Tullow - Pre-emption rights exercised as expected
All,
Please refer to our unchanged analysis here.
Despite rumours, Tullow exercised their pre-emption rights, in line with thesis. In fact, the more we analysed the option, it became inconceivable that Tullow would not exercise, given the price and associated increase in production the additional stake provided. Additionally, it removes any doubt about the operator status at Jubilee field. The consideration is expected to be $150m, if pre-emption by other JV partners is fully exercised, for an additional 10% daily production (6,000 boepd).
Unhedged:
Tullow, by pre-empting, have acquired an additional c.6,000 boepd for c. $150m. At $65/bbl, this equates to $142m of Revenue and $77m of EBITDAX annualised. As the acquired production is unhedged, at $80m/bbl, it is $110m of EBITDAX, which equates to a 1.35x acquisition price. Just as important, it keeps Tullow as the largest JV in the Jubilee field, and removes any doubt about a change of operator.
Deep Water Tano (DWT) Block interest:
As a reminder, Kosmos and Ghana National Petroleum Corporation (GNPC) acquired Occidental’s stake in the DWT Block, which comprised of 24.1% in Jubilee field and 17% in TEN field, with Kosmos buying slightly disproportionately more of the Jubilee stake than the TEN field (Jubilee field is a better quality field with considerably higher current and expected production as a result of more near term drilling activity). The overall cost of the acquired asset was $750m.
We had estimated the cost to Tullow of the pre-emption rights at $125m, but were basing this on only pre-empting the Kosmos stake. Tullow also had pre-emption rights over the GHPC acquisition which they also exercised. If other partners don’t exercise, Tullow would take up a higher portion, and overall cost would increase by c.$56m.
The Maths:
Above is our estimate of the evolution of field interest at both Jubilee and at TEN. There is confusion about what working interest in each field (TEN or Jubilee) is due to the fact that Tullow are reporting the pre-emption rights as a right over equity in the DWT Block (which appears only part of the Occidental asset sale, meaning it is not proportional to the acquired interests released by Kosmos). Hopefully, by the time of the Trading Statement next Wednesday there will be clarity over the intentions of other JV partners, removing that complication.
Current Production
The Petroleum Commission, Ghana, has updated its figures for Gross Production at Jubilee and TEN for August and September. The graphs below are based on original working interests for Tullow (not taking into account the pre-emption rights).
These graphs perfectly summarise the main issue at Tullow - the increased production at Jubilee fields from increased investment (drilling activity). Conversely, the lack of investment at TEN field, is highlighted by the continuous decline in daily production. We do however expect this decline to be stopped by the recent gas injector well that was drilled in early October.
Positioning
We maintain our 3% position in the 2025 bonds (acquired at 70% in January) and our long 4% equity position (52p in March). Next milestones are the Final Investment Decision for Kenya (expected prior to year end) which should involve some farm-down of Tullow’s stake. Prior to that, next Wednesday, the Company will release a trading update, which should highlight the increased production figures and may even have a increased FY guidance (adjusted for the pre-emption rights).
Happy to discuss.
Tomás
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