*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.
Despite the fanfare of a new producing limb of the Jubilee field and headline grabbing reductions in debt, along with a new facility from Glencore to help redeem the 2025 bond, Tullow is not yet out of its debt morass. In fact it may just have played its last cards. And, in 2024, it faces several even greater tests: the results of a potential cliff-edge tax arbitration with the Ghana government, the need to either buy-in the TEN FPSO or extend the lease (with the risk of net cashflow on the field turning negative after costs) and the looming need to refinance its other bond, the 2026 bond, as its redemption date draws closer.
So why the gloom? Well we have the production numbers from the first 9 months of the year at Jubilee. And 2 things jump out. First, the scale of the decline before the new wells kicked in (May onwards). And second the peak.
Production peaked in September at almost exactly 100kbopd (backed out from Kosmos Q3 numbers and the Petroleum Commission of Ghana data). Since then we have had updates from Kosmos of production “around 100kbopd” (investor relations often use this sort of language for a figure 5% lower than the number quoted - “around” and “broadly flat” are legendary IR euphemisms), and then we have had a trading update from Tullow that they would miss the lower bound of their production guidance for 2023 due to reduced water injection at Jubilee and “delays” in starting up Jubilee South East. The water injection issue was due to be mitigated by additional water injectors coming on stream (given approx 300kbwd injection at Jubilee thats one hell of a washing machine) at the end of the year. But back to the maths. If we interpret “marginally below the bottom end of guidance for the year, which was 58kbopd” as around 1kbpd lower, then that would imply (in order to fit the maths) that Jubilee is exiting the year around 90kbopd, everything else being equal (eg TEN around 18kbopd going into year end, and Gabon in line with guidance).
Thus (with estimates in blue):
This would give a Jubilee gross production number of around 83.5-84 kbopd for the year. Net to Tullow that would be 32.75 kbopd (roughly). Contrast this figure with Tullow’s January 2023 guidance for Jubilee (below):
On that basis Jubilee is missing Tullow’s initial 2023 guidance by 4.25kbopd - nearly 12%. Even allowing for a month or so’s delay in getting JSE up and running that’s a whopper of a miss. And to double check this estimate here’s how the maths breaks down for the whole portfolio:
Looking at this, it offers a pretty sobering assessment for the prospects going forward. Firstly - if Jubilee is exiting the year at around 90kbopd after its last major development leg, what does that portend for reserve estimates going forward. It suggests a downward revision may be on the cards which could be quite steep (a bit like TEN’s denouement which accounted for Paul McDade’s departure a few years back). It also doesn’t augur well for 2024 production estimates for the group and indeed for Jubilee itself.
Buttressing this analysis is the continued chatter about Tullow’s problems with water injection. Clearly Jubilee has to inject a lot of water (the last we heard it was approx 3:1 vs oil production) to keep things running. Has that number gone up? - presumably so, given the number of additional water injection wells required. How much water injection can the ageing FPSO Kwame Nkrumah manage? When it was refurbished by MODEC and delivered to the client in 2010 that number was 230kbwd; the aspiration was to have 300kbwd of injection in 2023 - are we through that threshold now? More importantly from the perspective of water injection, is the JSE field in pressure communication with the main field? If so then perhaps that has accelerated water cut at the field. One thing we never seem to get from management is how much water Jubilee is producing. At some point then the water cut passes the point at which the FPSO can manage the decline through water injection.
Water Injection at Jubilee (from 2020 Capital Markets Day)
Perhaps this is why we have seen the rig, which was due to be released from Ghana in September 2023, remain on location and drill out more wells - according to Kosmos on their Q3 conference call, 1 additional producer and one injector to be tied in “early 2024” and then subsequently Tullow in their November trading update suggested two additional producers and one injector to be drilled before year end for tie in H1 2024. This rapid rig ramp up strongly implies that, in conjunction with the aforementioned water injection issues Jubilee may be running hard to stand still, and new wells have to be plugged in faster perhaps because of older wells watering out. It is unclear, and there may be more constructive answers. But what is clear is that well-intensity has risen in order to sustain a heroic struggle to keep production up (note in 2023 production at Jubilee would appear to have barely grown after a major project completion). It may even be hard in 2024 for the gains in 2023 to hold, let alone get anywhere near that 100kbopd plateau that is regularly discussed on conference calls. Is 80kbopd the new 100kbopd? Time will tell. But given an estimated 90kbopd December exit in 2023, (17kbd below Rahul Dhir’s stated snapshot level on the H1 2023 conference call in September) a 100kbopd plateau looks further and further out of reach.
So, while net debt may be declining, so is production, and looks to continue that descent in 2024, especially factoring in further declines at TEN and likely stagnation in Gabon. As production declines, the negative leverage on fixed costs may begin to severely impact the bottom line. That in turn impacts the ability to service debt, given a potential rise in net debt per daily barrel produced. Also given the company’s frequent inability to meet its guidance over a number of years, investors might wonder whether the cost of the call option of Tullow’s equity is worth the premium paid.
On top of this we have a tax arbitration outcome which could result in a cash-call of hundreds of millions of dollars this coming spring, uncertainty over the future or residual value of the Kenya project, and lack of clarity of the future at TEN. Any purchase of the TEN vessel would severely impact Tullow’s already stretched balance sheet while an amended and extended lease might prove too costly for a field whose production continues to dwindle. Finally, we don’t even know the small print on the Glencore debt. What terms does Glencore get on Tullow’s net off-take: does the terms of this arrangement constitute a further “hidden royalty” over Tullow’s production? And what recourse is there for Glencore if Tullow cannot service its debt? Certainly Glencore may feel they, rather than equity holders, or indeed the Ghanaian government, hold all the cards.
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This is well thought through commentary, so congrats !
A maybe factor is Rahul's IB background. During the GFC Cairn India arranged attractive funding, though seem to remember it was via a World Bank entity or similar.
Ghana has data through december for Jubilee, looks like production declined in 4Q w/ dec at c. 90kbopd