Tullow - Update prior to call on Wednesday

All,

Prior to the FY20 results (to be held on Wednesday), please find our updated model here.

We have updated the model for the recent agreement with the RBL lenders, the announced non-operated asset sales and more importantly raised the oil price assumption in line with recent moves. We were surprised that the RBL lenders agreed to extend the facilities without entering into negotiations with the bondholders over upcoming maturities. We are now assuming that the Convertible bond will mature as scheduled in July but at current prices, it remains unattractive.

We are maintaining our 3% position in the 2025 bonds, with a 2% position in the 2022 Notes at current levels. Additionally, we are adding a 4% equity position at 52p.

Cash needs

The Company will report FY2020 numbers on Wednesday 10th March and will have to give further details on cash management over the next two years (including the maturity of the 2022 bonds). With the current oil price above $65/bbl, it has given the Company some additional flexibility. But even with the completion of recently announced asset sales in Equatorial Guinea and Gabon, the Company still needs to address the projected cash shortfall in H2 2022.

The Company faces a choice over increased CAPEX in FY21 and FY22 to lead to higher production in years to come. To fund the CAPEX, and with the momentum of oil prices, we expect the Company to raise new money. This can be achieved with either new debt financing via new bond or convertible or, with the current equity market capitalisation >$1bn, potentially equity raising. Coupled with a cash-raising, the Company are likely to seek further asset sales, with the Kenyan operations the most likely asset.

P&L impact

We see limited downside with Company-specific news in the short-term and therefore taking an opportunistic equity position currently. We do not expect a deeply discounted equity raise but any equity raising could see our long equity position fall in value. We expect this to be short-lived and the gain on our bond position to compensate any short term volatility.

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

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