Moody’s Investor Services has assigned B3 rating outlook to Tullow Oil plc’s proposed $1.8 billion bond issuance. However, the rating action is subject to a review for upgrade.
According to Moody’s, the consideration for review is based on the expectation that Tullow’s refinancing of outstanding debt repayments will lead to two essential outcomes: First, that the bond issuance will potentially reduce the existing debt on the company’s balance sheet; Also, that this action when successful will substantially improve the company’s liquidity profile.
Furthermore, Moody’s anticipates that the adjusted leverage will remain at 5x, but it will decline afterwards. Thus, this will be driven by expected growth in production, and mandatory debt and lease repayments.
More so, Moody’s expects Tullow Oil plc’s production to decline to about 54 to 57 kboe/d due to the insufficient investments towards sustaining high production in the last couple of years.
Supposing average Brent price of $55/bbl and a unit operating cost of around $13.5/boe, Moody’s estimates that Tullow would record an adjusted EBITDA (i.e. Earnings before interest, taxes, depreciation and amortization ) of around $700 to $725 million in 2021.
Moody’s expects that Tullow would record a zero to marginally negative free cash flow generation this year. This is based on the substantial interest payments and huge investments in capital expenditure that Tullow has to satisfy.
Therefore, Moody’s anticipates that the restocking of Tullow Oil plc’s reserves will generate the financial resources needed to reduce the debts outstanding on the balance sheet. Also, this is in line with the net leverage target of 1x-2x, as provided by the company’s stated guidance, and to allocate dividends to shareholders. Albeit, Moody’s does not expect payment of dividends within the medium term.
Outlook faces some risks
These notwithstanding, Moody’s takes into consideration some operational risks regarding the drilling of oil wells. Moody’s position is that Tullow Oil plc is likely to face some difficulties as the company has experienced such up to 2019.
Even so, Tullow Oil plc upon announcing the refinancing of debts indicated that the successful execution of the bond sale is subject to the behaviour of general market conditions.
Other factors it mentioned included national or global events affecting the capital markets and the coronavirus pandemic. Also, unforeseen developments in the company’s business or industry or changes in laws governing the company’s ability to complete the transaction.
Nonetheless, Moody’s is upbeat about Tullow’s operational improvements seen in 2020 regarding water injection and gas offtake, as well as uptime. These, it says have jointly improved the company’s performance, notwithstanding the impact of the pandemic and OPEC+ oil cuts in Gabon.
According to Moody’s, the rating action reflects the recent changes made in Tullow’s management strategy, and the renewed emphasis on production efficiencies than riskier exploration and early stage developments.
Meanwhile, the rating agency further highlighted the high concentration of Tullow’s assets in Ghana. It also underscored the low cost nature of its reserves and the relatively short life of its 2Proven reserves of around 9.5 years.
According to Moody’s these are promoting the need to bring new resources to production to net out the declining rates of mature oil fields.