Tullow - Verifying production levels

All,


Please find our unchanged analysis on Tullow here.

At the current yields 11% and 16% for the Senior Secured and Senior Notes respectively, Tullow deserves a further look. Without dismissing the importance of oil price on Tullow’s financials, we have always maintained that production levels is the main risk for Tullow. Because, under the terms of the bonds Tullow have hedged a significant portion of their production, production levels are more important in determining the success or failure of last year’s refinancing. Due to the absence of quarterly reports from Tullow, we are finding other data sources to verify and potentially update our production assumptions, particularly in Ghana.


Production:

- We have historically relied on the Petroleum Commission, Ghana’s website to track gross monthly production figures for Tullow’s main fields, Jubilee and TEN but the Commission have not updated the site since January production figures.

- Kosmos, the junior non-operating partner at both fields have released their Q1 numbers. Gross Production at Jubilee was 91,200 boepd in Q1, versus guidance of 82,000 boepd for FY22. Note, Jubilee FPSO is currently undergoing a two week planned shut down for routine maintenance with production expected to recommence at the end of the week.

- At TEN, Q1 production was c.25,000 boepd in Q1, versus FY22 guidance of 24,500. The production in Q1 is marginally lower than we had expected on our assumption of reducing production figures over the coming quarters. We have yet to be convinced that the recent drilling at TEN will have a meaningful impact on the declining production.

- More importantly, the Ghanian production facilities have maintained their high reliability, with uptime at the FPSOs averaging 99% in Q1. At Jubilee, a water injector well was drilled and completed in Q1 and is providing pressure support to the field. A further producer well and water injector were drilled in Q1 and expected to complete during Q2. All of these will continue to support production levels for the remainder of the year.

- Kosmos have a call at 3pm today, which we will listen to hear any further updates.


Kenya:

- Africa Oil, the 25% junior partner at the Kenyan fields, are due to report this Thursday. At their previous call, they stated that the Kenyan authorities had a 10th May deadline to approve the Field Development Plan (FDP) that Tullow, Total and Africa Oil submitted in December 2021. Tullow has never acknowledged such a deadline and expect it to be a formality.

- Some analysts have linked this approval to Tullow’s process of farming down their 50% interest in the Kenyan operations to fund the future CAPEX. Although government approval is essential, we do not think it will be the trigger for any announcements in relation to the farm down process.


AGM:

- Tullow are holding their Annual AGM on 25th May. There is nothing extraordinary on the agenda of the meeting, and we expect it to be a non-event. However, as part of the AGM, the Company will release a short trading update, where we expect an update on the 6 new wells that were due to be drilled in 2022 (three of which have already been drilled in Q1).

- It is unlikely that Tullow will comment on the farming down process at the AGM, unless they have firm commitments.

- Similarly, it is likely to be too early for any update on discussions with the Ghanian government in relation to future gas supplies. Tullow are expected to fulfil the foundation Gas agreement by year-end, and therefore are currently negotiating Gas Sales Agreements for associated gas with the Ghanian government. Foundation gas is usually supplied at nil cost as part of the license agreement, with associated gas will be sold at commercial prices.

- Away from production/pricing, the Ghana tax liability remains a large downside risk. This issue has been rumbling on for some time and again highlighted in Tullow’s FY21 accounts. Ghana has issued a demand for $471m for potential liability from operations in FY14-16. This has been disputed since 2018 with limited newsflow on the situation. An adverse settlement would be negative for Tullow, but given the improved cash flow from the high oil prices, any impact will be diminished.


Positioning:

- We maintain our 3% position in the 2025 bonds (acquired at 70% in January 2021) and our long 4% equity position (52p in March 2021).

- Over recent weeks, the differential between sub and senior bonds and absolute trading levels have continued to widen despite the increase in oil prices. Our model, which is more conservative than Tullow's guidance, and based on a $100/bbl oil price for FY22, $90/bbl thereafter, shows the Company reaching below 1.0x leverage by December 2024, just before the refinancing of the structure.

- Downside protection is provided by the hedging position Tullow are obliged to undertake as part of the refinancing.

- In the current environment, we still view Tullow bonds and equity attractive risk reward trades.


Tomás

Tomás MannionTULLOW