Tullow Oil - disappointing Production Guidance will hinder negotiations

All,

We have updated our model slightly on the back of the trading statement this morning, please find here.

The extension by one month of the RBL redetermination date is a little surprising and we would have expected this to be in place. At this point, however, it doesn’t change our view on Tullow Oil and we fully expect the Company to engage with bondholders in relation to the upcoming maturities. Our base case remains a new RBL facility with a partial repayment of the 2021 and 2022’s with the balance extended for a period of time. The timing has slipped a little in relation to the commencement of negotiations with bondholders but it isn’t a great concern.

Away from this, the Company has given some details for CAPEX and production levels in 2021. Our revenue projections were in line, but we had expected a higher oil price with lower production. And it is the lower production guidance into 2021 that is of concern. Notwithstanding the planned shut-down of the Jubilee field in September 2021 (we were expecting this to be postponed), the overall production figures from their Ghanian fields are worrying. Combined with the planned lower CAPEX spend in 2021 this will hinder any deleveraging going forward.

The stability/rising oil prices is a supporting leg to a long Tullow Oil position, but production levels are the key to any successful deleveraging strategy. The lower CAPEX number and lower production guidance on Ghanian fields are not positive signs.

We remain long the 2022 and 2025 bonds at current levels. Upside remains from the undervalued remaining oil reserves, potential farm down of Kenyan operations and a focus on production assets versus exploration assets in the medium term.

Happy to discuss.

Tomás
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E: tmannion@sarria.co.uk
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