Tullow Oil - Initiation

All,

Please find our initiation piece on Tullow Oil here.

Recent strength in the Oil price and the expected announcement in the next couple of weeks on the redetermination Facility it is timely to revisit Tullow Oil. We think the redetermination announcement will lead to the commencement of negotiations with bondholders in relation to upcoming maturities.

We expect that the Company will announce that the RBL facility is in breach of its 18-month liquidity test at the RBL redetermination in January 2021, which will commence negotiations with all bondholders. The Company are already in advanced discussions with its RBL lenders. The Company is likely to achieve a consensual deal given current oil prices, which is likely to involve a new RBL facility, a term out of existing notes plus a cash offering to entice current holders to accept.

With a default likely in 90 days post RBL facility failing the liquidity test, it is in everyone's interest to achieve a consensual deal and not force the Company into a default scenario.

The downside for this position is linked primarily to oil prices, but in the absence of a deal, the Company's assets are likely to deteriorate with lower CAPEX spend, destroying value for all stakeholders. There is no significant single shareholder, so debt/equity swap can't be ruled out, but our base case scenario deems this unlikely.

We are taking a 3% position in the 2025 bonds, with a 2% position in the 2022 Notes. We are not taking a position in the Convertibles given their high trading levels and potential downside under various extension scenarios.

Happy to discuss.

Tomás
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E: tmannion@sarria.co.uk
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