Agenda. The IFRS Process. Summary Impact of IFRS on 2004 Results. IFRS Standards Relevant to Tullow s 2004 Results

Transcription

1 Tullow Oil plc Transition to IFRS Building a balanced portfolio of Exploration and Production Assets 24 August 2005

2 Agenda The IFRS Process Summary Impact of IFRS on 2004 Results IFRS Standards Relevant to Tullow s 2004 Results Reconciliation of 2004 Results UK GAAP to IFRS IAS 39 Financial Instruments Summary and Conclusions 1

3 Transition to IFRS The IFRS Process 2

4 The IFRS Process EU requires all EU listed companies to prepare consolidated accounts under IFRS for 2005 year end The basic components of the financial statements (balance sheet, P&L, cashflow, notes etc) will remain Presentation and terminology will change slightly for most companies to comply with IFRS changes will be kept to a minimum Accounting for certain transactions and activities will differ under IFRS, impacting on reported earnings and the balance sheet, with a tendency to increased earnings volatility Cashflows and economics of the business are generally unaffected by IFRS 3

5 IFRS Timeline and Information Flow For 31 December year end UK GAAP and IFRS Comparatives IFRS Reporting only IFRS Transition Date IASB finalised IFRS s for 2005 adoption 2004 results were the last to be published under UK GAAP 2005 interim results published under IFRS 2005 full year results published under IFRS (may still give UK GAAP info) Publish reconciliations of 2004 full year and half year UK GAAP results and balance sheets to IFRS 4

6 Transition to IFRS Summary Impact of IFRS on 2004 Results 5

7 IFRS Standards Relevant to Tullow IFRS 2 Share Based Payments IAS 12 Income Taxes IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 39 Financial Instruments Other Standards (IFRS 6) 6

8 IFRS Summary Cashflows and commercial substance of transactions not impacted Marginal impact on 2004, largely due to PRT and Gawain depreciation 5% decrease in 2004 EPS 1% decrease in 2004 net assets Key impacts for 2005 onwards are IAS 39 and PRT First disclosure of IAS 39 will be in 2005 interim results Interim Reporting will give both UK GAAP and IFRS Comparatives Guidance for H2 will be available under IFRS 7

9 Summary Impact of IFRS on 2004 Results UK GAAP m IFRS m % Change Comment on principal changes Revenue % No change Operating Costs % IAS 17 Espoir Lease Depletion and Amortisation % IAS 17 Espoir lease, IAS 12 Energy Africa tax gross up IAS 16 component depreciation: Gawain Operating Profit % Additional depreciation Profit after tax % Negative Gawain depreciation offset by PRT charge reduction Operating Cashflow % No change Net assets % Negative Gawain depreciation offset by PRT charge reduction EPS (p) % Dividend per share (p) % No change 8

10 Transition to IFRS IFRS Standards Relevant to Tullow s 2004 Results 9

11 IFRS 2 Share Based Payments UK GAAP Treatment No accounting impact of share option awards IFRS Scope Mandatory compliance from 1 Jan 05 IFRS 2 is retrospective and applicable to awards since 7 Nov 02 Process Fair value is established at the date of grant based on actuarial model which takes account of volatility, staff turnover, early exercise and dividend yield Record accounting charge over anticipated vesting period Deferred Tax credit reduces P&L impact Relevance To Tullow Share Option Schemes, Employee Share Plans and PSP s are within scope the latter likely to be most material in future periods Impact Equity based incentives reflected in the P&L upon award Relatively minor impact on 2004 ( 330k) - likely to increase in future periods 10

12 IAS 12 Income Taxes Deferred tax on Business Combinations (1) UK GAAP Treatment No deferred tax gross up required on acquisitions Fair value exercise required Generally no goodwill in oil and gas sector IFRS Scope Effective for business combinations after 1 Jan 2004 (IFRS 1 exemption) Business combination the bringing together of separate entities or businesses into one reporting entity IAS 12 does not cover asset transactions Process Deferred tax gross up only includes assets which are subject to CT Local country corporation tax rates Intangible assets included in calculation 11

13 IAS 12 Income Taxes Deferred tax on Business Combinations (2) Relevance to Tullow The Energy Africa Acquisition is a business combination under IAS 12 Schooner/Ketch acquisition is not a business combination Impact Deferred Tax Gross-Up applied to EA assets at date of Acquisition million Additional value depreciated on normal basis over asset lives DDA/Barrel in % higher notional Equal and opposite deferred tax reversal reduces tax charge in each accounting period Net P & L impact marginal - 17k in 2004 No cash impact on income taxes 12

14 IAS 12 Income Taxes Petroleum Revenue Tax UK GAAP Treatment No definitive guidance Treated as a tax with Petroleum Revenue Tax (PRT) calculated on a Unit of Production basis (UOP) IFRS Scope Tullow elects to treat PRT as a tax under IAS 12 income taxes include all domestic taxes which are based on taxable profits Industry debate continues tax vs cost Process Deferred PRT now calculated on a temporary difference basis Relevance to Tullow PRT paying fields are Murdoch, Murdoch K and Orwell; Alba sold May 05 Impact 2004 PRT charge, net of deferred tax, decreased by 3.3 million Under IFRS, lower PRT charge in early years. No change on life of field PRT charge 13

15 IAS 16 Property, Plant and Equipment (1) UK GAAP Treatment Depreciation calculated on a field-by-field basis under successful efforts accounting policy Field can include a group of independent assets e.g. CMS/Thames IFRS Scope Effective date 1 Jan 05 Depreciation - depreciable amount should be allocated on a systematic basis over the assets useful life (IAS 16.50) Introduces the notion of component depreciation with implications for asset grouping based on common reservoir/infrastructure Grouping allowable but must have same useful life and method of depreciation Include future reserves and costs in UOP calculation Process Revisit reserves and useful lives of key infrastructural complexes grouped under UK GAAP CMS, Thames, Equatorial Guinea Determine whether component approach causes material adjustment 14

16 IAS 16 Property, Plant and Equipment (2) Relevance to Tullow The Gawain asset within Thames area suffered material reserve downgrades in 2003/04 It will now cease production in advance of the remainder of the Thames Complex, but is grouped with Thames under UK GAAP IFRS requires Gawain to be depreciated based on its own reserves and useful life only Impact 2004 Gawain depreciation charge, net of deferred tax, increases by 4.6 million No impact on CMS or Equatorial Guinea Assets grouping continues. Gabon, Côte d Ivoire, Congo, Pakistan depreciated on strict field by field basis no impact Full prospective IFRS guidance will be give with interim results (including updated reserves) 15

17 IAS 17 Leases (1) UK GAAP Treatment A finance lease is a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee PV of minimum lease payments > 90% of fair value of leased asset IFRS Scope Effective date 1 Jan 05 Accounting change from UK GAAP more likely long term leases will become classified as Finance Leases Process All lease terms reviewed Certain criteria have to be met as follows: Lease transfers ownership of the asset to the lessee by the end of the lease term The lessee has an option to purchase the asset at a price lower than the fair value The lease term is for the major part of the economic life of the asset At the inception of the lease, the PV of the minimum lease payments amounts to at least substantially all of the FV of the leased asset The leased assets are of a specialised nature 16

18 IAS 17 Leases (2) Relevance to Tullow Since 2001, Espoir field partners have joint lease covering Field FPSO and running to 2011 Under UK GAAP, the lease payments have been an operating cost Under IFRS, this will now be classified as a Finance Lease No other arrangements impacted Ceiba FPSO owned by partners Impact The Capital value of the Lease Payments is recorded as a Fixed Asset and a Long Term Liability (Debt) The Fixed Asset is depreciated over field life in the normal way Unit Operating costs are reduced and depreciation costs are increased under IFRS Minimal impact on Net Assets Summary 2004 impact Operating Cost Depreciation Interest UK GAAP ( 000) (2,722) Nil Nil IFRS ( 000) Nil (2,221) (489) 17

19 IFRS 6 Exploration for and Evaluation of Mineral Resources UK GAAP Treatment Successful efforts accounting policy IFRS Scope Effective date 1 Jan 06 (earlier application encouraged) Applies only to exploration and evaluation ( appraisal ) expenditures If early adoption not required to restate comparatives Impact As Tullow followed a successful efforts accounting policy under UK GAAP No changes required Recognition no impact, still measured at cost (pre licence expenditures and expenditures incurred after commercial viability is demonstrable specifically excluded) Presentation Allocate E & A costs to Intangible and Tangible based on underlying nature of expense 18

20 Transition to IFRS Reconciliation of 2004 Results UK GAAP to IFRS 19

21 2004 Operating Profit reconciliation 70,000 60,000 67,499 (556) (2,989) (7,669) ,786 50,000 '000 40,000 30,000 20,000 10,000 0 UK GAAP IFRS 2 IAS 12 IAS 16 IAS 17 IFRS IAS 12 additional depreciation due to Energy Africa tax gross up IAS 16 additional depreciation due to component treatment on Gawain 20

22 2004 Profit after Tax reconciliation 30,000 25,000 25,934 (317) 3,292 (4,601) 12 24,340 20,000 '000 15,000 10,000 5,000 0 UK GAAP IFRS 2 IAS 12 IAS 16 IAS 17 IFRS Modest impact on 2004 Earnings Negative Gawain depreciation offset by positive PRT movement 21

23 2004 Net Assets reconciliation 400, , ,594 (8,283) (189) 375, , , ,000 ' , , ,000 50,000 0 UK GAAP IFRS 2 IAS 12 IAS 16 IAS 17 IFRS Minimal impact on 2004 Net Assets Negative Gawain depreciation offset by positive PRT movement 22

24 Summary Impact of IFRS on 2004 Results UK GAAP m IFRS m % Change Comment on principal changes Revenue % No change Operating Costs % IAS 17 Espoir Lease Depletion and Amortisation % IAS 17 Espoir lease, IAS 12 Energy Africa tax gross up IAS 16 component depreciation: Gawain Operating Profit % Additional depreciation Profit after tax % Negative Gawain depreciation offset by PRT charge reduction Operating Cashflow % No change Net assets % Negative Gawain depreciation offset by PRT charge reduction EPS (p) % Dividend per share (p) % No change 23

25 Transition to IFRS IAS 39 Financial Instruments 24

26 IAS 39 Financial Instruments (1) IAS 39 is the most significant change for Tullow in migration from UK GAAP to IFRS UK GAAP Treatment Under UK GAAP hedges are often not recognised until the hedged transaction occurs few rules Scope IAS compliance required from 1 Jan 05, no prior year comparatives will be required (IFRS 1 exemption) Under IFRS all derivatives, even hedges, are recorded on the balance sheet at market value (Mark to Market MTM ) The IAS 39 definition of a derivative captures Commodity derivatives (swaps, options etc) Long Term Gas Contracts Interest rate derivatives FX derivatives 25

27 IAS 39 Financial Instruments (2) Process IAS 39 is a very complex standard that requires significant analysis and planning at contract inception All contracts reviewed and hedge effectiveness tests undertaken Relevance to Tullow Tullow has hedged both oil and gas since 2001 Rising Commodity Prices mean the majority of contracts are substantially out of the money Tullow has 3 main categories of financial instruments EA Barclays hedges: Call $29/bbl, Put $24.5/bbl, 4000 bopd to 2009 LT Gas contracts Thames, Powergen, Schooner/Ketch Others: swaps, collars etc. 26

28 IAS 39 Financial Instruments (3) Impact No cash impact, other than normal flows associated with hedge settlement Positive or negative MTM impacts depending on underlying commodity price movements EA Barclays hedge Negative MTM 1/1/ million, 30/6/ million Tullow to designate as hedge Some ineffectiveness likely to lead to charge to income statement Fair value on acquisition impacts accounting LT Gas contracts - Thames, Powergen Tullow to apply own use exemption no adjustments Schooner/Ketch contracts Tullow are proposing that own use exemption will apply However still uncertainty due to volumetric flexibility inherent in contract Possible charge to income statement Physical Gas Forward Sales Directly correlated to physical flows thus no impact Other derivatives Negative MTM 1/1/ million, 30/6/ million Tullow to apply hedge accounting Any ineffectiveness likely to lead to charge to income statement 27

29 Transition to IFRS Summary and Conclusions 28

30 IFRS Summary and Conclusions Cashflows and commercial substance of transactions not impacted Marginal impact on 2004, largely due to PRT and Gawain depreciation 5% decrease in 2004 EPS 1% decrease in 2004 net assets Key impacts for 2005 onwards are IAS 39 and PRT First disclosure of IAS 39 will be in 2005 interim results Interim Reporting will give both UK GAAP and IFRS Comparatives Guidance for H2 will be available under IFRS 29

31 Tullow Oil plc Transition to IFRS Building a balanced portfolio of Exploration and Production Assets 24 August 2005