Tullow Oil - Forward looking
All,
Please find our unchanged analysis here.
We are not geopolitical analysts and although the tensions in Ukraine and potential lifting of sanctions against Iran are impacting oil prices we remain focused on the underlying credit and equity story at Tullow Oil. 2021 was a transformative year for Tullow, with lucky timing on the recovery of oil prices allowing Tullow to refinance and push out its maturities. With limited upcoming maturities until 2025, Tullow are now focused on improving their productivity in Ghana, managing their non-operating assets and trying to extract value from the Kenyan development plan.
Resolving Historic Issues:
- Last week, Tullow made two announcements about outstanding issues. Firstly, Tullow lost an arbitration process against HiTec Vision, and have to pay $76m to HiTec within 14 days. The original claim was for $96m, but the arbitration panel has made a binding settlement of $76m against Tullow. The claim relates to an entity that was subsequently sold in 2016 to Equinor. Tullow has accepted the arbitration ruling. This ruling was unexpected.
- The second announcement is the confirmation of First Oil in Uganda, an asset sold by Tullow in 2020 to Total. There was a contingent payment of $75m subject to First Oil, which was confirmed by Total on 1st February.
- Most analysts had expected the receipt of the Total payment, so no impact on the underlying story.
- Although both issues are not related, they effectively net off against each other. The events remove the uncertainty from Tullow’s cashflow, but we are effectively $76m worse off than we had modelled.
Are there other claims outstanding:
- A Company of Tullow’s size and geographical operating sphere will always generate potential claims and counterclaims, but the one we are most concerned about is the Ghanian tax claim. The latest claim by the Ghana Revenue Authority (GRA) is for $365m, ($337m in remittance and withholding tax and $28m in corporate tax), which was issued in April 2020. This demand has been put on hold by the Ministry of Energy (MoE) and negotiations with the GRA are ongoing.
- The background of the claim is a dispute surrounding the application of branch profit remittance tax under a law that Tullow considers not applicable since it falls outside the tax regime set out in Tullow Ghana Limited's petroleum agreement and double tax treaties. The claims are for financial years 2014 to 2016 and originally were for $406m.
Way forward:
- FY21 results will be released on 9th March, but with most of the data broadly shared, the focus will be on the production figures for FY23 and beyond. With limited debt repayment in FY22 and FY23 ($100m per annum) Tullow need to increase CAPEX to ramp up their production figures.
- However, the main driver of Tullow debt and equity prices will be any progress on a farm-down of Tullow’s Kenyan operations. The Field Development Plan was submitted in time, in line with the license extension and Tullow and its partners are in discussions with the Kenyan government to progress the project. However, realistically the project won’t progress without new capital, and Tullow and its partners are seeking a new strategic partner to fund future CAPEX.
Positioning:
- We maintain our 3% long position in the 2025 bonds and 4% long position in the equity. We again reiterate the differential between the 2025 “sub” bonds and the 2026 “senior” bonds is too wide, currently 400bps and our expectation that the increasing market capital (now greater than $1bn) will tighten the differential.
- Tullow benefits from the recent oil price rises but production levels are the main risks facing investors.
- In summary, at 15% yield for the sub bonds, with limited upcoming maturities, and oil prices c. $90/bbl, bond we are compensated for production issues.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
M:+44 7786 705 806
www.sarria.co.uk