Oil producer Tullow Oil (TLW) says there is 25% less oil in its Kenyan asset in the South Lokichar basin than previously expected, confirming previous media speculation that resource estimates would be downgraded.
The negative news accompanies an otherwise decent set of full year results which largely matches the guidance given in a January 2018 trading update.
Revenue came in a touch above $1.7bn, delivering a slightly smaller than expected net loss of $222m.
WHAT'S HAPPENED TO THE KENYAN ASSET?
The 2C contingent resources attributed to Kenya has been downgraded from 750m barrels of oil equivalent (mmboe) to 560 mmboe.
That’s not as bad as some observers had feared, perhaps explaining why Tullow’s share price is up 2.8% to 188.7p off the back of the news.
One press report in Kenya previously speculated the resource would be downgraded to a mere 250m barrels; a figure which if true would have raised doubts over the commerciality of the asset.
Contingent resources are known accumulations of hydrocarbons which are not considered ready for commercial development due to one or more contingencies.
They are measured on a sliding scale - from 1C to 2C to 3C - and, in theory, once any contingencies have been removed these should convert to 1P, 2P and 3P reserves respectively.
WHAT DO THE EXPERTS SAY?
UBS analyst Karen Wang says: ‘While disappointing, with shares underperforming the wider European E&Ps (exploration and production companies) by about 10% year to date, we think some of Lokichar downgrade (was) already priced in.’
There is also likely to be some relief that the resource downgrade doesn’t appear so acute as to render the development uncommercial.
‘For Tullow shareholders, we expect a sense of relief that the project remains substantial though smaller and likely more costly (per barrel) than previously thought,’ says Canaccord Genuity analyst Charlie Sharp.
‘Overall, there is a sense of “this could have been worse” in terms of Kenya, and a substantial development is still in the works with FID in 2019.
‘Overall, a small negative on results, but the stock is buoyed by a more solid/recovering oil price.’
