Tullow Oil revival gets boost from lenders

Troubled oil company Tullow Oil plc’s path to revival got a boost as its lenders agreed that the company’s debt capacity remains in a healthy position.

A release issued by the company on Friday said its recent Reserves-Based Lending (RBL) redetermination confirms a debt capacity of US$1.9 billion as well as a US$700 million liquidity headroom of undrawn facilities and free cash at the start of the second quarter of the year.

The Anglo-Saxon company and operator of Ghana’s Jubilee and TEN oil fields said it will now pursue further savings in addition to initial measures that, among other things, included layoffs expected to affect about a third of its global workforce.

“Securing the ongoing support of our RBL lending banks and confirming our debt capacity has been important given the current challenging environment,” Chief Financial Officer Les Wood said.

Per the agreement with lenders, Tullow voluntarily reduced facility commitments from US$2.4 billion to US$2.2 billion, effectively accelerating its first scheduled commitment amortisation from October 2020.

It is expected that the reduction in debt capacity and commitments will translate into a reduction in finance costs.

According to Mr. Wood, the agreement with the lenders verifies the strength of the company’s producing assets and robust hedging strategy. Combined with the further cost savings it has identified, this confirms the strength of Tullow’s liquidity in the medium term, he added.

Cost savings

Last year, the company’s operational challenges culminated in a US$1.6 billion loss. This triggered a raft of actions in a bid to trim costs and return to profitability.

After previously slashing its planned capital expenditure for 2020 by 30 percent, the company is further reducing the amount to US$300 million from US$350 million, while expenditure earmarked for decommissioning has been revised to US$65 million from US$100 million.

Tullow said it expects additional savings through the deferral of activities across the portfolio and through savings that can be realised by ongoing farm-down activities.

“In Ghana, for example, savings will be made through the early termination of the Maersk Venturer rig and the deferral of some well activity, combined with the removal of any non-critical work that does not focus on safety and asset reliability.”

Hedge cushion

Tullow said the impact of reduced crude oil prices is mitigated by its robust hedging strategy, whereby 60 per cent of its 2020 sales revenue is hedged at a floor price of US$57 per barrel (/bbl) and 40 percent of 2021 sales revenue is hedged at a minimum price of US$53/bbl.

For January and February 2020, the company’s realised oil price was US$62/bbl, and following the recent price drop, hedging receipts of US$30 million are forecast for March 2020.

According to the company, underlying operating costs remain less than US$12/bbl, with operating costs in Ghana at US$9/bbl. It said its hedging policy together with expected output of 70,000-80,000 barrels per day results in a free cash flow breakeven oil price of US$35/bbl for the rest of the year.