Preliminary Results

Tullow Oil PLC 21 March 2007 Tullow Oil plc 2006 Results Another record year; exciting outlook for 2007 and beyond 21 March 2007 - Tullow Oil plc ('Tullow'), the independent oil and gas, exploration and production group, announces its results for the year ended 31 December 2006. Tullow had an excellent year in 2006. Record operational and financial results were achieved in a favourable oil and gas pricing environment, and each core area continued to deliver strong performances. This outcome underpinned ongoing reinvestment in exploration and development activities together with a material increase in dividends and helped to create the financial platform for the acquisition of Hardman Resources Limited ('Hardman'), which was effective in December 2006 and completed in early January 2007. Results Highlights 2006 2005 Change £ millions £ millions Sales Revenue 578.8 445.2 Up 30% Operating Profit 262.6 198.6 Up 32% Profit Before Tax 263.3 178.6 Up 47% Operating Cash Flow before Working Capital 446.7 309.5 Up 44% Stg p Stg p Basic Earnings per Share 24.23 17.50 Up 38% Final Dividend per Share 3.50 3.00 Up 17% • 11% increase in average annual production to 64,720 boepd • 89% organic reserves replacement; three year average organic reserve replacement of 98% • Total reserves and resources increased by 149 to 506 mmboe • Current production is 76,000 boepd and is expected to reach 85,000 boepd by year-end • Initial commercial reserves booked in Uganda; First production scheduled for early 2009 • Preliminary assessment of gross recoverable reserves in the Albertine Basin of 100 to 250 mmbbls • Three gas discoveries in the UK including the potentially significant K4 discovery in the CMS area • Okume, West Espoir and Bangora developments successfully on stream • Seven new African licences awarded • Completion of £595 million Hardman acquisition in January 2007 Commenting today, Pat Plunkett, Chairman, said: 'The balance and diversity of Tullow's business allows us to adapt quickly and with flexibility to opportunities as they arise and to tailor our investment plans to the changing circumstances of the industry. Our production assets along with our development and exploration activities, and the Hardman business, leaves Tullow with a high-quality, opportunity-rich portfolio in each of its core areas. Our business is healthy and growing and should remain so for the foreseeable future.' Aidan Heavey, Chief Executive, said: 'Tullow had another remarkable year in 2006. Our assets delivered strong production growth and good organic reserves replacement. Seven out of 12 of our exploration wells were discoveries and we proved a new and significant hydrocarbon province in Uganda which is already having a material impact on reserves. We completed our largest ever acquisition and continued to attract and retain great people and acquire quality new acreage. We have an excellent portfolio managed by a top-class technical, commercial and financial team. Our strategy is clear, our business is growing and we are continuing to drive record performance throughout the business.' Full details of the presentation, webcast and conference calls in conjunction with these results are on page 20 of this announcement and in the 2006 Results Centre on the Group website at www.tullowoil.com. 2006 Results For the year ended 31 December 2006 During 2006, we invested close to £1 billion in growing the business, including £332 million on capital expenditure, 70% of which was invested in our production and development assets and £595 million on the acquisition of Hardman. The 30% increase in revenue and the Group's operating cash flow before working capital adjustments of £446.7 million comfortably funded all our capital investment and returns to shareholders. Record operating and financial results overall Tullow's 2006 revenue increased by 30% to £578.8 million (2005: £445.2 million) as a result of higher production, and sales prices which were on average some 29% ahead of 2005. This growth was driven by strong increases in European gas production against a background of stable African oil output and significantly higher price realisations. European revenues were 60% ahead of 2005, whilst African revenues increased by 9%. Underlying cash operating costs were down 2% compared with 2005, despite significant cost pressure within our industry. This strong cost performance reflected efficiencies arising from increased production across all assets, ongoing cost control initiatives in UK assets and the addition of lower-cost Asian production during the year. Operating profit before exploration costs written off grew by 32% to £295.1 million (2005: £224.4 million), reflecting strong growth in production and realised oil and gas prices. Profit before tax increased by 47% to £263.3 million (2005: £178.6 million) and basic earnings per share amounted to 24.23 pence, an increase of 38% (2005: 17.50 pence). Excellent environmental performance In 2006, Tullow had no significant environment, health, safety or security issues. The Lost Time Incident Frequency Ratio was 0.81, well within our target of 1.0, despite a 65% increase to 6.1 million hours worked, both onshore and offshore, during the year. Furthermore, our responsibilities also include working with communities in a sustainable manner and in 2006 Tullow spent US$1.5 million in funding social and community projects within our core areas. Challenging external environment Whilst the commodity pricing environment has been strong, leading to increased ability to commercialise our oil and gas assets, it has been countered by a tight and inflationary contractor environment. In 2006, despite significant inflationary pressures on our field operating costs we managed to maintain our cost of production below 2005 levels. This has been achieved by strong cost management, but more importantly through optimal use of our infrastructure by increasing throughput and synergies. This will continue in 2007 where operational synergies, especially in the Espoir and Ceiba/Okume projects, are expected to have a greater impact. Competition also increased for new assets and licences during the year and Tullow's entrepreneurial approach combined with our diverse portfolio of assets assists us in managing this challenge. In general we are acquiring the equipment and resources necessary for our major developments and operational programmes, although we have seen lead times for future developments significantly increase. To address this industry-wide problem we have had to enhance our skills in medium to long-term operational planning and improve our capacity to share resources across our global asset base. Tullow prioritises financial and operating flexibility and undertakes a structured and rigorous project and prospect evaluation process to ensure effective allocation of funds at any point in the cycle. For 2007, this means we will be concentrating funding and resources mainly in Africa and Asia, until the anticipated improvement in pricing and the contractor environment occurs in the UK gas market. Focused growth strategy Tullow focuses on the long-term resourcing, growth and health of the business and invests accordingly. During 2006, £595 million was invested in the acquisition of Hardman. Hardman represents an outstanding strategic opportunity for Tullow, enabling us to establish a material and influential footprint in Mauritania, assume control of the prime block in the Albertine Rift Basin in Uganda and acquire highly prospective exploration interests in South America. The transaction is a clear demonstration of the substantial financial and operational capability of Tullow's business and team. The Hardman business has now been fully integrated and encouraging operational progress has already been made in Mauritania and Uganda. Strong positive outlook Tullow's strong cash flow and rigorous approach to the management of financial risk allows us to continue to implement our growth plans with confidence whilst maintaining and servicing debt of approximately £450 million. During 2007 our focus will be on continuing to increase production to a targeted level of 85,000 boepd by year-end, and drilling over 40 exploration wells, including major campaigns in Uganda, Namibia and India. The oil and gas industry is as dynamic as ever and the combination of excellent knowledge of our core areas, financial and operating flexibility and continued investment in our people means the outlook for Tullow is both positive and exciting. Operations Review Each of our core areas demonstrated substantial progress in 2006. Record UK production and gas price realisations Tullow's interests in Europe are centred on gas and infrastructure in the Southern North Sea. Over the last six years Tullow has established a dominant position in the Thames-Hewett and Caister Murdoch System (CMS) infrastructure hubs through a combination of acquisitions, an active development and exploration programme and participation in licensing rounds. Our most significant activity during the year was on the Schooner and Ketch fields, where effective operational management increased average uptime to 98% and achieved maximum production of over 100 mmscfd. However, the overall outcome of the work programme, which included the non-commercial Schooner NW development well, was below expectations, leading to a 45 bcf downgrade in commercial reserves attributed to the Schooner and Ketch assets at 31 December 2006. Elsewhere, the CMS and Thames-Hewett area fields continued to perform strongly driving average UK production to 172 mmscfd, a 32% increase over 2005 levels and allowing Tullow to take maximum advantage of record gas prices, particularly in the first half of the year. In parallel to growing production, Tullow also participated in four successful exploration wells, including the potentially significant K4 discovery in the CMS Area. These discoveries, along with the Thurne, Kelvin and Wissey projects already in progress, form the basis of future development and there are a further six exploration wells planned in 2007. In February 2007 Tullow was awarded six exploration blocks spread across the Thames-Hewett and CMS Areas in the 24th offshore Licensing Round. The Group plans to acquire seismic data as part of a full evaluation of the potential of this acreage and anticipates that exploration wells on this acreage will form part of the 2008 drilling programme. Following unprecedented gas pricing in early 2006, the recent much-needed increase in pipeline capacity and the impact of a comparatively mild winter have combined to drive gas prices for the first quarter of this year down to 2003 levels. Looking forward, however, the overall underlying supply and demand fundamentals, allied to the gradual convergence of UK and European gas markets, mean that the long-term outlook for the UK gas business remains positive. Key objectives delivered in Africa 2006 was an outstanding year for Tullow's African assets. Production commenced from two major development projects, a significant new hydrocarbon province was discovered in Uganda and the portfolio was enhanced through the award of licences in Angola, Madagascar, Ghana, Congo (DRC) and Gabon. Since year end, Tullow has also acquired interests in two licences in Cote d'Ivoire. In January 2007, Tullow completed the acquisition of Hardman which added materially to the Group's assets in Mauritania, enabled Tullow to take operational control of Block 2 in Uganda and further high impact exploration acreage in Africa. During 2006, we had a number of key objectives in Africa: • Ongoing infill drilling on producing assets; • Major developments to deliver first oil in Equatorial Guinea and Cote d'Ivoire; and • Significant exploration programmes in Gabon and Uganda. Our principal production objectives were achieved. The response to infill drilling was positive across all fields, and our Gabon output was in line with expectations. On the development front, both West Espoir and Okume came on stream as anticipated. In exploration, while the outcome of the Gabon programme was disappointing, results to date from Uganda have exceeded our most optimistic expectations and point to the potential for a world-class new hydrocarbon province to be delivered by the 2007 and 2008 exploration and appraisal programmes. Development work on existing discoveries is under way with a view to producing first oil in early 2009. Based on the wells drilled to date, Tullow's preliminary assessment of the gross recoverable reserves in the Albertine Basin is in the range of 100 to 250 million barrels. Encouraging progress was also achieved on the Kudu project in 2006. The Group has focussed on the gas sales negotiations for the gas to power project, the preparation for two appraisal wells in 2007 to test the significant upside potential of this asset and the start of negotiations to bring a partner into the project to reduce the Group's working interest to 70%. Tullow is currently in exclusive negotiations with a potential partner in respect of this interest and expects to conclude arrangements in advance of the commencement of the 2007 appraisal programme in April 2007. In 2007, the Group expects to continue with very significant levels of exploration, development and production activity in Africa. Exploration activity will involve drilling at least six exploration wells with a focus on the two key campaigns in Uganda and Namibia and the high impact Mahogany well in Ghana, in addition to ongoing development projects in Gabon, Congo (Brazzaville), Cote d'Ivoire and Equatorial Guinea. Significant progress made in South Asia 2006 was a very successful year for Tullow in South Asia, with significant progress made across the exploration and development portfolio. The regeneration of the Group's Asian assets continues apace and the foundations are now in place for an exciting 2007 programme. In Bangladesh, Tullow produced first gas from its Bangora project in May and, following a successful appraisal drilling programme, made a declaration of commerciality in December and recorded a material upgrade to reserves at year end. In Pakistan, two development wells were drilled on the Chachar field and, with the installation of the gas plant complete, first gas will be produced in May. On the exploration front, following a seismic programme during 2006, a two-well programme on the potentially significant Kohat Block will spud late this year. Perhaps most encouraging, however, has been India, where seismic undertaken during 2005 and 2006 has led to the delineation of a number of distinct targets in the CB-ON/1 Block in the Cambay Basin, which will be the subject of a multi-well drilling campaign in 2007. The growth challenge The recent announcement of first production from the Okume field was a major milestone for Tullow. For the Group, bringing Okume on-stream means that over 95% of our commercial reserves at the end of 2006 are now successfully producing. While this is a positive achievement, it also creates a challenge to access and create the next generation of development projects. Based on our annual production rate, Tullow needs to find over 30 million barrels of oil per year to maintain reserves and still keep growing. We believe our portfolio is more than capable of achieving this objective and our exploration, development and new ventures activities are geared towards exceeding it. Finance Review Tullow has grown into a versatile and balanced oil and gas Exploration and Production Group and our strategic, financial and operational objective is to run a balanced international business with a long-term perspective on performance and growth. Within the Group we have defined a number of business units based on geography and activity type. Each business unit is responsible for the execution of a development strategy and achievement of short-term performance targets. These targets are based on and support the Group's strategic objectives and Key Performance Indicators, which are used to assess the ongoing positioning of the business. During 2006, Tullow achieved extremely strong performance across all its key indicators and this enables us to continue to invest with confidence. Key performance indicators 2006 2005 Change Lost Time Incident Frequency Rate per million hours worked 0.81 0.82 Down 0.01 Production (boepd) 64,720 58,450 Up 11% Reserve replacement (%) 89% 118% Down 29% Sales volume (boepd) 57,300 53,350 Up 7% Realised oil price per bbl ($) 52.24 43.05 Up 21% Realised gas price (pence per therm) 46.18 33.85 Up 36% Cash operating costs per boe (£)1 4.74 4.84 Down 2% Operating cash flow before working capital per boe (£) 18.76 13.50 Up 39% Net debt 122.1 140.2 Down 13% Interest cover 24.0 15.5 Up 8.5 times Gearing (%)2 15% 36% Down 21% 1. Cash operating costs are cost of sales excluding depletion and amortisation and under/over lift movements 2. Gearing is net debt divided by net assets Higher production and better pricing Working interest production averaged 64,720 boepd, 11% ahead of 2005. Sales volumes averaged 57,300 boepd, representing an increase of 7%. Production increased most notably in Europe, which rose 21% or 5,000 boepd, and Asia which rose 330% or 1,400 boepd. Oil production from Africa was in line with 2005, driven by strong performance in Equatorial Guinea and Cote d'Ivoire offset by a modest decline in Gabon. Prices realised for both oil and gas during 2006 showed material increases over 2005. In the UK, extreme shortness in gas supply during the first half of the year led to record prices and was the principal factor driving Tullow's realised prices to 46.2p/therm, a 36% increase over 2005. The Group also recorded tariff income of £16.6 million (2005: £14.7 million) from its UK infrastructure interests. Increases in world oil prices during the first half were also a key influence on realisations from Tullow's African business which rose by 21% to $52.2/bbl (2005: $43.1/bbl). Tullow's oil production sold at an average discount of 5% to Brent during the year, reflecting improved competitiveness in the West African oil trading environment and revised blending and marketing arrangements in respect of the M'Boundi field. As a result of higher production and prices, 2006 revenue amounted to £578.8 million, an increase of 30% over 2005. The mix of production also changed slightly, with UK production increasing from 41% of 2005 production to 45% of the 2006 total; with increased production from Asia, this meant that the Group's production was relatively evenly balanced between oil and gas. Oil Gas Total % of Total Revenue analysed by Core Area £ millions £ millions £ millions Europe - 307.0 307.0 53% Africa 268.3 - 268.3 46% Asia - 3.5 3.5 1% Total 268.3 310.5 578.8 % contribution to Group 46% 54% Effective operational cost control Underlying cash operating costs, which exclude depletion and amortisation and movements on under/over lift, amounted to £112.0 million (£4.74/boe). These costs were 2% below 2005 levels, despite higher underlying oil and gas pricing, which had a direct impact on reported operating costs due to royalties in respect of Gabonese production. Reported operating costs before depletion and amortisation for the year of £114.7 million (2005: £123.5 million) were also impacted by the inclusion at market value of £2.7 million associated with overlifted volumes at 31 December 2006, principally relating to the Group's interests in Gabon and Equatorial Guinea. Enlarged business, more activity and investment Depreciation, depletion and amortisation for the year amounted to £144.9 million (£6.13/boe). This represents a 21% increase over 2005, principally as a result of a higher depreciation charge on UK assets. The increased charge was driven by material investment in the Schooner and Ketch assets combined with a reduction of 45 bcf in commercial reserves attributed to the fields. The reduction in reserves followed an evaluation of the results of the 2006 redevelopment programme and the drilling of the unsuccessful Schooner NW well. Tullow invested significantly in people during 2006. Average staff numbers increased 20% to 209 people, adding strong resources to our technical, commercial and senior managerial teams. As a result, underlying general and administrative costs have increased by 48% to £18.3 million. The total general and administrative costs charge of £22.5 million also includes a charge of £4.2 million in respect of the Group's share-based incentive schemes (2005: £1.4 million). Exploration costs written-off were £32.5 million (2005: £25.8 million), in accordance with the Group's 'successful efforts' accounting policy, which requires that all costs associated with unsuccessful exploration are written-off to the Income Statement. The principal write-downs during 2006 related to Angola, Gabon, UK exploration and new ventures/pre-licence costs. The Group drilled 12 exploration wells in 2006 and made seven discoveries, and is planning to drill over 40 wells during 2007. Operating profit increased 32% Operating profit before exploration activities amounted to £295.1 million (2005: £224.4 million), an increase of 32%, reflecting the strong growth in Group production and realised oil and gas prices, somewhat offset by increased depreciation charges on a per barrel basis. More effective hedging At 31 December 2006 the Group's derivative instruments had a negative mark to market value of £21.0 million (2005: £147.8 million). Of this, £72.7 million relates to a negative mark to market on oil contracts, of which £74.0 million relates to hedges acquired as part of the acquisition of Energy Africa in 2004, which is largely offset by a positive mark to market on gas contracts of £45.6 million. The Group's position also includes a positive mark to market of £5.9 million in respect of foreign exchange derivative instruments entered into in respect of the Hardman transaction and the balance relates to interest rate derivatives. While the oil and gas arrangements all qualify for hedge accounting, the variations in crude oil discounts and gas production patterns for Tullow do cause a degree of hedge ineffectiveness. During 2006, however, the steady reduction in average discount attributable to Tullow's oil production, combined with lower year- end commodity prices, has resulted in an improvement in overall cumulative hedge ineffectiveness at 31 December 2006. Consequently, a credit of £9.8 million has been recognised in the Income Statement for the year in respect of oil and gas contracts. In addition a credit of £5.9 million is reflected in the Income Statement in respect of foreign exchange derivative instruments as they do not qualify for hedge accounting under IAS 39. Tullow continues to undertake hedging activities as part of the ongoing management of its business risk and to protect the availability of cash flow for reinvestment across its asset portfolio. Hedges in respect of 2007 provide downside protection on revenue of over £280 million, representing over 75% of 2007 budgeted capital investment. The Group's hedge position as at 15 March 2007 can be summarised as follows: Hedge Position H1 2007 H2 2007 2008 Oil Volume - bopd 16,491 17,400 10,793 Current Price Hedge - US$/bbl 52.67 55.47 51.80 Gas Volume - mmscfd 93.6 69.8 54.4 Current Price Hedge - p/therm 44.35 44.98 46.11 Financing costs and interest cover Tullow's growth during 2006, and in particular the Hardman acquisition, was greatly facilitated by the support of the Group's banking syndicate and the balance and diversity of our portfolio. Prudent use of debt is a core element of the Group's overall strategy and Tullow has a flexible financing facility which allows non-OECD activities to be funded at an overall financing cost of circa 8%. The net interest charge for the year was £15.0 million (2005: £19.8 million) and reflects reduced levels of net debt during 2006. At 31 December 2006, Tullow had net debt of £122.1 million, including £46.5 million of net cash attributable to Hardman. Since year-end this has increased to £450 million as a result of the Hardman transaction, involving payment of AS$819.5 million (£329.9 million) of cash consideration on 10 January 2007. Interest cover is very healthy at over 24.0 times (2005: 15.5 times). No increase in effective tax rate The tax charge of £105.9 million (2005: £65.4 million) relates to the Group's North Sea and Gabonese activities and represents 40% of the Group's profit before tax (2005: 37%). After adjusting for non deductible exploration costs, hedge ineffectiveness charges and non-recurring items the Group's underlying effective tax rate remained unchanged at 35%, despite the introduction of an additional 10% supplementary Corporation Tax by the UK Government on 1 January 2006. Strong profit for the period and increased dividend Profit after tax amounted to £157.4 million, representing a 39% increase over 2005. This profitability has allowed the Group to once again substantially increase its dividend. A final dividend of 3.5 pence per share has been proposed by the Board. This brings the total payout in respect of 2006 to 5.5 pence per share, representing an increase of 38% over 2005. While the Board plans to maintain a progressive dividend policy future increases are unlikely to match those of recent years, due to the significant level of the current reinvestment opportunities the Group has. Shareholder distribution and total shareholder returns Since Tullow initiated dividend payments in 2003, cash returned to shareholders has exceeded £80 million. This is an important component of total shareholder return, which in 2006 exceeded 49%, placing Tullow in the top quartile of its peer group. Over the five year period from 2001 to 2006, Tullow's total shareholder return has been in excess of 400%, while total shares in issue have doubled from 358 million shares to the current level of approximately 717 million shares spread across over 10,000 shareholders. Strong balance sheet capacity and financial flexibility The excellent pricing environment, allied to increasing production and effective control of underlying operating costs, led to record operating cash flow before working capital movements of £446.7 million, 44% ahead of 2005. This cash flow, allied to the positive asset performance and strong reserve replacement of recent years meant that the Group had access to substantial financial capacity throughout 2006; facilitating investment of £332 million in production, development and exploration, a 38% increase in the dividend and the acquisition of Hardman. During 2006 approximately 70% of Group capital expenditure was associated with ongoing development and production enhancement projects in the UK, Gabon, Congo (Brazzaville), Equatorial Guinea and Cote d'Ivoire. The remainder of expenditure was reinvested in exploration and appraisal activities, where the Group drilled 12 wells, recording seven discoveries. The success of these multi-year programmes has enabled Tullow to record average organic reserve replacement of 98% for the three year period 2004 to 2006. During 2007, we plan to invest a further £350 million in our assets, with the objective of achieving average production of approximately 80,000 boepd and delivering three major exploration campaigns in Uganda, Namibia and India. Hardman Acquisition On 25 September 2006, Tullow announced a proposal to acquire Hardman by way of a Scheme of Arrangement. Following the approval of the acquisition by Hardman shareholders and the Australian Courts, the Scheme became effective on 20 December 2006 and formal completion occurred on 10 January 2007. The acquisition of Hardman was by a cash offer, combined with a partial equity alternative amounting to up to a maximum 65 million Tullow shares, representing approximately 40% of the value of the transaction. The partial equity option was fully exercised by Hardman shareholders and the balance of the acquisition consideration, amounting to £359.1 million, was paid in cash funded by a mixture of existing debt and a new facility provided by Bank of Scotland Corporate. Following the transaction, Tullow has net debt totalling approximately £450 million. During 2007, the Group will seek to repay a portion of this debt and adjust the terms of the remainder to match better the Group's reserve base and long-term growth objectives. Hardman's business and assets have been consolidated in Tullow's financial statements with effect from 31 December 2006. A preliminary fair value exercise has been undertaken to determine the values attributable to the acquired assets and liabilities within the Group's Balance Sheet as at 31 December 2006. The total fair value attributed to the transaction amounts to £750.0 million, comprising £594.7 million of consideration and associated costs and an additional £155.3 million of deferred tax uplift provided in accordance with the provisions of IAS 12. Based upon this preliminary exercise, Tullow has allocated a total of £86.9 million to Tangible Assets, relating to the Chinguetti field in Mauritania, and a total of £623.6 million to intangible assets reflecting Hardman's interests in a variety of discoveries, potential development projects and exploration across a total of seven countries including Uganda and Mauritania. The balance of the preliminary fair value allocation, amounting to £39.5 million, is accounted for by the other net assets, including cash balances, acquired. Due to the timing of the transaction and the wide range of assets and interests acquired, the fair value allocated at 31 December is preliminary in nature and will be reviewed during 2007 in accordance with the provisions of IFRS 3 relating to Business Combinations. The reserves attributable to the Hardman assets have also been reflected in Tullow's commercial reserves and contingent resources analysis at 31 December 2006. In particular, Tullow has allocated a total of 9.6 mmboe to its 19% interest in Chinguetti and 17.8 mmboe to Hardman's 50% interest in the Mputa and Nzizi discoveries in Block 2 in Uganda (where Tullow now holds a total interest of 100%) within the commercial reserves category. Financial Strategy and Outlook Tullow operates a business which is commercially aggressive but financially conservative. We recognise the financial risks inherent in our operations and mitigate them through portfolio diversity, prudent hedging and close attention to costs. Ends Group Income Statement Year Ended 31 December 2006 Note 2006 2005 £'000 £'000 Sales Revenue 578,847 445,232 Cost of sales (261,268) (243,149) Gross Profit 317,579 202,083 Administrative expenses (22,490) (13,793) Disposal of subsidiaries - 30,537 Profit on sale of oil and gas assets - 5,524 Exploration costs written off (32,494) (25,783) Operating Profit 262,595 198,568 Gain/(loss) on hedging instruments 15,701 (159) Finance revenue 3,030 4,367 Finance costs (17,994) (24,197) Profit from Continuing Activities before Tax 263,332 178,579 Income tax expense 7 (105,894) (65,443) Profit for the Year from Continuing Activities 157,438 113,136 Earnings per Ordinary Share 2 Stg p Stg p - Basic 24.23 17.50 - Diluted 23.67 17.15 Group Statement of Recognised Income and Expense Year Ended 31 December 2006 2006 2005 £'000 £'000 Profit for the Financial Year 157,438 113,136 Currency translation adjustments (55,057) 32,447 Hedge movement 68,236 (120,449) Total Recognised Income and Expense for the Year 170,617 25,134 Group Balance Sheet As at 31 December 2006 2006 2005 £'000 £'000 ASSETS Non-Current Assets Intangible exploration and evaluation assets 820,437 160,543 Property, plant and equipment 934,368 736,563 Investments 496 496 1,755,301 897,602 Current Assets Inventories 13,735 5,141 Trade receivables 74,609 66,441 Other current assets 28,963 26,851 Cash and cash equivalents 99,478 65,386 Derivative financial instruments 16,065 - 232,850 163,819 Total Assets 1,988,151 1,061,421 LIABILITIES Current Liabilities Trade and other payables (161,797) (139,415) Hardman acquisition payable (333,912) - Other financial liabilities (7,516) - Income tax payable (20,549) (25,038) Derivative financial instruments - (70,639) Total Current Liabilities (523,774) (235,092) Non-Current Liabilities Trade and other payables (17,137) (19,118) Other financial liabilities (206,883) (198,372) Deferred tax liabilities (311,925) (51,473) Provisions (124,868) (91,139) Derivative financial instruments (37,088) (77,208) Total Non-Current Liabilities (697,901) (437,310) Total Liabilities (1,221,675) (672,402) Net Assets 766,476 389,019 EQUITY Equity attributable to Equity Holders of the Parent Called up share capital 65,190 64,744 Share premium 126,075 123,019 Other reserves 69,791 60,589 Shares to be issued 235,621 - Retained earnings 269,799 140,667 Total Equity 766,476 389,019 Group Cash Flow Statement Year Ended 31 December 2006 Note 2006 2005 £'000 £'000 Cash Flows from Operating Activities Cash generated from operations 9 404,064 273,840 Income taxes paid (61,868) (25,360) Net cash from operating activities 342,196 248,480 Cash Flows from Investing Activities Acquisition of subsidiaries 21,336 - Disposal of subsidiaries - 57,227 Disposal of oil and gas assets - 31,769 Purchase of intangible exploration & evaluation (67,976) (69,766) assets Purchase of property, plant and equipment (243,087) (298,320) Finance revenue 3,030 4,359 Net cash used in investing activities (286,697) (274,731) Cash Flows from Financing Activities Net proceeds from issue of share capital 3,502 1,570 Debt arrangement fees (1,176) (10,481) Repayment of bank loans (27,914) (351,637) Drawdown of bank loan 59,996 390,515 Finance costs (16,997) (21,483) Dividends paid (32,492) (14,555) Purchase of treasury shares (3,976) - Net cash used in financing activities (19,057) (6,071) Net Increase/(Decrease) in Cash and Cash Equivalents 36,442 (32,322) Cash and Cash Equivalents at Beginning of Period 65,386 85,070 Translation Difference (2,350) 12,638 Cash and Cash Equivalents at end of Period 99,478 65,386 Notes to the Preliminary Accounts Year Ended 31 December 2006 1. Basis of Accounting and Presentation of Financial Information While the financial information included in this preliminary announcement has been prepared in accordance with International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to publish full financial statements that comply with IFRS in April 2007. The financial information set out in the announcement does not constitute the Company's statutory accounts for the years ended 31 December 2006 or 2005. The financial information for the year ended 31 December 2005 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under s. 237(2) or (3) Companies Act 1985. The statutory accounts for the year ended 31 December 2006 will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's annual general meeting. 2. Earnings per Share The calculation of basic earnings per share is based on the profit for the year after taxation of £157,437,794 (2005 - £113,136,158) and 649,665,389 (2004 - 646,637,815) ordinary shares, being the basic weighted average number of shares in issue for the year. The calculation of diluted earnings per share is based on the profit for the year after taxation as for basic earnings per share. The number of shares outstanding, however, is adjusted to show the potential dilution if employee and other share options are converted into ordinary shares. The weighted average number of ordinary shares is increased by 15,593,396 (2005: 13,214,424) in respect of the share option scheme, resulting in a diluted weighted average number of shares of 665,258,785 (2005: 659,852,239). 3. Dividends Paid and Proposed During the year the Company paid a final 2005 dividend of 3 pence per share and an interim 2006 dividend of 2 pence per share, a total dividend of 5 pence per share (2005: 2.25 pence per share). The Directors intend to recommend a final 2006 dividend of 3.5 pence per share, which, if approved at the AGM, will be paid on 6 June to shareholders on the register at 4 May. 4. 2006 Annual Report and Accounts The Annual Report and Accounts will be posted to all shareholders on 19 April 2007, save those who have elected to receive these electronically. Investors willing to avail themselves of this facility should visit our website (www.tullowoil.com) and follow the appropriate links. 5. The Annual General Meeting is due to be held at Haberdashers' Hall, 18 West Smithfield, London, EC1 on Wednesday 30 May 2007 at 12 noon. 6. Segmental Reporting In the opinion of the Directors the operations of the Group comprise one class of business, oil and gas exploration, development and production and the sale of hydrocarbons and related activities. The Group also operates within four geographical markets, Europe, Africa, Asia and South America. The following tables present revenue, profit and certain asset and liability information regarding the Group's business segments for the years ended 31 December 2006 and 2005. South Europe Africa Asia America Unallocated Total £'000 £'000 £'000 £'000 £'000 £'000 2006 Sales revenue by origin 307,007 268,302 3,538 - - 578,847 Segment result 129,735 159,304 (3,954) - - 285,085 Unallocated corporate expenses (22,490) Operating profit 262,595 Gain on hedging instruments 15,701 Finance revenue 3,030 Finance costs (17,994) Profit before tax 263,332 Income tax expense (105,894) Profit after tax 157,438 Total assets 541,684 1,281,760 62,174 79,815 22,718 1,988,151 Total liabilities (250,234) (356,008) (15,507) (20,315) (579,611) (1,221,675) Other segment information Capital expenditure: Property, plant and equipment 161,675 217,693 10,567 - 3,136 393,071 Intangible fixed assets 37,197 575,808 15,897 79,815 - 708,717 Depletion, depreciation and (79,870) (64,068) (992) - (1,651) (146,581) amortisation Europe Africa Asia South America Unallocated Total £'000 £'000 £'000 £'000 £'000 £'000 2005 Sales revenue by origin 179,501 264,939 792 - - 445,232 Segment result 54,066 125,428 (3,194) - - 176,300 Disposal of subsidiaries 30,537 Profit on sale of oil and gas 5,524 assets Unallocated corporate expenses (13,793) Operating profit 198,568 Loss on hedging instruments (159) Finance revenue 4,367 Finance costs (24,197) Profit before tax 178,579 Income tax expense (65,443) Profit after tax 113,136 Total assets 429,928 585,523 40,630 - 5,340 1,061,421 Total liabilities (146,788) (235,629) (10,142) - (279,843) (672,402) Other segment information Capital expenditure: Property, plant and equipment 262,743 103,968 1,417 - 3,701 371,829 Intangible fixed assets 38,862 35,308 3,910 - - 78,080 Depletion, depreciation and (56,716) (59,758) (2,238) - (985) (119,697) amortisation Unallocated expenditure and net liabilities include amounts of a corporate nature and not specifically attributable to a geographic area, including tax balances and the Group debt. 7. Taxation on Profit on Ordinary Activities a) Analysis of charge in period The tax charge comprises: 2006 2005 £'000 £'000 Current tax UK corporation tax 14,344 2,843 Foreign taxation 17,434 26,173 Total corporate tax 31,778 29,016 UK petroleum revenue tax 21,605 9,319 Total current tax 53,383 38,335 Deferred tax UK corporation tax 45,585 16,002 Foreign taxation 6,530 11,496 Total corporate tax 52,115 27,498 UK petroleum revenue tax 396 (390) Total deferred tax 52,511 27,108 Total tax charge 105,894 65,443 b) Factors Affecting Tax Charge for Period As the Group earns a significant portion of its profits in the UK. the tax rates applied to profit on ordinary activities in preparing the reconciliation below is the standard rate of UK corporation tax plus the rate of SCT. The difference between the total current tax charge shown above and the amount calculated by applying the standard rate of UK corporation tax (30%) plus the rate of the supplementary charge in respect of UK upstream profits (SCT) (20%) to the profit before tax is as follows. 2006 2005 £'000 £'000 Group profit on ordinary activities before tax 263,332 178,579 Tax on group profit on ordinary activities at a combined standard UK 131,666 71,432 corporation tax and SCT rate of 50% (2005 - 40%) Effects of: Expenses not deductible for tax purposes 7,264 1,176 Utilisation of tax losses not previously recognised - (589) Net losses not recognised 19,635 41,087 PRT 22,001 8,929 UK corporation tax deductions for current PRT (11,001) (3,728) Adjustments relating to prior years 290 354 Income taxed at a different rate (63,961) (53,218) Group total tax charge for the year 105,894 65,443 The Group's profit before taxation will continue to be subject to jurisdictions where the effective rate of taxation differs from that in the UK. Furthermore, unsuccessful exploration expenditure is often incurred in jurisdictions where the Group has no taxable profits, such that no related tax benefit arises. Accordingly the Group's tax charge will continue to depend on the jurisdictions in which pre-tax profits and exploration costs written off arise. The Group has tax losses of £124 million (2005 - £130 million) that are available indefinitely for offset against future taxable profits in the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as they may not be used to offset taxable profits elsewhere in the Group. 8. Acquisition of Subsidiary On 25 September 2006 the Group announced a proposal to acquire 100 per cent of the issued share capital of Hardman Resources Limited by way of a Scheme of Arrangement. Following the approval of the acquisition by Hardman shareholders and the Australian Courts, the Scheme became effective on 20 December 2006 and formal completion, which involved the payment of AS$819.5 million and the issue of 65 million Tullow shares, occurred on 10 January 2007. The acquisition of Hardman provides additions to the Group's production, development and exploration activities in Africa and adds exploration acreage in Europe and South America. The transaction has been accounted for by the purchase method of accounting with an effective date of 20 December 2006, being the date that Tullow gained control of Hardman. For reasons of materiality and practicality, Tullow has consolidated Hardman's results from 31 December 2006. The fair value allocation to the Hardman assets is preliminary in nature and will be reviewed in accordance with the provisions of IFRS 3 - Business Combinations. Due to the inherently uncertain nature of the oil and gas industry and intangible exploration and evaluation assets in particular, the assumptions underlying the preliminary assigned values are highly judgemental in nature. The purchase consideration equals the aggregate of the fair value of the identifiable assets and liabilities of Hardman, and therefore no goodwill has been recorded on the acquisition. Deferred tax has been recognised in respect of the fair value adjustments as applicable. Book Value Fair Value £'000 £'000 Intangible exploration and evaluation assets 58,563 623,542 Property, plant and equipment 79,951 86,931 Inventories 3,674 3,866 Other current assets 10,790 10,790 Cash and cash equivalents 46,540 46,540 Trade and other payables (11,480) (11,480) Derivative financial instruments (1,147) (1,147) Deferred tax liabilities (3,605) (158,842) Provisions (5,463) (5,463) 177,823 594,737 Total Consideration 594,737 Satisfied by: Cash 25,204 Hardman acquisition payable 333,912 Shares to be issued 235,621 594,737 Net cash inflow arising on acquisition Cash consideration (25,204) Cash and cash equivalents acquired 46,540 21,336 If the acquisition of Hardman Resources Limited had been completed on the first day of the financial year, group revenues for the year would have been £632,984,000 and Group net profit attributable to equity holders of the parent would have been £131,304,000. 9. Cash Flows from Operating Activities 2006 2005 £'000 £'000 Profit before taxation 263,332 178,579 Adjustments for: Depletion, depreciation and amortisation 146,581 119,697 Net foreign exchange losses 840 72 Exploration costs written off 32,494 25,783 Disposal of subsidiaries - (30,537) Profit on sale of oil and gas assets - (5,524) Share based payment charge 4,186 1,403 Gain/(loss) on hedging instruments (15,701) 159 Finance revenue (2,451) (4,367) Finance costs 17,415 24,197 Operating Cash Flow before Working Capital Movements 446,696 309,462 Decrease/(increase) in trade and other receivables 509 (38,538) Increase in inventories (4,729) (1,749) (Decrease)/increase in trade payables (38,412) 4,665 Cash Generated from Operations 404,064 273,840 10. Group Proven and Probable Commercial Reserves and Contingent Resources Summary (Unaudited) EUROPE AFRICA ASIA TOTAL Oil Gas Oil Gas Oil Gas Oil Gas Petroleum mmbbl bcf mmbbl bcf mmbbl bcf mmbbl bcf mmboe Commercial Reserves 1 Jan 2006 - 356.2 113.0 23.8 - 95.3 113.0 475.2 192.2 Revisions - 4.6 18.1 (1.9) - 12.2 18.1 14.9 20.6 Acquisitions - 4.2 28.8 - - - 28.8 4.2 29.5 Production - (62.6) (12.1) (0.7) - (3.7) (12.1) (67.0) (23.2) 31 Dec 2006 - 302.4 147.8 21.2 - 103.7 147.8 427.3 219.1 Contingent Resources 1 Jan 2006 - 191.4 0.7 781.2 - 16.2 0.7 988.8 165.5 Revisions - (16.7) 20.6 4.1 - 6.3 20.6 (6.3) 19.5 Acquisitions - - 34.6 405.9 - - 34.6 405.9 102.2 31 Dec 2006 - 174.7 55.9 1,191.2 - 22.5 55.9 1,388.4 287.3 Total 31 Dec 2006 - 477.1 203.7 1,212.4 - 126.2 203.7 1,815.7 506.4 1. Proven and Probable Commercial Reserves are based on a Group reserves report produced by an independent engineer 2. Proven and Probable Contingent Resources are based on both Tullow's estimates and the Group reserves report produced by an independent engineer 3. Tullow has classified the Ugandan discoveries Mputa and Nzizi as Commercial reserves 4. Mauritanian reserves and resources are based on Operator or RISC (independent engineer) report values as appropriate The Group provides for depletion and amortisation of tangible fixed assets on a net entitlements basis, which reflects the terms of the Production Sharing Contracts related to each field. Total net entitlement reserves were 145.8 mmboe at 31 December 2006 (2005: 162.2 mmboe). Contingent Resources relate to resources in respect of which development plans are in the course of preparation or further evaluation is under way with a view to development within the foreseeable future. About Tullow Oil plc Tullow Oil plc is a leading independent oil and gas, exploration and production group and is quoted on the London and Irish Stock Exchanges (symbol: TLW.L). The Group has interests in over 100 production and exploration licences in 18 countries and focuses on three core areas: North West Europe, Africa and South Asia. For further information please consult the Group's website www.tullowoil.com. Events on results day In conjunction with these results Tullow is conducting a London Presentation and a number of events for the financial community. All times are BST. 09.30 UK/European Conference Call (and simultaneous Webcast) To access the call please dial the appropriate number below shortly before the call and ask for the Tullow Oil plc conference call. A replay facility will be available from approximately noon on 21 March until 27 March. The telephone numbers and access codes are: Live Event Replay Facility available from Noon UK Participants 020 7138 0832 UK Participants 020 7806 1970 Irish Participants 01 655 0486 Irish Participants 01 659 8321 Access Code 9647656# To join into the live webcast, or play the on-demand version, you will need to have either Real Player or Windows Media Player installed on your computer. 17:30 US Conference Call To access the call please dial the appropriate number below shortly before the call and ask for the Tullow Oil plc conference call. A replay facility will be available from approximately 20.30 21 March until 27 March. The telephone numbers and access codes are: Live Event Replay Facility available from 20:30 Domestic Toll Free +1 888 469 4228 Domestic Toll Free +1 800 406 7325 Toll +1 480 293 1744 Toll +1 303 590 3030 Access Code 3712116 For further information contact: Tullow Oil plc Citigate Dewe Rogerson Murray Consultants + 44 20 8996 1000 +44 20 7638 9571 +353 1 498 0300 Aidan Heavey, CEO, Tom Hickey, CFO Martin Jackson Joe Murray Chris Perry, IRO Disclaimer This statement contains certain forward-looking statements that are subject to the usual risk factors and uncertainties associated with the oil and gas exploration and production business. Whilst the Group believes the expectations reflected herein to be reasonable in light of the information available to them at this time, the actual outcome may be materially different owing to factors beyond the Group's control or within the Group's control where, for example, the Group decides on a change of plan or strategy. Accordingly no reliance may be placed on the figures contained in such forward-looking statements. This information is provided by RNS The company news service from the London Stock Exchange

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