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Tullow's winning ways

Created:

2 December 2009

Written by:

Alistair Blair

Last week the Investor Relations Society handed out its annual report awards. I often earmark my first column in December to have a look at the winners, because they tend to demonstrate that investor relations people favour form over substance (at any rate, when dealing with investors). But this year, they have snatched my fun away. I wouldn't say the winner of the FTSE 100 section, Tullow Oil, was an inspired choice, but I think its annual report was pretty diligent and I see little scope for stick or sarcasm.

Nevertheless, I have some quibbles. After all, this is supposed to be the best report published by any of the UK's top 100 companies. It really should be quite inspirational. Let's start with Tullow's risk section. Poor old Tullow faces 22 different risks, which is twice as many as the average FTSE 100 company.

Or does it get off on boilerplate? Is the risk that "Strategy fails to meet shareholder expectations", for example, really the kind of thing Parliament had in mind when it told companies they must list out the principal risks and uncertainties facing them? Ditto, the risk of a hostile acquisition or the risk of a failure in corporate and social responsibility? I am sure Parliament was referring to risks specific to the company.

Too many risks is a rather trifling accusation, but it is a signpost for a non-trifling issue, which is length. Tullow takes 80 pages to lay out the narrative part of its annual report, which is definitely too long. Tullow will no doubt plead that it needs all those pages to meet burdensome reporting requirements.

But, frankly, it doesn't. Tullow is a pretty straightforward company. Its value largely rests in just two African oilfields which it is exploring and developing with great success. Land Securities, for example, which is a much more complex company, also takes 80 pages to describe itself in a quite impressive level of detail. Tullow could have done its job in 60 pages if it had wanted to do so.

Better still, both Tullow and Land Securities and every other company could make it their business to start the annual report with a four-page summary of the whole annual report. Most investors, be they fund managers or private individuals, would find a genuine executive summary very beneficial, saving them the trouble of tracking down the key facts they need amidst pages of boilerplate.

This could contain a five- or ten-year table, a graph of share price performance relative to the sector, a short section on competitive and sector trends, a 200-word appraisal of last year's performance, another 200 words on the outlook, 100 words on the balance sheet, gearing and funding, key board changes if any and a single paragraph encapsulating director remuneration. I don't want to get rid of the detail, because sometimes I will want to refer to it. But I also want an executive summary that presents the wood without the trees.

And for extra brownie points, this report could be written by an outsider - for example an analyst, accountant or (dare I say it) a journalist, whose stock in trade was getting to the nub of the matter and expressing it efficiently and plainly. If the Investor Relations Society took up the cause of executive summaries, I'd swoon before them.

But to get back to Tullow, I'd like to make a point despite the fact that it will be forlorn before I start. Do investors really need to be told eight times that Tullow is "entrepreneurial", or that its execution is "excellent", it has the "right skills" and "proven expertise". A lot of space is given over to these messages. They are clutter.

The value of a statement can often be gauged by considering its opposite - for example, by inserting the word "not" into it. Unless it is conceivable that the claimant might own up to being "not entrepreneurial", "not excellent" in execution, not having the right skills nor proven expertise, then there is no real communication going on in asserting the opposite.

More interesting to investors would be a few reflective paragraphs about how Tullow is coping with the different cultural challenges that face a £10bn company compared with the £500m company it was not so long ago. And where the pinch points are in its skills set.

But, hey, if you've drilled 22 exploration wells in 12 months and found oil down 17 of them, and increased your share price by 700 per cent over five years, then, frankly, I can bear a bit of needless boasting.