More bad news for Tullow oil after tax decision

African focused oil explorer and FTSE 100 constituent, Tullow oil, isn’t having much luck recently and as a result its shares are languishing at £7.69, just over their 52 week low.

Today it announced that its subsidiaries operating in Uganda have received a ruling from the Tax Appeals Tribunal (TAT) relating to Capital Gains Tax (CGT). Following the completion of the farm-down of 66% of its assets in Uganda to CNOOC and Total in 2012, Tullow was issued with a CGT assessment by the Uganda Revenue Authority (URA) of approximately $472m. Tullow paid 30% of the assessment (approximately $142m) as legally required to launch an appeal.The TAT has calculated Tullow’s CGT liability for the farm-downs, including certain reliefs, to be $407m.

The disappointing news from Uganda follows news earlier in the week from Ethiopia with another duster to add to its recent poor drilling record. A second well in the Chew Bahir Basin failed to find hydrocarbons. In late May Tullow announced that exploration well 31/2-21S which was targeting the Gotama prospect, offshore Norway, did not encounter reservoir quality sandstones in the Upper Jurassic main target. There was similarly disappointing results from Maurtitania.

Though a hint of better news came from the Barents sea in early July where the Hanssen wildcat well in which Tullow has a 20% stake encountered a 20-25 metre oil bearing sandstone with good reservoir properties. Preliminary volume estimates of up to 50 million barrels of recoverable oil from this discovery confirm the potential of the Wisting cluster.

Though Kenya has been very fruitful in terms of oil discoveries, problems with the locals have also plagued operations. It was forced to temporarily abandon operations at two exploration blocks in northern Kenya in October 2013 because of protests by the local Turkana people.

The company reported a $415 million (£243 million) pre-tax write-off during the first half of 2014 after wells drilled in Mauritania, Ethiopia and Norway after the disappointing well results. The company’s main asset is the flagship Jubilee oil field in Ghana with 100,000 barrels per day of production. Tullow has a 35% interest in Jubilee and this contributes the lion’s share of the full-year production guidance of between 79,000 and 85,000 bpd of oil.

Tullow is spending heavily on infrastructure and drilling with over $2 billion being invested this year. The development of the TEN field offshore Ghana is the real key to the company’s fortunes and will add significantly to the company’s output when it comes on stream in 2016 with 80,000 barrels per day of production.

Shareholders in Tullow have had a rough time of late but speculation has been mounting of late that a larger company may come in with a cheeky bid to snap up its strong African assets. Any further weakness could certainly see someone pounce given that analysts from broker Westhouse ascribe a value of $7.6 billion or 524p per share for the oil fields already in production, of which Jubilee makes up around two thirds.

Tullow may be the FTSE 100’s only pure play oil exploration company, but as many oil and gas investors will know, wild catting is not for the faint hearted!

Contrarian Investor UK

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