Tullow Oil Plc’s momentum of exploration success suffered a rare hiccup Wednesday, as the U.K.-listed oil explorer said its first-half earnings would take a $440 million hit from asset write-downs, and production from a key Ghanaian oil field will be at the lower end of expectations.
The write-downs served as a reminder of the high costs of oil prospecting when finds aren’t as big as hoped, which overshadowed an otherwise optimistic trading update from the company and sent its shares lower.
Tullow, whose track record of discovering oil is among the best in the industry, attributed the write-down to the combined cost of unsuccessful drilling campaigns, oil license relinquishments and the revaluation of previous discoveries.
Chief Financial Officer Ian Springett said the decision to revalue some of its oil and gas fields now was a prudent move that would allow for greater clarity on Tullow’s near- to medium-term prospects.
“The success that we’ve had means that we are now focusing on our big projects and some elements fall down the pecking order,” said Mr. Springett.
Following a thorough review of its exploration asset values, Tullow said it had written down the value of the Odum discovery in Kenya, undeveloped discoveries in Mauritania and the Kudu prospect in Namibia, which Tullow inherited with its acquisition of Energy Africa in 2004.
Further disappointment came with news that production from the Jubilee field offshore Ghana is now only anticipated to average between 70,000 and 80,000 barrels of oil equivalent a day in 2012, lower than the previous range of 78,000 to 86,000 barrels of oil equivalent a day.
Jubilee’s output ramp-up has been delayed by ongoing repair work on some of the field’s wells.
Despite this, Tullow said it still expects to post record first-half revenues and is gearing up for a “high-impact” exploration and appraisal program of 40 wells over the next 12 months.
Output from Tullow’s producing interests averaged 77,400 barrels of oil equivalent a day during the first six months of 2012, a 3% increase on the same period last year, the company said.
At 1029 GMT, Tullow shares traded down 27 pence, or 1.8%, at 1504 pence, underperforming the broader FTSE 100 index, which was 0.2% lower.
Analyst Anish Kapadia, of Tudor Pickering Holt, said investors could understandably be disappointed by today’s announcement. “The stock has generally high expectations…in that sense, it’s quite fair that it’s come down this morning,” he said.
