Moody’s has affirmed Tullow Oil’s B2 Corporate Family Rating (CFR), B2-PD probability of Default Rating (PDR) and B3 senior unsecured notes with a stable outlook.
The rating action was influenced by the ratings downgrade of the Government of Ghana (Ghana, Caa1 stable), where the majority of Tullow Oil’s production and cash flow are concentrated.
Moody’s recently downgraded Ghana on concerns over the country’s increased fiscal, refinancing and debt challenges. Moody’s lowered Ghana’s local currency (LC) and foreign currency (FC) country ceiling to B1 and B2, respectively from Ba3 and B1.
“The affirmation of Tullow Oil’s ratings reflects Moody’s view that the company can be rated one notch above the sovereign rating despite generating 70% of its daily production from oil fields in Ghana”.
Moody’s
Tullow Oil benefits from a degree of insulation from economic and financial disruptions potentially arising in case of sovereign distress, owing to a number of factors.
First, Tullow’s offshore production and direct sales of crude oil outside of the African continent. Second, the limited exposure to foreign exchange risk supported by US dollar revenues. Third, an established and diversified financing framework, independent of the Ghanaian domestic banking system. Fourth, protection from adverse changes in tax regimes through stabilisation clauses included in the petroleum agreements.
The rating affirmation also reflects the expectation that Tullow Oil’s credit metrics will continue to meet Moody’s requirements for the B3 rating, supported by stable hydrocarbon volumes, maintenance of a competitive cost profile and continued adherence to a prudent financial policy framework.
However, the rating action also considers the company’s small scale, a financial profile characterised by high leverage and the very high negative exposure to carbon transition risk.
Tullow Oil’s liquidity position is good, Moody’s said, noting that its assessment considers the company’s projected positive Free Cash Flow (FCF) generation under a $65-60/bbl Brent price scenario in 2022-2023.
That said, the company has around $200 million of average cash balances, and also has access to a committed $500 million cash tranche of the Revolving Credit Facility (RCF), which is currently undrawn and expected to remain unutilised.
Internally generated cash flows and available cash should cover all of Tullow Oil’s funding needs over the next 12-18 months, including the annual $100 million amortization of the senior secured notes due in May each year, starting in 2022.
Factors Influencing Upgrade or Downgrade
The stable outlook reflects Moody’s expectation that Tullow Oil will continue to conservatively manage its balance sheet, while securing commodity hedges on a substantial part of its production and keeping its leverage comfortably within the boundaries of the B3 rating guidance. Moody’s also expect the company to maintain a good liquidity profile.
However, Moody’s highlights that an upgrade of Tullow Oil’s ratings is unlikely, given the significant exposure to Ghana (Caa1 stable) that constrains the company’s CFR.
“Subject to an upgrade of the Ghanaian sovereign rating, positive rating pressure could result from rising operating profitability and improving FCF generation accompanied by a strong liquidity profile”.
Moody’s
Furthermore, an upgrade is possible in the case of substantial deleveraging, such that E&P debt to average daily production falls below $30,000 and retained cash flow to gross debt improves to at least 15%.
On the other hand, Tullow Oil’s ratings could come under negative pressure if the company’s E&P debt to total average daily production remains sustainably above $60,000 or if retained cash flow to debt falls below 10%.
Weakening liquidity including a failure to address the 2025 maturities at least 12 months in advance could also lead to a downgrade. Tullow Oil’s ratings would be downgraded also following a downgrade of Ghana’s sovereign rating, Moody’s said.
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