Tullow Oil

TLW LN: Thoughts about tomorrow's Interims

*Please read the disclaimers at the base of this report.  The author has a short position in Tullow. Does not constitute a recommendation to buy or sell the securities mentioned herein. Do your own due diligence.

Tullow reports its interim results for 2023 tomorrow, after trumpeting the successful start up of Jubilee South East and a bounce back of Jubilee gross oil production to “over 100,000 barrels of oil a day”, following tie in of two JSE producers.

However we see risks ahead for both production targets and the capital structure from a shareholder perspective.

First, production targets:

The company has stated clearly that the 2023 target, at least with reference to Ghana, excludes any gas sales where we know there is an agreement in place to sell a limited amount of gas back to Ghana, on a rolling extension basis. Yet the target risks coming in at the low end of the range or being missed for two reasons:

1. TEN volumes, once again have disappointed, and there is no new activity planned into year end. For the first seven months of the year production has averaged 18.1kbopd, or 9.9kbopd net to Tullow. Before the shutdown in July production was averaging 19.2kbopd, or 10.5kbopd net to Tullow. With natural declines and without additional wells we would expect that number to be lower for the remaining months of the year, so there’s a likelihood that Tullow’s net production average from TEN is likely to be 9-10 for the year rather than 11 in the guidance.

2. Then there’s Jubilee. Production through end July averaged just under 75kbopd for the year to date, or 29.2kbopd net to Tullow. In order for the company to average 37kbopd for the year net in Jubilee, net production for Tullow would have to average 48kbopd for the remaining five months of the year, or a staggering 123kbopd gross. Given the production numbers for July at Jubilee, courtesy of the Ghanaian government, and Tullow’s and Kosmos’s own statements we know that according to CEO Dhir, after the flush production from the second JSE well production was “over 100kbopd”, or according to Kosmos “around 100kbopd”. Backing out production before the new wells of upwards of 82kbopd, and with a final well yet to come onstream, we know that so far the wells have added flush production of perhaps 8-10kbopd apiece, and so we can surmise that an additional producer would have the same effect whenever it comes onstream. Assuming no decline from the previous stated mid month production, we would then reach approx 110kbopd. If that was the average production for the remaining 5 months of 2023, then, at best, we would be shy of 35kbopd at Jubilee. But this would require the third producer on stream almost immediately in August (no press release to that effect) and no decline which is simply not conceivable. Indeed July production “only” averaged 89kbopd gross at Jubilee, and backing out 2-3 days of down-time for tie in doesn’t get us much above 100kbopd for an exit rate. It would seem prudent to “lose” 5% of this to natural decline and decline from flush production from new wells in the remaining five months of the year, and prudent again to only assume three months production at best from the third producer. So 95kbopd gross average for the remaining 5 months plus 5kbopd for the third well (8kbopd at start but no sign of it as yet in mid September) would leave us with a 100kbopd average for the remaining 5 months or 39kbopd net to Tullow. That leaves Jubilee at approx 33kbd net to Tullow in 2023.

3. Assuming everything else was constant (eg Gabon, where we have seen a coup recently), then that would see us come in at around 56-57kbopd for the year net, up to 2kbopd shy of the bottom of the guided range and 8% lower than 2022, not a great scenario for equity holders.

On the funding front there are other dark clouds looming on the horizon. The Tullow 2025 bonds ($630m outstanding) trade at a hefty discount to par and a yield to maturity in the 30s, but with maturity now within 18 months. Shares have bounced off the lows with oil prices and the noise around the Jubilee SE project. Tullow is not going to be in a position to finance unsecured notes like these at that kind of interest rate, and even secured debt is unlikely to be affordable with likely mid teens plus coupons. So the only show in town appears to be equity. Also it is worth bearing in mind that the first of two international arbitration cases over Tullow’s tax payments to Ghana is coming up in October with up to $320m at stake if Tullow loses, with a further claim of $387m against it waiting in the wings. Its unlikely that Tullow management would want to wait for the outcome of that and potentially be in a worse position to refinance afterwards. So the near-term risks would seem to point towards some sort of capital raise or hybrid financing, with a risk of dilution to existing shareholders.

That, coupled with the risk on Tullow’s 2023 guidance, make the near term set up for Tullow equity holders appear unfavourable.

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The information contained above is not intended to constitute and should not be construed as investment advice and should not be construed as an offering or a solicitation of an offer to invest in any product or share.  It is for personal use and information use only.  It should not be relied on in the context of the investment objectives and financial situation of particular needs of any particular person or class of persons, and relevant advice should be obtained before taking any investment decision.  The information above has been obtained from sources that we believe to be reliable and accurate at the time of publication, however, we give no warranty of accuracy as to the information or opinions offered above.  Opinions given above are given at the time of posting and are subject to change without notice.  The value of investments may fluctuate and you may not receive back the amount originally invested. Past performance is not  a guarantee of future performance.   At any time we may have a position long or short in a given company under discussion.