Tullow Warns of Default Risk as It Slumps to Loss

Tullow Warns of Default Risk as It Slumps to Loss

Reprinted from the FT – 09/09/2020

Oil and gas explorer says ‘potential liquidity shortfall’ threatens the ability to pass lenders’ tests. Tullow said it was exploring ‘various refinancing alternatives’.

Tullow Oil warned it risked defaulting on a debt facility if it does not resolve a potential liquidity shortfall, as the Africa-focused explorer slumped to a $1.4bn pre-tax loss for the first half of the year. The London-listed company said on Wednesday that a “potential liquidity shortfall” threatened its ability to satisfy requirements at a “redetermination” next January of its reserves-based lending facility.

The company said it was exploring “various refinancing alternatives” but the news, revealed in its half-year results, pushed its shares down a fifth in early trading in London.

At the January redetermination of its RBL, Tullow must show sufficient funds for the following 18 months, a period that includes the falling due of $650m of debt in April 2022.

The company warned that if it was unable to show it had sufficient funds for the 18 months to July 2022 or resolve the “forecast liquidity shortfall” within 90 days of failing the January test, “there will be an event of default under the RBL facility by the end of April 2021”.

It said actions under consideration to address the potential shortfall included refinancing the senior notes due in April 2022 or convertible bonds due in July next year. Other options under review include seeking to “secure new liquidity from banks or capital markets investors”.

Tullow delivered the warning as its half-year results showed it had fallen into the red for the six months to June 30, compared with a $268m pre-tax profit during the same period last year. Its net debt pile also increased to $3bn from $2.9bn at the same point last year, while free cash flow was negative, which the company blamed on factors such as redundancy costs, tax, and necessary capital expenditure.

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Premium Revenues were 16 per cent lower year-on-year at $731m as production fell and the group realised lower oil prices for its output.

But the biggest hit to the results came from a $941m write-down of its assets in Uganda — due to be sold to France’s Total — and in Kenya; plus $418m of impairments reflecting lower long-term oil price assumptions.

A number of smaller independent explorers have reported losses for the first half of the year after Brent crude prices slumped from almost $70 a barrel in January to below $20 in April as the coronavirus pandemic ravaged global energy demand. But Tullow was already battling its own problems before the pandemic. Its shares plummeted 70 per cent last December when it told investors it expected production to be almost a third lower than it had forecast at the outset of 2019.

Chief executive Rahul Dhir, who joined the group in the summer from rival Africa-focused oil and gas group Delonex Energy, has ordered a “comprehensive review” of the company’s “portfolio, growth prospects and capital structure”, which he expects to lay out at a capital markets day “towards the end” of this year. Mr. Dhir told the Financial Times on Wednesday there was no “silver bullet” to solving Tullow’s difficulties but he stressed the company was also making progress in slashing its cost base and insisted the board had “conviction there is potential in the business” once its capital structure was addressed. Before Mr. Dhir’s arrival, Tullow had already set out a plan to raise more than $1bn through disposals and by axing 35 per cent of its workforce.