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Tullow: Big Bond Bath

May 03, 2021 10:51 AM ETTullow Oil plc (TUWLF), TUWOY37 Comments


  • Tullow has launched a massive bond fund-raising in an attempt to plug the gap left by the apparent cancellation of its reserve based lending facility and its maturing convertible.
  • A $1.8bn bond issue would appear to have questionable asset cover given Occidental's rumored sale of Ghana assets for $500m. Equity holders are thus unlikely to realize much value.
  • We believe the bond launch is a last ditch move to avoid a cross default on the debt based on the 30 day default cure period on a key covenant.
  • Whatever the glide path, we believe equity holders will still end up carrying the bag, facing ever higher financing costs and falling production.
  • Even if the near-term credit trigger is removed (and it may yet not be), we remain short the stock and reiterate our bearish case from our previous article.

Rubber duck falling out of bath overflowing with water
Photo by Andrew Brookes/Cultura via Getty Images

Tullow (OTCPK:TUWLF) recently announced the launch of a $1.8bn bond deal to pay back its 2021 convertible, its 2022 bond and reduce its bank debt by approximately $700m. Effectively its Reserve Based Lending facility is being

This article was written by

UK based former fund manager, now research consultant, advisor, and analyst. brevarthanresearch.substack.com.  Historic coverage focused on energy and mining sector as well as industrials and more recently renewables. 25 years of investing experience at both institutional investments and hedge funds. Believer in intensive fundamental research but with a keen eye on the macro. Long term sceptic/cynic on management disclosure and alignment with shareholders. Avid reader of books (history, philosophy and good fiction). Can be found on twitter @hedgewatch1 @brevarthan (formal). The floor is zero.

Analyst’s Disclosure: I am/we are short TUWLF, TUWOY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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.

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Comments (37)

Darp Research profile picture
Tullow, alongside its joint venture partners Kosmos Energy, Ghana National Petroleum Corporation, Petro SA and Jubilee Oil Holdings, is pleased to announce the successful start-up of the Jubilee South East (JSE) Project, offshore Ghana.

The first JSE production well has been brought onstream and a further two producers and one water injector are expected onstream this year to help sustain gross Jubilee production over 100,000 bopd. Tullow and its partners plan to maintain this increased level of production at Jubilee over the next few years through an ongoing infill drilling programme. The partnership has identified multiple future drilling locations and is focused on high-grading these opportunities to further extend the plateau and realise the full potential of the significant Jubilee resource base.

That was Friday, Monday they say already over 100,000. If you are wondering why up 21% today, this is why. Roughly double oil rate.
TopDoggie profile picture
@Darp Research I have been holding Tullow for a while. Glad to see some rays thru the clouds.
Darp Research profile picture
Anyone look into the Tullow merger? With Capicorn? Looks like good for Tullow, Capicorn has boatload of cash and profits www.tullowoil.com/...

Interested in others take?
TopDoggie profile picture
@Darp Research I think it is a great deal for both. It brings the debt ratio way down for Tullow.
Darp Research profile picture
@TopDoggie Yes, some say so good for Tullow that they may have to spend more to get the votes.
Darp Research profile picture
Tullow deserves quite a bit higher stock price than they have got. This deal adds even more growth and value

News Release
Tullow pre-emption of Deep Water Tano component of Kosmos Energy/Occidental Petroleum Ghana transaction

11 November 2021 - Tullow Oil plc (Tullow) announces that it has exercised its right of pre-emption related to the sale of Occidental Petroleum's interests in the Jubilee and TEN fields in Ghana to Kosmos Energy.
Pre-emption summary

- Tullow to pre-empt on Deep Water Tano (DWT) Block interest indirectly acquired by Kosmos Energy

- Post completion, it is anticipated that Tullow's equity interests will increase to 38.9% in the Jubilee field and to 54.8% in the TEN fields

- The additional equity interests are expected to add c.10% to daily Group production and the associated incremental cash flow will help to accelerate Tullow's debt reduction

- The consideration is expected to be c.$150 million (if pre-emption by other Joint Venture (JV) Partners is fully exercised), which will be subject to closing adjustments

- Tullow will fund this transaction through existing resources

Rahul Dhir, CEO of Tullow Oil, commented today:

"This is a value accretive, self-funded opportunity for the Group which will increase Tullow's daily Group production by c.10% and generate additional cash flow to help accelerate debt reduction. Increasing our operated stakes in the Jubilee and TEN fields underscores our commitment to investing in and delivering our Ghana Value Maximisation Plan. This opportunity fits well with our strategy to focus on maximizing value from our producing assets. We look forward to constructive conversations with our JV Partners and the Government of Ghana as we finalise the transaction."

Assets being acquired

As per the DWT Joint Operating Agreement (JOA), Tullow has pre-emption rights in respect of the 11.05% participating interest within the offshore DWT Block acquired by Kosmos Energy as a result of its acquisition of Anadarko WCTP Company announced on 13 October 2021. Tullow has exercised its right of pre-emption over this participating interest in DWT and assuming all JV Partners also fully exercise their pre-emption rights, this would increase Tullow's share in the Block by 7.7% (to a total of 54.8%). This would in turn increase Tullow's equity interests in the Jubilee and TEN fields to 38.9% and 54.8%, respectively.

Strategic and financial impact

Increasing exposure to these assets is aligned with Tullow's strategy to focus on its producing assets. The additional equity is expected to increase Group daily production by c.10% and generate over $250 million incremental free cash flow at $65/bbl for Tullow between 2022 and 2026, which will help to accelerate debt reduction.
TopDoggie profile picture
@Darp Research Dipping today again. Seriously thinking of adding more here.
Darp Research profile picture
@TopDoggie It is up 8% now. When some hedges roll off they will make oodles of cashflow.
TopDoggie profile picture
@Darp Research Ended up starting a position in something else. Sent you a message.
Darp Research profile picture
0559 GMT - Tullow Oil's(TUWLF) material leverage to higher oil prices stemming from improved production expectations at Ghana's offshore Jubilee oil field has influenced rating and valuation changes, Jefferies says. The bank has a $70 barrel oil-price scenario with the company's total net asset value increasing 61% to 93 pence and a 2022 to 2025 free cashflow yield increase to 33%. Jefferies upgrades its rating on the stock to buy from hold, and raises the target price to 70 pence from 50 pence, because of the oil company's renewed focus on Ghana production and its increased commodity price deck. (anthony.orunagoriainoff@dowjones.com)

$70 oil, are you kidding me? It is $85, try maybe 60% increase in FCF and a 150 target over the current 51 price. At least they are getting the direction right,
TopDoggie profile picture
@Darp Research I was going to buy more today. Then CGX crashed on the open and I loaded up. 40% discount to what Frontera is buying a massive amount at.
Darp Research profile picture
@TopDoggie Tell me more?
TopDoggie profile picture
@Darp Research Since then I sold a good chunk of CGX at a profit and bought Frontera. It has a lower ceiling but a much higher floor.
Darp Research profile picture
I just pulled some sell orders had on TUWOY higher up. Have good profits on it already. With $85 Brent it cures any money issues Tullow had. And have thought since August Brent headed to $90-100.

They will make massive amounts of money going forward, expecting fireworks on it, a 3 bagger in less than a year my guess.

They may get bot too, so said to self, let this baby run.
TopDoggie profile picture
@Darp Research I bought back the shares I sold. I agree.
TopDoggie profile picture
Up 7% in London. Hopefully it climbs all week. The shorts must be getting nervous.
300 p stock at 45p
Darp Research profile picture
See Tullow is up 10% on London., Oil+2.5

Should be big day for oils today, @Brevarthan Research are you still short?
TopDoggie profile picture
The bond offering is expected to close at par on the 17th. We will know how this ends in short order. I am betting on the bond deal going thru.
Chancer profile picture
Held Tullow for almost 12 months and sold for a nice 109% gain. Glad to get out before the trouble begins.
@Chancer There is no trouble. Tullow is printing money at today's oil price.
Matthias Kiunke profile picture
Tullows short term credit needs were an occasion for a certain bank to get the company in a corner, to convert their debt into shares and take control of the company and its oil. This speculation with the RBL has failed as Tullows management didnt play the game with you guys as the new CEO owns a substantial amount of shares (worth 750.000 USD), but now just raises the capital needed with a "normal" senior bond. No more hassle with the RBL, no more dependence on "liquidity forecast tests" and no dilution at these low share prices. Bad luck therefore for shorters and the mentioned bank.

Your effort writing two long articles in just a few days (having never before written anything about Tullow!) tells us that its about sure you re not doing this for your own account, but are a hired gun for exactly that bank or a hedge fund working for it. Your employer is short the stock as you mention, but the main reason for all the time you spend is neither you being Mother Theresa wanting us all to make profits shorting the stock as well, nor is it that you just wanna gain sth with your shorts. My guess is your bank wants the bond to fail and you re writing these articles only UNTIL the bond is fully bought (= the next 2-3 weeks). Once the bond is fully bought and the stock has risen another 30% we will not read anything from you anymore. You ll be gone.

We dont laugh about you as well as you dont laugh about us investors. You re doing what you re payed for. You re polite and professional. And thanks to disclosure rules everyone knows you re only doing your job.

... and of course you understand that we dont believe in what your employer tells you to tell us :)
Darp Research profile picture
@Matthias Kiunke I noticed the same timing thing.

So is Tullow shorted?

Just checked. I have most on OTC, which is not shorted, but have 2,000 TLW.L thru IB. And? 2021-04-30 TLW 2021-04-30 -1,969

99% of it is being shorted! that is borrowed from me to short. I have maybe 60-70 stocks at IB and and TLW is the most shorted stock there is of all them. Interesting. Think you are on to something.

Edit, I see the author admits is short Tullow. In the last 2 years have noticed heavily short stocks do better than the average stock. The sector most shorted was Uranium stocks, and that has been maybe the best sector for months.
Brevarthan Research profile picture
@Matthias Kiunke I assure you I work for no bank. I am a private operation. I am not getting paid to write this for anyone. Address your comments to the points raised, not the man making them.
TLW may well face operational challenges to rebuild production but the bond bath argument is nonsense.

Where is the hard evidence of a pending default? There is none. If the RBL banks had served a default notice TLW would have had to put the information in the public domain.

You entirely ignore the fact that Banks have given commitments for $600 million in new money, impossible if a default was pending. I fully expect many of the RBL banks will be in the new facility. Similarly, Moody's would not rate the new bond B3, two notches above the current unsecured debt, and place the TLW corporate rating on review for an upgrade if there was a pending default.

Refinancing the 2021 and 2022 debt maturities when oil has recovered and markets are strong is an entirely rational corporate finance decision: removes refinancing risk until 2025.

Terming out the core part of the RBL with bonds and replacing the uncommitted piece with a smaller revolving credit facility is also smart: it eliminates the uncertainty around biannual redeterminations and removes the highly subjective RBL liquidity coverage test.

The end of April announcement timing is also perfectly logical as TLW will market the bond off Dec year-end numbers: the convention is to announce refinancing no later than 4 months after the end of the reporting period, before they go stale.

Always a risk they cannot get the bond away but I expect they will: we should know this week.
Matthias Kiunke profile picture
@Tugela Falls well said and your last sentence answers why this "person" wrote 2 articles in just a week: disseminating nonsense information. The thing is just: bond buyers are much more professional than retail investors and look - as you mentioned it well - at the upgraded credit rating and its reasoning rather than anonymous shorters postings ;)
TopDoggie profile picture
@Matthias Kiunke This sounds like a Credit Suisse playbook. Lend money try to snatch the assets.
Matthias Kiunke profile picture
@TopDoggie many people underestimate chair Dorothy Thompson and CEO Rahul Dhir. Both are competent and loyal and not at all ready to "sell" Tullow - neither to a bank nor to any competitor. Now s the last chance for many to try to buy Tullow for a bargain price these days and of course it was quite clear that someone would buy a hired gun for some articles. Rahul has made it clear to anyone putting around a million USD of own cash into his mission to turn around Tullow. And he will succeed. I trust and like him. And isnt good investment about trust in great management after all? I trusted Neal Froneman in 2018 and 2019 investing in Sibanye Stillwater, 6folded my investment so far, now know about all upper management of that company, visited the worlds 2nd deepest mine thanks to them and got friends with their head of IR. With Tullow I expect 10 or 20fold it in about 4 years and hopefully have a good beer with Rahul once Covid ends :)

Being constructive in life makes you a whole bunch of great friends. Being a shorter... well ... remember these eternal outsiders from school? They now work for hedge funds :D

With crude up 1,4% today, we ll see Tullow at .60 tomorrow with a 20% gain for all investors already since the first article "Brevarthan" posted a few days ago.

Best time ever to invest here.
Brent is currently trading over $67/bbl. Some investment banks, such as Goldman Sachs, expect Brent to trade ~$80 by summer.

In the last earnings report, Tullow cited it will generate over $500M in operating cash in 2021 with Brent at $50/bbl. A $10 increase in Brent, according to Tullow, would generate in additional $100M in free cash flow.

I am going to take an opposing view here and reiterate Tullow represents a compelling high return investment opportunity in a plus $65 Brent environment.

I would suggest those interested in Tullow to review Africa Oil Corporation's October 2020 investor presentation where they assess international producing assets by cost/barrel. Tullow's producing assets in Ghana (Tullow and TEN) are sub $12/boe - according to Africa Oil.

Also, Hess has pegged Tullow's Jubilee field as the second lowest project breakeven field in the world (right behind Exxon's Liza field) and profitable at sub-$35 Brent. Hess claims Rystad Energy as a source.

Moreover, with extra FPSO capacity (two FPSOs) at Jubilee and TEN - Tullow plans to commence an infill drilling program until those vessels return to full capacity. This is after years of prior Tullow management neglected allocating capital to maintain Jubilee and TEN production levels.

As part of Tullow's new management team strategy - the company is targeting $7B in cash flow generation over the next 10 years from their West African Assets.
Brevarthan Research profile picture
@OIL_RUN I think you omit FPSO leasing costs here given the IFRS 16 accounting of leases as debt vehicles (this is the FPSO day rate which the company admits it omits from quoted opex per barrel). If you look at recent Tullow CMD presentation you will note the opex per barrel ramping as production declines, which in the case of TEN, it is doing precipitously. As per Rystad, I have had to correct them on several occasions previously given their assumptions. Readers with i-bank research access may wish to peruse Jefferies Oil research which recently pegged Tullow with the highest full cycle oil costs in Europe. Full cycle costs includes the cost of reserve replacement, and decommissioning expenses as well as forecast tax expenses. I would point out that the recent history of Tullow drilling wells in Ghana has not been a happy one, with the recent Ntomme 9 well experiencing extended drilling time, and a disappointing flow rate. Please watch the yellowstone Q&A video with mgmt (end of the presentation) on youtube for further interesting points.
@Brevarthan Research

"Tullow with the highest full cycle oil costs in Europe" . You better change your information sources...
At least you admitted your short position. Allied to the various hit pieces it’s clear you are in panic mode
Brevarthan Research profile picture
@easy rider 1200 No panic thanks for thinking of me. If you are short a levered oil name it makes sense to have long oil ideas as well. Its important to eliminate factor risk when shorting, such as much higher oil prices than expected.
@easy rider 1200

How can someone short Tullow quoting at 4 times normalized FCF/EV? Is it just I or 99% of short-sellers do not get you have to be George Soros to win money at it, and they are not.
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