Tullow - past performance an indicator of future returns?

All,

Please find our analysis of Tullow here.

Although this morning’s trading update is mainly backwards-looking, the focus of Tullow will remain on the drilling programme in Ghana and future production levels. And first impressions are positive, as Tullow confirm (what Kosmo’s had already stated), that the initial well at Jubilee is now on-stream with encouraging initial flow rates. Tie-in of the 2nd rig (water injector) is expected in Q3, with 3rd and 4th rigs drilled this year with tie-in expected late 2021 and early 2022 respectively.

Average production from Jubilee is expected to increase in H2 before growing further in 2022 as the drilling campaign continues.

Hedging:

In line with the new financing, Tullow has hedged c. 66% of H2 21 production with $48/bbl floors and $67/bbl calls, and c. 35% of FY22 production with $48/bbl/$72/bbl floor/call strike prices. FY23 and FY24 hedging is 30% and 10% respectively, with higher floors of $55/bbl and calls of $69/bbl.

H1 operations:

While full numbers will be released in September, the Company has given some guidance to H1 performance. Although production slightly ahead of our expectations, the Company is projecting c.$200m of positive FCF for H1, $100m lower than our model (potentially Working capital movements - no guidance given).

Net debt is correspondingly $100m higher than our projections, at c. $2.3bn, with liquidity of $700m.

Conclusion:

We are maintaining our 3% long 2025 position and 4% long equity position following this morning’s trading update. The numbers and guidance is broadly in line with our expectations the main driver of value in Tullow is the drilling programme. We are encouraged by the initial drilling success but the acknowledge it is still early stage in the overall plan.

Happy to discuss.

Tomás

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

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