Tullow Oil - Kosmic Decisions
All,
Please find our unchanged analysis on Tullow here.
Decision time for Tullow. The sale of the Occidental stake in Jubilee and TEN does not come as a surprise. However, with the deal now signed, Tullow has 30 days to invoke its pre-empt rights to maintain its relative share. Although bond investors probably would prefer cash to be used to fund future CAPEX instead, we think it is in all bondholders' and equity holders' interests to invoke the option, given the low relative cost (c.$120m) and the certainty of retaining its operating status.
Impact on Tullow:
- Tullow has 30 days to invoke its pre-emptive rights on the deal to maintain its relative stake. The additional stake would be for c. 3.5% of Jubilee field and 8% of the TEN field and would cost c. $120m. Equity holders, who believe in the value of the asset, will definitely be pushing for the pre-emptive rights to be invoked. At first glance, debt holders may be reluctant to see cash leak from the entity but we believe it would be beneficial to the overall credit story.
- Additionally, invoking the pre-empt rights removes any possibility of a change of operator. Without the pre-empt, Kosmos would become the largest stakeholder at Jubilee and although it appears they have no plans to take over as operator, the risk remains. For c,$120m Tullow could remove that risk.
Tax Claims:
- Occidental announced that separately to the sale, "Occidental settled certain tax claims related to historical operation”. Unfortunately Occidental provided no details to determine what level of cash settlement there was and we are unable to read across to Tullow’s potential tax claim. As a reminder Ghana tax authorities have issued a demand of $471m for potential tax liabilities from operations in FY14-16. This claim is in dispute since 2018. Occidental has never reported the amount of their tax liability.
- Without further information, it is hard to gauge the probability of an unfavourable arbitration for Tullow from their potential tax liability. Having spoken to Tullow earlier today, they too are keen to ascertain what, if any, cash settlement, Occidental paid.
Sale Details:
- Occidental sold its interests in two Ghanian offshore fields (Jubilee and TEN) for $750m in two parts - $550m to Kosmos which closed on October 13th and $200m to Ghana National Petroleum Corporation (GNPC) which is expected to close during Q4. Kosmos has purchased an additional 18% stake in the Jubilee field and 11% interest in the TEN field. This compares to Tullow’s 35.5% stake in Jubilee and 47% stake in TEN. The transaction raises a couple of points:
1 Sale Price:
The sale price appears low and significantly below the value implied by the current MV of Tullow for the corresponding stakes. Back of the envelope, Tullow owns 2x the sold stake in Jubilee and 4x the stake in TEN. Given the production profiles of both fields, and the majority of the production and CAPEX over the coming years focused on Jubilee, it is not unreasonable to create Tullow’s Ghanian assets, on comparable metrics, i.e. 2x the price Kosmos paid. This implies a value of $1.1bn which is significantly below the c. $3-4bn valuation implied by current EV (accounting for other assets at Tullow). This can be partially explained by the following:
- The deal was agreed in April 2021 with a $65/bbl oil price, which is significantly below the current oil price.
- Occidental were a stressed seller and with limited buyers, it could be described as a buyers market.
However, notwithstanding that, the price does appear very cheap.
2 Differing portions for the two buyers:
Some people have questioned the differing portions purchased by the two buyers. Occidental sold a 24.1% stake in Jubilee and 17% stake in TEN fields. Kosmos acquired 18% (75% off the Jubilee stake) and 11% (70% of the TEN field). We don’t see the differential between 75% and 70% to be significant, and it would be obvious to favour the Jubilee field over TEN field given its production profile. It is interesting that the Ghanian state paid 27% of the overall portion given they only acquired 25% off the Jubilee field.
Why did Occidental Sell?
- Occidental sold its minority working interest in two Ghanian fields on Wednesday as part of their attempt to deleverage following their Anadarko acquisition in April 2019. Bluntly, the sale proceeds of the Ghanian assets are minimal compared to the $55bn acquistion price of Anadarko, but the sale had been on the cards since the acquisition, as Occidental attempted to sell their non-core assets in order to reduce their debt levels. The Ghanian asset sale was previously it was linked to Occidental’s sale of Anadarko’s Algerian assets to Total but due to regulatory issues this did not take place in August 2019. The asset has formally been for sale since May 2020 when Total and Occidental agreed to waive the previous sale and purchase agreement. Occidental accounted for the assets under Discontinued Operations.
Positioning:
- We maintain our 3% long position in the 2025 bonds and 4% long position in the equity. We have been disappointed that we haven’t seen a greater uptick in the equity value of Tullow from the recent rally in oil prices but acknowledge that, in line with our own analysis, it is all about production. The Company are due to give a trading statement on 10th November, which will nearly coincide with the 30 day notice on their pre-empt rights. We hope and expect the Company will invoke the rights. Separately, we are expecting an update from Total in relation to FDI at Uganda (which will trigger a $75m payment from Total to Tullow). We don’t expect any update on the Kenyan Field Development Plan (FDP) in November but understand discussions and drafts FDPs are currently with the Kenyan government and the December 31st deadline will be met.
- We will use information provided by Kosmos to generate a DCF on the stake purchase and attempt to bridge the apparent valuation gap between the markets value of Tullow’s Ghanian assets and the sale price agreed by Occidental.
Happy to discuss
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
M:+44 7786 705 806
www.sarria.co.uk