Tullow Oil:2005 results

4:08 a.m. Thu 30 Mar 2006

Independent Oil and gas producer Tullow Oil announced record earnings for the year to December 2005, in line with the guidance issued earlier. The company reported a 44% increase in average annual production to 58,450 boepd, which together with strong prices helped increase operating profits by 250% to £198.6m.

Feverish exploration and development programmes have driven the profits of the smaller companies in the sector (such as Dana Petroleum) by three digit figures. The oil majors such as Shell and BP have had to contend with mere double digit profit growth and that too mostly due to better prices.

The reason for the more rapid growth is that the small companies start with a much small base of production so it is relatively easier to increase output. The oil majors need massive increases (in absolute terms) to return the kind of growth figures that have become routine amongst the smaller players (for example Shell’s production in 2005 at 3.5m boepd is about 60 times Tullow’s).

Being smaller and nimbler, the minnows have also been able to buy over and exploit ageing fields that have proved to be too expensive for the oil majors; making it still easier to increase output. The majors need to depend more on discovering new sources to increase output.

Tullow’s current production is 69,000 boepd and is expected to reach 75,000 boepd by year end. The company succeeded in replacing 118% of its reserves in the current year resulting in total reserves increasing by 53mmboe to 358 mmboe.

With the outlook on medium term oil prices firm, the smaller oil players look set to outperform the majors. Trading at 352.75p, the company is on a prospective PE (2006 earnings) of 14.9x at the upper end of the sector range, although the strong growth prospects would seem to warrant a greater premium. The yield is a negligible 0.78%.