Tullow - What Has Changed
All,
Please find our previous Tullow Oil analysis here. We will update our assumptions and models when the Company release its full-year numbers.
Tullow Oil made multiple announcements this morning (Friday 20th), but in substance, little has changed. While the proposed Amend and Extend transaction provides the Company with an additional 30 months of runway, this period is clearly intended to facilitate a sale of the business, which now appears to be the sole viable exit route.
In early September, we noted that the Company was unlikely to appoint a new CEO, arguing that the CFO and Chairman were adequately positioned to oversee a sale process. The subsequent appointment of Mr Perks briefly raised market expectations that the company was pursuing alternative strategic outcomes. However, it has now become apparent to all stakeholders that this is fundamentally a liquidation-led equity story.
Summary
The proposed Amend and Extend transaction will be completed; there is no credible alternative available to the Company. The transaction effectively removes the near-term maturity pressure, and noteholders should seek to benefit from the early-bird consent incentives.
The restructuring clearly confirms that Glencore’s $400m facility is subordinated and will be categorised as junior secured debt post-transaction. This removes any remaining ambiguity around the proceeds waterfall in the event of a sale.
The business is firmly positioned for sale. Tullow Oil has until September 2027 to execute a legally binding sale and purchase agreement. While there is no enforcement mechanism should this deadline be missed, it is likely that bondholders would agree to a further extension if required, potentially incorporating a mandatory cash sweep.
Operational performance has deteriorated. Production has declined, and while management has reduced the cost base, the forward outlook for profitability and free cash flow generation remains subdued.
The Government of Ghana continues to represent a material counterparty risk. Tullow had expected approximately $140m of payments in Q4 that did not materialise, increasing outstanding receivables to roughly $225m (net to Tullow). Notably, the Company’s FY26 guidance assumes only $40m of cash inflow from Ghana, implicitly acknowledging ongoing payment uncertainty.
Investment Rationale:
- We are not taking a position in the Senior Secured Notes at current levels. While we continue to believe that the intrinsic value of the company exceeds net debt, realising that value depends entirely on a third party’s willingness to pay it. Tullow now operates as a forced seller with minimal negotiating leverage and therefore remains exposed to distressed or opportunistic buyers setting the terms.
- On recent calls, management stated that it had engaged in discussions with private capital providers to support a refinancing. However, today’s announcements did not refer to such discussions, reinforcing our view that Tullow has exhausted its available strategic options.
- Theoretical upside remains par, based on asset net present value, but in practice, we expect the bonds to remain anchored in the low-80s until the company delivers concrete progress on asset disposals. Even if a transaction materialises, unresolved tax disputes and significant decommissioning liabilities could materially erode recoveries.
- Downside risk remains substantial and could exceed 20 points. An adverse outcome in the tax arbitration would raise serious questions around directors’ duties and the risk of trading while insolvent. Given the fragility of the capital structure and ongoing solvency concerns, we find it surprising that the company has not pursued a delisting.
The Proposed Amend and Extend
- Tullow has entered into a binding Lock-Up Agreement with holders representing approximately 66% of its $1.285 billion 10.25% senior secured notes due May 2026, alongside Glencore, to implement the transaction. The existing senior secured notes will be released and replaced with new “Extended Notes” maturing in November 2028, with a minimum $100m repayment at closing. The Extended Notes will carry a coupon of 10.25% plus either 1.75% payable in cash or 3.0% payable in kind (PIK). The notes will benefit from 101% call protection for life. Early-bird consenting holders will receive a 1.0% consent fee. Non-consenting bondholders will receive only 95% of their existing holdings in the new notes, with the remaining value redistributed pro rata to consenting holders.
- Glencore’s existing $400m secured notes facility will be released and replaced with new junior secured notes maturing in May 2030. In addition, Glencore will provide a new $100m super-senior cargo prepayment facility to enhance near-term liquidity.
- The Lock-Up Agreement, supported by noteholders and Glencore, will be implemented via a consent solicitation if participation exceeds 90%, or through an English restructuring plan, with a targeted closing in Q2 2026.
- Unless a legally binding sale and purchase agreement is entered into by 30 September 2027, the maturities of both the Extended Notes and the Cargo Prepayment Facility will be accelerated to 15 May 2028.
- Bondholders have marginally improved their position, with Glencore debt (which replaced the old senior notes) being clearly subordinated as junior debt. This clarification should remove any residual uncertainty around the proceeds waterfall.
Trading Statement
- Cash generation remains the central issue. Tullow missed its $300m free cash flow guidance issued in November by approximately $200m, delivering actual free cash flow of just $100m. The shortfall was driven by a $140m non-payment from the Government of Ghana, a $40m delayed payment from Kenya (now expected in Q1), and lower-than-expected production in November and December. Ghana receivables as at 31 December 2025 totalled approximately $225m net to Tullow (pre-tax), comprising around $65m of unpaid cash calls, $110m of gas-related receivables, and $50m related to TEN development debt. No guidance was provided on the timing of settlement.
- A further potential tax exposure has emerged in Kenya, where authorities are alleging underpayment of VAT and capital gains tax on the disposal, amounting to $170m. Tullow has indicated confidence that the matter will be resolved without any cash outflow.
- Production guidance for 2026 is muted at 34-42 kbopd. The Company plans to drill five wells at Jubilee in an effort to support production levels. Pre-financing free cash flow is guided at $150-180m at $65/bbl; however, this figure is inflated by the assumed receipt of $40m from Kenya and $40m from Ghana that were not received in FY25. Excluding these items, the underlying cash flow at $60/bbl is estimated at approximately $100m.
Extended Licenses
- The Ghanaian government has confirmed the extension of the licenses from 2036 to 2040, although the state’s participating interest will increase by 10% during the four-year extension period. Revised gas supply terms and a gas payment security mechanism have also been agreed with the Government of Ghana. While the detailed terms have not been disclosed, the principal concern remains payment reliability. As part of the FY25 results, Tullow confirmed a $140m payment delay from the Ghanaian government, of which approximately $100m relates to gas supply.
Purchase of the FPSO at TEN
- Tullow Oil has entered into a Sale and Purchase Agreement to acquire the TEN FPSO for a gross consideration of $205m, equating to approximately $125.6m net to Tullow. Completion is expected by the end of Q1 2027, subject to conditions precedent and regulatory approvals. Bringing ownership of the FPSO in-house will allow Tullow, as operator, to extract further cost savings, eliminate annual lease costs, and enhance operational control. The net consideration—equivalent to approximately one year of current net lease costs—is expected to be funded from in-year cash flow generated by TEN and will be paid upon completion of the transaction at the end of the first quarter of 2027.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk