboe. The vendors of Spring are HitecVision, a private equity company (87.6%) and other shareholders (12.4%) including some current Spring staff.

Spring has a team of 37 people based in Oslo who will form the basis of Tullow Norge AS and Spring's chief executive, Roar Tessem, will become managing director.

In addition to the purchase price, a bonus payment has also been agreed with the vendors in the event of commercial exploration success. This payment is limited to four specific prospects and will be paid on a sliding scale up to a maximum of $150 million per prospect and $300 million in aggregate. The acquisition remains subject to approval from the Norwegian Ministries of Energy and Finance.

Disposal of UK and Dutch SNS gas assets
Tullow also intends to begin the process of divesting its exploration, development and production assets in the UK and Dutch Southern North Sea. These gas assets currently produce approximately 18,000 barrels of oil equivalent per day. The company hopes to complete the process by year-end 2013.

The company noted that following exploration and development success in Ghana, Kenya and Uganda, the assets are now non-core to the Group and no longer fit within Tullow’s light oil focused portfolio.

Jeffries International Ltd. have been appointed to manage the sale of the assets.

“These transactions are part of an ongoing process of carefully refocusing our business and ensuring efficient allocation of capital by monetising non-core assets and re-investing the proceeds in high potential oil exploration. Our Southern North Sea gas assets are therefore no longer core to Tullow’s business which has a clear focus on light oil in Africa and the Atlantic Margins. The acquisition of Spring adds a material portfolio of oil exploration assets and high quality people that will provide a superb foundation for building our portfolio and expertise in the highly prospective North Atlantic,” noted Aidan Heavey, chief executive of Tullow Oil plc.


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