tullow oil plc â€“transition to ifrs - investis cms

Tullow Oil plc –Transition to IFRSBuilding a balanced portfolio of Exploration and Production Assets

24 August 2005

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

Agenda

1

Transition to IFRS

The IFRS Process

2

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

The IFRS Process

3

IFRS Timeline and Information Flow

2004 2005For 31 December year end

UK GAAP and IFRSComparatives

IFRS Reportingonly

IFRS‘Transition

Date’

IASBfinalisedIFRS’s for

2005 adoption

2004 resultswere the last

to be publishedunder UK GAAP

2005 interimresults

publishedunder IFRS

2005 fullyear resultspublished

under IFRS

Publish reconciliations of 2004 full year and half yearUK GAAP results and balance sheets to IFRS

(may still giveUK GAAP info)

4

Transition to IFRS


5

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)

IFRS – Standards Relevant to Tullow

6

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


Negative Gawain depreciation offset by PRT charge reduction

-1%375.5379.1Net assets

-5%5.886.18EPS (p)

No change0%1.751.75Dividend per share (p)

No change0%154.3154.3Operating Cashflow


-5%31.332.9Profit after tax

Additional depreciation-16%56.867.5Operating Profit

IAS 17 Espoir lease, IAS 12 Energy Africa tax gross up IAS 16 component depreciation: Gawain

+19%80.467.6Depletion and Amortisation

IAS 17 Espoir Lease-4%60.863.5Operating Costs

No change0%225.3225.3Revenue

Comment on principal changes% Change

IFRS£m

UK GAAP£m

8

Transition to IFRS

IFRS Standards Relevant to Tullow’s 2004 Results

9

UK GAAP TreatmentNo accounting impact of share option awards

IFRS Scope Mandatory compliance from 1 Jan 05IFRS 2 is retrospective and applicable to awards since 7 Nov 02

ProcessFair value is established at the date of grant based on actuarial model which takes account of volatility, staff turnover, early exercise and dividend yieldRecord accounting charge over anticipated vesting period Deferred Tax credit reduces P&L impact

Relevance To TullowShare Option Schemes, Employee Share Plans and PSP’s are within scope – the latter likely to be most material in future periods

ImpactEquity based incentives reflected in the P&L upon awardRelatively minor impact on 2004 (£330k) - likely to increase in future periods

IFRS 2 – Share Based Payments

10

UK GAAP TreatmentNo deferred tax gross up required on acquisitionsFair 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

ProcessDeferred tax gross up only includes assets which are subject to CTLocal country corporation tax ratesIntangible assets included in calculation

IAS 12 – Income TaxesDeferred tax on Business Combinations (1)

11

Relevance to TullowThe Energy Africa Acquisition is a business combination under IAS 12Schooner/Ketch acquisition is not a business combination

ImpactDeferred Tax Gross-Up applied to EA assets at date of Acquisition - £49.2 millionAdditional “value” depreciated on normal basis over asset lives – 5.6 % higher notional “DDA/Barrel” in 2004Equal and opposite deferred tax “reversal” reduces tax charge in each accounting periodNet P & L impact marginal - £17k in 2004No cash impact on income taxes

IAS 12 – Income TaxesDeferred tax on Business Combinations (2)

12

UK GAAP TreatmentNo definitive guidanceTreated as a tax with Petroleum Revenue Tax (PRT) calculated on a Unit of Production basis (UOP)

IFRS ScopeTullow 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

ProcessDeferred PRT now calculated on a temporary difference basis

Relevance to TullowPRT paying fields are Murdoch, Murdoch K and Orwell; Alba sold May ‘05

Impact2004 PRT charge, net of deferred tax, decreased by £3.3 millionUnder IFRS, lower PRT charge in early years. No change on life of field PRT charge

IAS 12 – Income TaxesPetroleum Revenue Tax

13

UK GAAP TreatmentDepreciation 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 05Depreciation - 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

ProcessRevisit reserves and useful lives of key infrastructural complexes grouped under UK GAAP –CMS, Thames, Equatorial GuineaDetermine whether component approach causes material adjustment

IAS 16 – Property, Plant and Equipment (1)

14

Relevance to TullowThe Gawain asset within Thames area suffered material reserve downgrades in 2003/04It will now cease production in advance of the remainder of the Thames Complex, but is grouped with Thames under UK GAAPIFRS requires Gawain to be depreciated based on its own reserves and useful life only

Impact2004 Gawain depreciation charge, net of deferred tax, increases by £4.6 millionNo impact on CMS or Equatorial Guinea Assets – grouping continues.Gabon, Côte d’Ivoire, Congo, Pakistan depreciated on strict “field by field” basis – no impactFull prospective IFRS guidance will be give with interim results (including updated reserves)

IAS 16 – Property, Plant and Equipment (2)

15

UK GAAP TreatmentA 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 ScopeEffective date 1 Jan 05Accounting change from UK GAAP – more likely long term leases will become classified as “Finance Leases”

ProcessAll lease terms reviewedCertain 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

IAS 17 – Leases (1)

16

Relevance to TullowSince 2001, Espoir field partners have joint lease covering Field FPSO and running to 2011Under UK GAAP, the lease payments have been an operating costUnder IFRS, this will now be classified as a Finance Lease No other arrangements impacted – Ceiba FPSO owned by partners

ImpactThe 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 wayUnit Operating costs are reduced and depreciation costs are increased under IFRSMinimal impact on Net AssetsSummary 2004 impact

IAS 17 – Leases (2)

(489)NilInterest

(2,221)NilDepreciation

Nil(2,722)Operating Cost

IFRS (£’000)UK GAAP (£’000)

17

UK GAAP Treatment‘Successful efforts’ accounting policy

IFRS ScopeEffective date 1 Jan 06 (earlier application encouraged)Applies only to exploration and evaluation (‘appraisal’) expendituresIf early adoption not required to restate comparatives

ImpactAs Tullow followed a ‘successful efforts’ accounting policy under UK GAAP – No changes requiredRecognition – no impact, still measured at cost (pre licence expenditures andexpenditures incurred after commercial viability is demonstrable specifically excluded)Presentation – Allocate E & A costs to Intangible and Tangible based on underlying nature of expense

IFRS 6Exploration for and Evaluation of Mineral Resources

18

Transition to IFRS

Reconciliation of 2004 Results – UK GAAP to IFRS

19

2004 Operating Profit reconciliation

IAS 12 – additional depreciation due to Energy Africa tax gross upIAS 16 – additional depreciation due to component treatment on Gawain

20

67,499 (556) (2,989)(7,669)

501 56,786

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

UK GAAP IFRS 2 IAS 12 IAS 16 IAS 17 IFRS

£'00

0

2004 Profit after Tax reconciliation

Modest impact on 2004 EarningsNegative Gawain depreciation offset by positive PRT movement

21

24,34012

(4,601)3,292(317)25,934

0

5,000

10,000

15,000

20,000

25,000

30,000


£'00

0

2004 Net Assets reconciliation

Minimal impact on 2004 Net AssetsNegative Gawain depreciation offset by positive PRT movement

22

379,084 260 4,594 (8,283) (189) 375,466

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000


£'00

0



-1%375.5379.1Net assets

-5%5.886.18EPS (p)

No change0%1.751.75Dividend per share (p)

No change0%154.3154.3Operating Cashflow


-5%31.332.9Profit after tax

Additional depreciation-16%56.867.5Operating Profit

IAS 17 Espoir lease, IAS 12 Energy Africa tax gross up IAS 16 component depreciation: Gawain

+19%80.467.6Depletion and Amortisation

IAS 17 Espoir Lease-4%60.863.5Operating Costs

No change0%225.3225.3Revenue

Comment on principal changes% Change

IFRS£m

UK GAAP£m

23

Transition to IFRS

IAS 39 – Financial Instruments

24

UK GAAP TreatmentUnder UK GAAP hedges are often not recognised until the hedged transaction occurs – few rules

ScopeIAS 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

IAS 39 – Financial Instruments (1)

IAS 39 is the most significant change for Tullow in migration from UK GAAP to IFRS

25

ProcessIAS 39 is a very complex standard that requires significant analysis and planning at contract inceptionAll contracts reviewed and hedge effectiveness tests undertaken

Relevance to TullowTullow has hedged both oil and gas since 2001Rising 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

ImpactNo cash impact, other than normal flows associated with hedge settlementPositive or negative MTM impacts depending on underlying commodity price movementsEA Barclays hedge – Negative MTM 1/1/05 £21.0 million, 30/6/05 £81.5 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 1/1/05 £10.5 million, 30/6/05 £59.8 million– Tullow to apply hedge accounting– Any ineffectiveness likely to lead to charge to income statement


27

Transition to IFRS

Summary and Conclusions

28

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

Tullow Oil plc –Transition to IFRSBuilding a balanced portfolio of Exploration and Production Assets

24 August 2005

tullow oil plc â€“transition to ifrs - investis cms

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