Tullow Oil - Our view on relative value of three bonds

All,

Please refer to our unchanged analysis here.

The weakness in Tullow Oil bonds on Friday/today was the topic of conversation this morning. Weakness across the board can be explained by potentially unfavourable news filtering from RBL discussions, the larger moves in the 25’s has raised some questions. We struggle with the premise the 2021 bonds get repaid without a new (larger) RBL facility being agreed.

Note, it is widely accepted the Company will not be able to pass its 18-month liquidity test currently due largely to upcoming maturities. $1.3bn falls due by April 22. ($372m of the RBL falling due in October 21 and April 22, $300m for the July 21 convertibles and $650 for the April 22 bonds). It would be a brave/foolish director who would pay down the convertibles in July when their own internal test proves they are insolvent 9 months later. Therefore, without an agreement from the RBL (and perhaps the bondholders) the likelihood of bonds been paid back is remote. In these circumstances, short-dated bonds should trade worse.

Assuming a deal is reached, the certainty for the next 2-5yrs (any RBL deal will have to take us beyond 2022 at minimum) should provide support for the overall business. OK - the converts trade from current levels (90) to par in July, but to get the equivalent return on investment in the 25s they only have to increase 6.5points. A 4yr bond with no short term maturities should trade better than low 70s and 17% yield!

The negative to the 2025 trading up is the introduction of a new piece of debt, layering the 2025 (ranking behind the RBLs). We are unable to get our hands on the Guarantee Subordination Agreement, but having spoken to lawyers we think this would be impractical.

Next steps: We fully expect an opening negotiation stand from the RBL lenders stating their willingness to extend the RBL facility in return for some extension of the 2021 and 2022 borrowings. The Company are likely to update the market on the sales process for the Kenyan operations ($200-250m) and potentially use some of these proceeds to partially repay the upcoming maturities.

Happy to discuss.

Tomás
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Tomás Mannion
E: tmannion@sarria.co.uk
T: +44 20 3744 7009

M:+44 7786 705 806
www.sarria.co.uk