I can't see how Tullow can refi the 2026s into unsecured paper without paying well into the double digits, no creditor will want to be behind Glencore in priority without enormous compensation. If they do another secured deal and production stays on its current decline path (as you have been correctly flagging for a few years!) then value is likely breaking around the Glencore debt unless oil can stay high enough to offset, which seems a heroic assumption. My base case then would be that Glencore ends up with majority equity and current shareholders will get a Nostrum-style token amount...
Thanks for your posts – I think the thesis is certainly interesting. However, I’ve been looking into this one for a little bit, and reached some different conclusions:
Regarding the base decline rate, it seems the historical production declines referenced in your chart were due to temporarily reduced water injection rates. The first decline in 2020/2021 reversed itself after TLW brought on another water injector in early 2021. The 2023 decline, as you pointed out, was a function of water injector issues that have subsequently been solved. Applying such a high decline rate to 2024 forecasts is unrealistic. TLW will not voluntarily reduce its water injection rates. My conversations with the working interest owners at Jubilee indicated that the base decline is 10-15% with no capex spend. This seems to be a function of the flat profile of newer wells combined with the impact of water injection into the reservoir. Newer wells are rate limited / choked back and produce at a relatively constant rate for the first 24 months. Older wells do have a steeper decline in the absence of water injection supporting aggregate reservoir pressure. So, when water injection problems cause the aggregate pressure to drop, the older wells see a steeper decline as you point out. But when the reservoir pressure is restored, then that problem is rectified.
As for the long-term effect of water injection, Tullow has systematically drilled water injection wells at Jubilee since the field first came online and has yet to see a material negative impact from gas/water “cut through” in its production. Given how massive the Jubilee reservoir/OOIP is compared to the volume of resource that has been recovered to date, I think we are many years away from seeing any negative impact from the water injection.
Also, the incremental production from the three new 2024 producer wells should be at least 22.5kbopd (instead of 12kbopd). The 2023 Jubilee SE wells had oil rates well above 10kbopd gross, and new wells have historically had a flat production profile for 2+ years after being brought online. The three new producer wells, which are scheduled to come online in late Q1 / early Q2, should be online for an average of 9 months each. So even if you conservatively assume an oil rate of 10kbopd gross per well, it still adds an incremental 22.5kbopd for the full year.
TLW’s 2024 Jubilee net oil guidance is 39kbopd, which implies gross production of 100kbopd. I think this is feasible with relatively conservative assumptions. January 2024 oil production should be at least 90kbopd now that the water injection issues have been solved. At a 15% decline rate, 2024 base production is 83.6kbopd. If you add an incremental 22.5kbopd (as outlined above) from the three new producer wells and bake in 15 days of FPSO downtime, you get to ~102kbopd gross oil production for 2024.
With more aggressive assumptions—higher January 2024 base production, shallower decline, more production from new wells—you can get to 2024 gross production north of 110kbopd.
So TLW could miss its Jubilee production guidance if they have more water injection issues or operational hiccups that require additional downtime. But I’m reasonably confident that a production miss—especially one on the order of magnitude that you’re suggesting—will not be the result high base decline rates or weak incremental production from new wells.
I can't see how Tullow can refi the 2026s into unsecured paper without paying well into the double digits, no creditor will want to be behind Glencore in priority without enormous compensation. If they do another secured deal and production stays on its current decline path (as you have been correctly flagging for a few years!) then value is likely breaking around the Glencore debt unless oil can stay high enough to offset, which seems a heroic assumption. My base case then would be that Glencore ends up with majority equity and current shareholders will get a Nostrum-style token amount...
Thinking end-game here - do you see Glencore taking equity if (or when) Tullow ends up in distress?
Thanks for your posts – I think the thesis is certainly interesting. However, I’ve been looking into this one for a little bit, and reached some different conclusions:
Regarding the base decline rate, it seems the historical production declines referenced in your chart were due to temporarily reduced water injection rates. The first decline in 2020/2021 reversed itself after TLW brought on another water injector in early 2021. The 2023 decline, as you pointed out, was a function of water injector issues that have subsequently been solved. Applying such a high decline rate to 2024 forecasts is unrealistic. TLW will not voluntarily reduce its water injection rates. My conversations with the working interest owners at Jubilee indicated that the base decline is 10-15% with no capex spend. This seems to be a function of the flat profile of newer wells combined with the impact of water injection into the reservoir. Newer wells are rate limited / choked back and produce at a relatively constant rate for the first 24 months. Older wells do have a steeper decline in the absence of water injection supporting aggregate reservoir pressure. So, when water injection problems cause the aggregate pressure to drop, the older wells see a steeper decline as you point out. But when the reservoir pressure is restored, then that problem is rectified.
As for the long-term effect of water injection, Tullow has systematically drilled water injection wells at Jubilee since the field first came online and has yet to see a material negative impact from gas/water “cut through” in its production. Given how massive the Jubilee reservoir/OOIP is compared to the volume of resource that has been recovered to date, I think we are many years away from seeing any negative impact from the water injection.
Also, the incremental production from the three new 2024 producer wells should be at least 22.5kbopd (instead of 12kbopd). The 2023 Jubilee SE wells had oil rates well above 10kbopd gross, and new wells have historically had a flat production profile for 2+ years after being brought online. The three new producer wells, which are scheduled to come online in late Q1 / early Q2, should be online for an average of 9 months each. So even if you conservatively assume an oil rate of 10kbopd gross per well, it still adds an incremental 22.5kbopd for the full year.
TLW’s 2024 Jubilee net oil guidance is 39kbopd, which implies gross production of 100kbopd. I think this is feasible with relatively conservative assumptions. January 2024 oil production should be at least 90kbopd now that the water injection issues have been solved. At a 15% decline rate, 2024 base production is 83.6kbopd. If you add an incremental 22.5kbopd (as outlined above) from the three new producer wells and bake in 15 days of FPSO downtime, you get to ~102kbopd gross oil production for 2024.
With more aggressive assumptions—higher January 2024 base production, shallower decline, more production from new wells—you can get to 2024 gross production north of 110kbopd.
So TLW could miss its Jubilee production guidance if they have more water injection issues or operational hiccups that require additional downtime. But I’m reasonably confident that a production miss—especially one on the order of magnitude that you’re suggesting—will not be the result high base decline rates or weak incremental production from new wells.