Tullow - Rationale for divestment points to use of proceeds.

All,

Please find our Tullow model here.

Tullow Oil announced last night the sale of two non-operated assets in West Africa (Equatorial Guinea and Ghana) for an initial consideration of $135m plus contingency payments of up to $45m, subject to production levels and Oil price assumptions. This asset sale generates additional cash on balance sheet and the use of these proceeds will be part of any negotiations with RBL lenders and bondholders about upcoming maturities.

We do not view this sale as increasing the likelihood of the 2021 and 2022 bonds been repaid in full as they fall due. The Company has sold these assets to generate cash to invest in further CAPEX in their Ghanian fields, mainly Jubilee. There is no strategic reason to sell these non-operating assets (arguably cheap(ish)) to hand the money straight over to bondholders. The proceeds in the short term is $135m, c.10% of the upcoming maturities of RBL and bondholders of $1,322m by April 2022 (ignoring a potential acceleration of the RBL in full).

We view the proceeds to be used primarily for CAPEX on the Jubilee field, capturing the high IRR/quick payback of further well drilling in these fields. This is what creates equity value for the Company and foregoing the return on the non-operating fields for the return of further well drilling in Jubilee makes strategic sense. Paying back bondholders with the proceeds does not.
There is always the potential for 2021 and 2022 bondholders to get a partial repayment in return for an extension of maturities. But our core view is a debt extension is required and will become a condition of the RBL extension. This would tie in with the Company’s stated aim of “timing debt maturities to expected cashflow:” as mentioned on a conference call this morning.

Happy to discuss.

Details of the transaction are below. The Equatorial Guinea (EG) asset sale will require shareholder approval.

Tomás

TransactionTullow are selling non-operating assets that are expected to produce 6,000 boepd for FY21. That is roughly 2.2m barrels for the year, and most of the non-operating assets operating costs are c. $15/bbl. Therefore, at $50/bbl oil price (lets assume) that is an EBITDA of $77m for these assets. This equates to c.2.3x EBITDA but should consider Tullow are also transferring the decommissioning liabilities of c.$129m in this transaction.
Other metrics is valuing it on 2P reserves - has 20m barrels of 2P (although acquirer thinks they are buying 25m barrels of 2P). Initial Consideration is $135m so $6.75 per 2P (based on Tullow’s assumptions) and overall consideration is $9/bbl of 2P reserves.

EG transaction (needs Shareholder approval)Production is c. 4,500 boepd (1.6m per annum) 2P reserves of 14million barrels, 3P 22m and 2C 26m. $89m upfront, plus an additional $16m subject to production thresholds and oil above $60/bblCAPEX was expected to be $12m for FY21


The Dussafu TransactionProduction is c.1,500boepd (0.5m per annum), 2P reserves of 5million barrels, 3P c.10m, and 2C 5m. $46m upfront payment and $24m in contingency payments over 5yrs, subject to oil >$55/bbl and production from Hibicus and Ruche discoveries. CAPEX was expected to be $14m for FY21.
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