Tullow Oi is struggling to deliver on a cost saving initiative it announced at the end of 2017. Recent figures indicate that the mining and exploration company may have overstated its projections.
In December, the firm announced plans to deliver over $650 million of cost savings from the business since mid-2015 through to mid-2018, exceeding Tullow’s original target by 30%.
As 2018 began, Tullow Oil announced that it expects to spend $170 million on exploration, appraisal and predevelopment of crude oil resources in Turkana, northwestern Kenya, down from the $225 million that had been announced earlier. This was confirmed by Tullow CEO, Paul McDade in January 2018.
“Our focus now is to ensure that these underlying savings are sustained year-on-year. This is easier where we have direct control, but we must be vigilant on third-party costs, particularly in a potentially improving market,” the mining and exploration company said in its most recent annual report.
However, the first quarter of 2018 has past and Tullow may be behind on some of its commitments.
In April, 2018, Tullow Oil told investors that it remains on track to deliver on its current production guidance.
But in early May, 2018, Canadian bank RBC downgraded Tullow Oil’s earlier prospects as it saw the company struggling for additional upsides to its shares following a boost from high global oil prices.
RBC questioned whether previous debt reduction and cost-saving measures had dented the company’s earning prospects.
“With continued spending cuts, the deferral of Tullow’s debt repayments and the oil price surge, debt is now less of a concern,” the lender noted.
Tullow is currently working on a project in Kenya’s Lokichar Basin, in the northern part of the country. RBA analysts stated that if the Kenya project is as attractive as the management team hopes, Tullow may in fact meet its ambitious targets.
However, the bank said the potential value of the company’s Lokichar Basin was not being acknowledged by potential share buyers.
“At $430 million, the market appears to be allocating no value to the company’s approximate 20% stake in the Lokichar Basin,” the group explained. Kenya is new to the global oil market so some analysts are skeptical of the East African country’s plans to become a major fuel exporter, even with Tullow at its side.
Tullow Oil also stated on May 31st, 2018 that the company is interested in new oil blocks off Ghana’s coast. The blocks are part of the firm’s plans to consolidate its operations in the West African nation, Chief Executive Paul McDade said at the time.
A day before, the exploration company stated that it had hired Australian engineering company, Worley Parsons to design a pipeline needed to bring crude oil from Kenya’s Lokichar onshore fields to Kenya’s Lamu Port on the Indian Ocean coast. This means Kenya is preparing to start producing its crude oil reserves and join a host of fuel exporting companies already established across the continent.
According to Tullow Oil, the cost of the pipeline is estimated at $1.1 billion, with a further $2.9 billion needed for upstream operations.
In light of this increased spending and new investments, the company now has three months to meet its cost saving target.