Tullow - no news is good news

All,

We have updated our model for the acquisition here.

With oil prices above $80/bbl and the refinancing behind them, many investors think there is limited upside in Tullow. However, with the recent acquisition, and improving production reliability there are sufficient drivers for both equity and debt holders. Tullow continues on their path to deleveraging, plus with the additional (unhedged) production from the acquisition coupled with its hedging program, they are de-risking the credit. As we show in our model, Tullow has the potential to end H122 below 2.0x leveraged.

Tullow released its trading statement with no surprises to the market. There was, nor were we expecting, any update on the farm-down of their Kenyan operations, but the Company confirmed that plans continue seeking a JV partner. Production numbers were in line with expectations. This was a given, as Kosmos and the Ghanian Petroleum Authority had published before the release.

Hedging:

- Tullow has executed further hedges and now has over 60% of FY22 hedged with a floor of $51/bbl (and accompanying sold calls at $77/bbl). FY23 and FY24 are hedged for 45% and 15% respectively at $55/bbl floors (with sold calls at $74/bbl). This is in line with their bond obligations and we expect they will meet the requirement.

Cashflow:

- The Company has guided underlying Operating Cashflow for FY21 to be $600m in line with our model and $100m of FCF before the Total payment of $75m for Uganda. This potentially will be pushed to FY22 as parliamentary approval has not been given for Final Investment Decision in Uganda.

Positioning:

- We maintain our 3% position in the 2025 bonds (acquired at 70% in January) and our long 4% equity position (52p in March). The next milestones are the Field Development Plan for Kenya (expected prior to year end) which should involve some farm-down of Tullow’s stake.

Happy to discuss.

Tomás