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Antonvb, I have a background in credit markets. Plus I create excel models of the Companies I invest it. Which involves extracting revenue, cost, cash flow and then project forward with some assumptions. It is apparent here the amount of people who doesn't do that.
If people did some basic work (Tullow only report bi-annually) investors would see the impact of each $/bbl oil, the bigger impact of production levels, and the impact of CAPEX and interest bill on free cashflow.
I spend too much time, but I generally follow the cash. Valuations based on number of bbls of oil in the ground or asset value doesn't really work for me. I am a simple man who looks at the cash.
Happy,
You can infer the interest rate from the interest they paid in FY20 or FY19 versus the average debt outstanding debt in the corresponding year. I work it out to be c. 6-7% on the RBL but if you want to show me something else please do.
Income interest - as you stated interest rates so low, there is limited interest received in the current environment. So the lower cash balance isn't going to have much impact.
You are stretching the basis of negative comments.
If you want to be negative focus on the negatives - the concentration on single asset, the risk of failure on the well drilling, the Ghanian tax issue.
But this deal is a positive. Stop focusing on this deal
Ratings is Single B and there is no doubt it is expensive. With lots of questions surrounding its operations and exposure to single asset. Jubilee ,mainly (issues at TEN) the rate is expensive. I was expecting 9% but I still feel the certainty of financing over the coming 1-3yr horizon gives significant benefit.
Now, where for the equity. This is no doubt beneficial and I would expect by year end this to trade at 4x EBITDAX level, given a basis of c. 70p. This should be a floor but with uncertainty around the success or otherwise of the new well drilling program unlikely to kick in until 2022, it will be held back. But the momentum and deleveraging should see share price above ÂŁ1 as we go into 2022 (assuming successful drilling). That is a a big if.
I will continue to monitor the boards over the coming weeks but don't see much news coming out. I am long but I always appreciate alternative views, if I have thought of it and still willing to take the risk, makes no difference, and if I haven't thought of it, I need to do some more work.
Am off to do some work on Ceres Power and ITM Power. Need to educate myself on those names. Massive drops recently.
BumBum,
Correct to be wary of what is posted by anonymous sources, but statement out from Company stating bond done at 10.25% coupon.
Happy.....
Coupon increase is c. 4% which is $72m p.a. or $108m over 18 months. But no more redetermination nor fees related to that. And certainty is worth more.
Supercooler,
As of Dec2020, Cash of 800m, RBL of $1,430m, Convertible (July 2021) $300m, April 2022 bond of $650m and Mar-25 bond $800m. Total Gross Debt of $3,180m, net $2,375m
After transaction:
Cash of $175m,
New Bond May-26 $1,800
Existing 2025 bond $800m,
Total Gross Debt $2,600, Net Debt $2,425m.
So correct, no change in Net debt ($50m increase - irrelevant). But this new debt gives the Company an Revolver (overdraft) which is currently undrawn of upto $500m. So that is additional funding.
But, over next 18 months, they would have to repay $300m convertible bonds, $650m of 2022 bonds and some amortisation of the RBL facility totalling c. $410m. This would have used up all the cash on balance sheet and more.
This deal enables them to confirm multi-year drilling program and removes the 18 month liquidity test.
I hadn't the Company making Free cashflow in 2021 and 2022 to fund further CAPEX and with the debt repayment above it would not be able to do future CAPEX. Now it can.
Good luck
Supercooper -
Prior to this bond, the Company had to repay the 2021 and 2022 bonds, plus the amortisation on the RBL facility. This is cashflow that would have to be paid out. Now they no longer need to repay these - having extended the debt to 2026 so no amortisation means they have "free" cash to invest in CAPEX. In addition, there is the undrawn $500m revolver which can be drawn down.
If the deal didn't happen the debt repayment schedule would make it impossible to fund the CAPEX (as per capital markets day in November)
Darragh,
As this new bond is senior in ranking to the 2025 bonds, the 2026 New notes have entered a clause in the debt to prevent the 2025 been repaid before them.
In practice, this means than in 2024/early 2025 the Company will have to refinance the whole finance structure (both 2025 and 2026 together) or issue new debt with longer maturity to repay the 2025 notes. I.e. The 2026 note holders don't want the Company to use cash on balance sheet etc to repay the 2025's and leave the 2026 as the only debt outstanding.
Happy - 10.25-10.5% is expensive but given where the debt was trading prior to the announcement it isn't a surprise. Given the Company think they can generate IRRs of 80% plus as per their presentation in November, then 10% is cheap and sensible investment for the equity.
Some will balk at the 10.25-10.5% pricing, and I was surprised it wasn't closer to 9% but this is the reality. Talks of 6% was always too bullish. But the bond will be done.
The Company has now got the visibility and cash to fund the CAPEX in the next couple of years.
Equity holders are now subject to the success or otherwise of these. Good luck all.
See below for details on Bond
Bond will be done this afternoon - books close at 3:30 UK time. Price talk 10.25-10.5%
Slight change in the covenants -
Amending the definition of restricted covenants to include the 2025 bonds (i.e. the Company can't repay the 2025 while this new bond, 2026 maturity is outstanding).
Removing the ability to do $150m of share purchases
Limitations on restrictions on dividends
People who are long shouldn't fear negative posts - because we already are aware of the issues that are mentioned
https://brevarthanresearch.substack.com/p/tullow-big-bond-bath
I am sharing this from a person who is short. I disagree with the main thesis of the note that the reason the RBL is exiting is to do with not been able to cure the 18 month test.
In January, the Company accelerated its RBL re-determination date, in my opinion, so they could negotiate with bondholders following a breach of this 18 month liquidity test. Remember, in November/December the oil price was sub $50/bbl and it was likely that the Company would not meet its liquidity test over the following 18 months.
Bringing the redetermination date forward, imho, meant they had more time to negotiate with the 2021 and laterly the 2022 bondholders. I was very surprised that the RBL lenders agreed a new extension in January. However, the Company had benefited from the oil price rise and maybe felt they had lost some leverage against the 2021 and 2022s.
As we have progressed in time, it is difficult to negotiate with the 2021s. The last thing anyone wants is cross default and potentially losing licenses on the back of this.
But the timing for the bond issuance now is to remove any amortisation and fund CAPEX/well drilling program. if the deal happens, then equity holders should rejoice as there is limited debt repayment over the next 2-3yr period, and the equity risk of well drilling is been funded by debt issuance.
THe occidental sale the author refers to should be monitored as the price appears low. They are non-operators so should trade at a discount. but the overall level is low.
I am long and I like reading all different approaches to investing, on this name and others.
But try to keep commentary civil, please.
Happy has made a valid point about production levels. Nobody has attempted to answer the question of what level of production is required to meet its cashflow requirements.
I am not an engineer and find it difficult to model existing well decay (declining production) but compensated by new well drilling and what the initial production would be from the new wells.
I take the Company's IRR projections, graph from their capital markets day, and bond financing. which demonstrates at different oil prices the IRRs on various CAPEX programs (i.e. new well drilling).
I have the Company projected to back to 75-85,000 boepd by 2023 (dropping to 55k by H2 2021) but it is very difficult to gauge.
I would like to ask others two questions:
What assumption for decay do you have on existing wells (portfolio wide) - my assumption is 6-7% p.a.
What assumption for each new well - I have 1,000 boepd new production for on average each $10m spent.
Happy to discuss this.
Happy, not sure where you are basing 200% of market cap. Look at any highly indebted company, of which Tullow is one, and their gearing is significantly higher than implied from 200% of market cap.
Tullow's hedging:
They are currently 75% hedged for FY21 and 18% hedged for FY22. They will enter new hedges to target $55/bbl floor, using collars to enable to benefit from oil price upside.
They will seek to be 75% hedged for 2yrs, and 50% for the 3rd year. And are committing to doing 50% of the hedge volume in the two weeks post deal, 25% in the following 3 months and balance by end of FY21 (December 21).
For clarity, the two deals, The RCF of $500m (plus $100m of Letters of Credit) and the $1.8bn are linked. Both happen or neither happen. The proceeds are then to be used for the repayment of the 2021 and 2022 notes and the outstanding RBL facility (in order for security to be secured).
Happy: Not underwritten. Best endeavours. But all HY bonds are likewise so not unusual.
Antonvb, I accept there are a lot of posters who don't take the time to think about and write more than one line stating equity going to the moon.
I am posting because I want to hear from bond buyers and see what they say.
Gong to be last post today unless new news comes out (which I an not expecting)
Happy - the bond prospectus is out publicly. Ask your dealer for it. Widely available but can't post link as it is only available to Qualified Investors.
The window isn't tight - bond will either close this week or won't get done. The convertible $300m will be redeemed in July and the $650m 2022 bonds will be on May 14th, but only subject to deal closing.
If deal doesn't close, the bonds and the equity will trade down, but the 2021 convertibles will still likely be repaid in July.
They are changing their investor base. Tullow are repaying $950m of bonds and $1.4bn of bank (RBL) facility. The RBL providers are not going to invest in the new bond offering. Therefore they need to be confident and wouldn't have launched the deal unless they figured they could get the deal done. But the risk remains.
If changing the investor base to remove the bi-annual redetermination process then they couldn't just speak to existing investors.
Anotonvb.
If all of the existing bondholders use the proceeds to buy the new bond, that is still only $950m of orders for the new bond. They will have to find an additional $850m of bond buyers.
About timing to buy. I agree - place your orders now, my point, and I think you agree, the price will not move until the deal completes or fails. I am long.
all of the quotes are from anonymous sources so you are right to be sceptical. But it is common for them to be anonymous in this particular source (debtwire.com).
However, for $1.8bn EM/HY bond to be done you will need some of the existing holders to roll over.
It is in their interest as the holders of the 2022 bonds have seen their bonds trade up from low 90% to near par and will be taken out at par if the deal progresses. But the deal is large and has pluses and minuses.
For clarity I expect the deal to be done. But I don't expect the share price to move over the next week until the deal is done. It will rally post bond issuance but not before it closes. (IMHO).
The risk remains (albeit small) it doesn't get done. But posters stating it will rally further this week I think are wrong. Wait until you hear the deal is done. Buying now is playing specifically the risk the deal gets done/doesn't get done.
I have it as a strong buy because I believe it is.
I can give you the bullish arguments - new well drilling driving production levels higher for FY22 and beyond, the refinancing removing RBL re-determination risk biannually, the removal of substantially all of the amortisation of debt in the short and medium term (reduced to $100m p.a. is what is proposed). Further payments expected from the Ugandan sale. I firmly believe that the Kenyan asset will be sold in FY21 as well (although the Company on recent call were a little more cautious).
There are a lot of others on here shouting for it to have strong buy.
I was highlighting the opposite view. Instead of criticising me, you could acknowledge it is a risk, especially given its size and either accept it is a risk you are willing to take (as I am) or argue the reasons why you think it isn’t a risk.
You ask for some quotes (I can’t post the link as it is behind a paywall).
"“The bond deal is great news, but the size of its ambition is surprising. USD 1.8bn is huge, they’re aiming for the moon,” said the second bondholder, who has a stake in the 2021 notes.
“I am pretty happy with the announcement, but the big question is whether there will be demand for such a large issuance,” added the first bondholder, who has a stake in the 6.25% 2022 notes.
There is a 70%-80% chance that the market could absorb such a large issuance, said the first bondholder.
With investor calls happening today, it is hoped that the security package and prospective yield will make the deal success more likely, said the third bondholder, who also has a large stake in the 6.25% 2022 notes.
“Bondholders will now be waiting to hear the company’s new strategy this afternoon,” added the third bondholder.
“USD 1.8bn is indeed large, but this is a secured first lien bond. That’s the difference with most other bond issues,” said a source close to the deal.
“A five year maturity, instead of say a seven-year deal, is good insofar as it signals the company's confidence in improving the balance sheet and don't want to commit into higher borrowing costs and having a constrained financing policy for a longer tenure,” added the sell-side analyst.
In light of the announced deal, Tullow Oil was placed under review for upgrade by Moody’s this morning (29 April).
There is always risks to all investments.
I will leave with the final comment. I tend not to post single line comments. I want to get into a honest debate/discussion. There are a lot of idiots on here and perhaps fair to assume I am one too. But look at previous posts on other companies and you will see I am not one to push up or down names. I try to have a debate.
I am bullish on Tullow, but wanted to see if anyone hearing anything on the bond issuance.
There are conflicting reports of getting pricing c.9% on the new $1.8bn deal and the deal failing altogether. Obviously, if Tullow can price the bonds c.9% it will cost c. $220m in annual interest, slightly above historic levels but removes any upcoming maturities and uncertainties. So we can all easily make the bull case for Tullow in that situation.
However, a failure in raising the bond would see the equity fall back into the 30s. Is anyone on here in contact with EM and HY buyers of this bond. Significant size is making me a little doubtful of the success of the bond.