Tullow - Turning into a boring company?
All,
Please find our unchanged analysis here.
Listening to the trading update conference call you wouldn’t guess that Tullow had a near-death experience last year. Tullow has benefited from the rise in oil prices but also done the self-help stages of improved reliability and better allocation of capex on producing assets versus exploration. However, this focus on producing assets is turning Tullow into a more predictable Company.
This should give comfort to bondholders, and although limited deleveraging is expected in FY22 and FY23, the focus of the CAPEX spend on producing assets should enable production levels to increase beyond current levels.
Equity holders have benefitted from the macro environment. The main equity driver, away from oil prices, will focus on the Kenyan farm-down and how much upside Tullow has to give away.
Disappointed:
- Our initial reaction to the trading statement this morning was one of disappointment. We had expected Tullow to achieve 60k boepd average, as H1 was 61.2k. The outcome of 59.2k implies a lower H2 figure than we expected and therefore a lower base to build FY22 and FY23 assumptions on.
- This lower H2 figure leads to Tullow guiding 55-61k boepd for FY22, versus our expected 58k. Our disappointment is based on the assumption we had expected to upgrade our forecasts. We have highlighted repeatedly the risk (TEN field) and again the Company guidance (11-12k) is below our base estimate.
- The $75m “overage” payment due from Total on the sale of the Ugandan assets has not yet been received. This was expected in FY21. Tullow remains confident that the payment will be received from Total.
Tempered by:
- Tullow has demonstrated improved operating performance with uptime >97% on both operated FPSOs and an increase in water injection rates.
- Decommissioning expenditure was lower than expected and although guidance for $100m for FY22 was a surprise to some analysts we have always had the decommissioning front-loaded. We have $120m in for FY22, and declining thereafter.
- Underlying operating cash flow and year-end net debt have both outperformed our projections. Net debt has reduced to $2.1bn versus an expected EBITDAX of c.$1bn. (2.1x).
Enough about the past. The future?
- Same themes as previously.
- More drilling: With limited scope to repay debt (2025 bonds can’t be repaid before the 2026 bonds, and the 2026 bonds are in non-call period), Tullow was always going to invest CAPEX on producing wells. Three new wells are planned for FY22 at Jubillee. This will support the production growth and should return Jubilee to >80k boepd gross in FY23 (75k in FY21). Additionally, three wells are to be drilled at TEN during FY22. These drillings are not going to impact production levels in the short term, but more focused on the Ntomme segment of the TEN field, with two of the wells development wells, which coupled with the infrastructure investment, should bring these wells on stream in FY23.
- Improved Hedging: Tullow has pushed out its hedges, and are currently hedged for 73% of FY22 production, with $51/bbl floors and $78/bbl calls. 50% hedged for FY23 with $55/bbl floors.
- Debt reduction: Tullow ended FY21 with c. 2.1x Net Debt/EBITDAX and with oil above $80/bbl are well placed to achieve gearing of 1.5x by 2025 (we would expect it earlier, but depends on the level of CAPEX spending in FY23 & FY24).
Non-Operated Assets:
- Post divestment of Equatorial Guinea and one field in Gabon, the non-operating field segment is reducing in importance. However, it still represents c.30% of production and has both upside and downside.
- On the negative side, the Espoir field still has operational issues - it had to be shut down twice in 2021 after a major issue in January 2021, and although back onstream now, further remediation plans for the FPSO are required.
- On a positive note, the Simba expansion in Gabon has progressed and production in FY22 should be 40% higher than in FY21. This has been highlighted to the market previously.
- However, during 4Q2021, the Tchatamba JV Partners made a near field discovery with a recent well in the Tchatamba South license area in Gabon. This discovery is undergoing a long-term production test during FY22 and has upside potential.
Kenya:
- No concrete update on the progress of the license. The Field Development Plan was submitted and they await approval from the Kenyan government. Tullow confirmed that the JV partners continue to see a strategic partner for this project and discussions continue. Surprisingly, there were no questions from analysts on this during this morning’s brief conference call.
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 had speculated that the increasing market capital (now greater than $1bn) would tighten the differential.
- Tullow benefits from the recent oil price rises but production levels are the main risks facing investors. However, we strongly feel that investors are been compensated for the risk with the 13% yield.
- The Company will report full numbers on 9th March when more focus will be given on drilling plans for FY22 and beyond. Additionally, we should expect further updates on Kenya licenses and the $75m contingent payment.
Happy to discuss.
Tomás