Gordon Stein, CFO of CleanTech Lithium, explains why CTL acquired the 23 Laguna Verde licenses. Watch the video here.
Checking in after a while. I think a key next leg up in SP is refinancing. Interesting to ask how management might think about it? Don’t know but there are parameters.
The need to refinance may seem far off, except it’s not. Tullow must refinance 12-months + before each maturity to avoid ballooning current liabilities. First up, the $600m bank facility in December 2024 which should be extended by December 2023. It’s undrawn so management could just cancel it but won’t. They need backstop liquidity, and cancelling sends a terrible signal their banks are running for the hills. But banks will not refinance without a clear plan around the following $1.9bn net debt wall. So, what can Tullow offer?
The $633m unsecured notes are due March 2025. So, a plan needed by March 2024. Refinancing today is not an option (2025s price/yield 64/40%+). But Tullow sits on c $333m cash, add-in $200m FCF(f) in H2, cash could reach c. $533M by December. That’s enough to buy back the entire issue at year end with another tender at up to 80c. I am sure TLW are thinking hard about it, but don’t think they will do it. S&P will downgrade Tullow’s debt to selective default with another discounted tender, & banks will not be happy, plus bondholders will not run to refi the $1.6bn bond due May 2026.
Tullow could call the 2025 notes at par. They could take a chunk of cash, say $400m, and call most of the 2025s at par in December. That would leave $233m outstanding and I think their banks would be ok this will get repaid as $350M FCF will be generated @ $80/b in 2024 and 2025.
Or they could go big: refinance the remaining 2025s along with an early call of the $1.6bn 2026 notes. The call premium on the 2026 notes is 105.125% par today, but it falls to 102.5625% in May 2024. Tullow got a $1.8 bn bond away back in the bad days of 2021, so another $1.8bn with a far stronger balance sheet is not a stretch, but it will be expensive.
Recognize a lot must line up: $80+ oil, no adverse tax decision, all will be clearer by year end.
@Slift: Thank you. I need to understand why you think the production decline from ‘TEN is inevitable’. I understand TEN geology is complex (I am no oiler, so drillers out there, please comment/challenge). But Rahul I thought articulated a credible offset plan, and the recent pre-emptive shows he backs his view with $$. I saw your Nov 17 ‘Debt’ post: can you share your annual bbl production decline forecast out to ’25, for Enyenra and Ntomme showing the decline. I am keen to understand - it is key to the investment case.
@L3Trader: On the Jubilee FPSO, maintenance was penned in for September 2021 but pushed to April 2022 (never good to defer maintenance). Nothing announced as far as I have seen on TEN maintenance.
On the story, agree the delta is likely upside TEN production .
@L3Trader; : Good point on the 3-way collar, I'd missed that so thanks, but there are none referenced in this week's trading update. New CFO should (and certainly must use any oil price weakness to) buy calls to offset the calls sold.
My point around the bank facility remains. Here's another perspective: Ghana gets it and bet they are working v hard on a plan to help TLW offset Scope 3 emissions way ahead of schedule (if not, they should). I'll wager there will be a major re-forestation announcement of a Ghana/TLW JV in the next 12 months) to take S3 to zero by 2030. If TLW has not thought of this, they should: Rahul & Co. have a unique opportunity to burn a trail (sorry ESG crowd for the 'burn' bit) for independent oil cos given its strategic position in Ghana.
But I'd guess bankers sitting in NY/LDN will anyway wilt under ESG pressure. So the sooner independents like TLW wean off bank debt, the better ... too much conditionality ... always to the detriment of shareholders.
Agree with you/daragh2020 on growing production. Its a key underpin to the investment case.
Tell me what makes you worried about the FPSO? Need to understand more. Not an engineer. The FPSO tanked the SP before, thought it had been fixed is there a material risk?
... volume increases AND uncapped exposure to oil prices make more $$. If an investor has a choice of investing in 1 of 2 oil companies: both going concerns, growing production and good management, but one has a hedge book which caps exposure to the upside price, they invest in the one with no cap. This is TLW's big challenge to get more investors into an great story, and it will become more pronounced as the oil price increases.
Those looking for a catalyst to re-rate the SP need to look at the roadblock that is the $600mm bank facility due Dec 2024. It sits atop the capital stack but is undrawn and never expected to be drawn, other than the $100mm Letter of Credit tranche. Yet this facility forced TLW to hedge 41mmbbls out to June 2024 and spend c. $96.5mm of shareholder money doing it, with who … the same banks. That’s before you get cost the lost upside: the average cap on the 2022 to 2024 hedges is c. $75.5/bbl, below current spot… guess who carries the can here, well, not the banks. Shareholders.
I get it that TLW had no choice – it needed to refinance and was a taker of terms. I also get it the hedge book helped TLW when oil cratered last year. But TLW is in a stronger place today and getting stronger.
The new CFO needs to relook at this facility and entire hedge strategy. The ESG winds are blowing, banks anyway want less O&G exposure. If TLW can’t renegotiate/refinance the facility minus the hedge conditions, TLW should get ahead of the curve and self-fund: for each $100mm of free cash flow accrued, cut the bank facility by the same amount, and unwind a pro rata amount of the hedge book, or at least the caps. There will be a cost to unwind the caps today , but the unwind cost will be peanuts compared to the cost/lost upside if oil moves higher.
It also gives shareholders what they want … full exposure to the oil price.
I do not believe TLW is required to hedge the new entitlement. RNS was also silent. The hedge requirement comes from the Revolving Credit Facility: TLW must hedge 41 mmbbls produced through June 15, 2024 and have this in place by Dec 31, 2021. I think their hedge program was already (largely) done at this point. So my read is no requirement to hedge the new entitlement. Disappointing TLW did not confirm this as it is SP positive at current oil prices.
@LeeRex.
Still around. Not a lot to say: transition year for TLW : stabilize the balance sheet and production. Rahul is doing both.
To move higher, IMO the SP needs another catalyst. Higher oil may not be enough because TLW is dragging a big anchor behind the ship. Yesterday the CFO said TLW had sold calls which cap oil upside at $72/bbl through the end of 2022, I think on something close to 75% of production. There is some upside above $82/bbl, but on a small number of barrels. This is how they paid for the put protection at $55/bbl. Great for lenders and bondholders; for shareholders, not so much. Shareholders are bullish oil and want exposure to the oil price. The hedge book caps this upside in an higher oil market. So weirdly, a pullback in oil may be good for TLW, IF the new CFO buys back those calls cheaply, to give shareholders real exposure to the next leg up in oil.
One other way to rerate, is Kosmos which I think more likely. TLW is all about Ghana, and Rahul made the point yesterday that the investment project IRRs on TEN and Jubilee are >50%, so payback in 2 years. So why not exercise the Kosmos pre-emptive? Kosmos is buying 18% of Jubilee and 11% of TEN for $550mm. If I read it correctly TLW could pre-empt and buy 3.8% of Jubilee and 8.3% of TEN. TLW sits on $100m + in cash (excluding the undrawn revolver). Even if they issued some equity, it would be immediately accretive to shareholders. The 30-day pre-emption expires around 12 November so watch this space.
@Joek1: The 25s are senior unsecured and the bond terms allowed TLW to create secured debt ahead of the 25s. But this seniority only matters in an EoD. In all other cases TLW must redeem the 25s at par. If you take $60 bbl oil for the rest of 2021 and 2022, TLW's adjusted total debt to EBITDA falls to something like 4.0x and at $70/bbl it gets to 3.5x. At 3.5x by end 2022, I'd be confident the 25s will be rated at least B3/B- and trade at or above par. TLW has set a net debt to adjusted EBITDA target of <=2x by 2025, so they are serious about debt reduction. As long as they can reverse production decline and increase production in TEN and JUBILEE, there is value in the 25s IMO. DYOR.
@L3 Trader: last update I saw was in March (60 per cent of 2021 oil entitlement hedged at an average
floor price of $48/bbl). TLW would have update bond investors but I have not seen those numbers. I assume TLW will post the bond circular once final in the coming days.
Bond done, no equity dilution, capital structure simplified and refinancing risk off the table until Dec 2024. All positives. But the 10.25% is expensive for a B3 credit.
There are a few takeaways in this. First, the bond was not oversubscribed so management did not have the leverage to drive pricing lower. They needed all investors in to get to $1.8 billion, and had to price at the level of the marginal bid. Second, the key investor concern is reversing production declines at Jubilee and TEN, and it is just too early in the drilling programme to prove the turnaround, so again management lacked leverage here to drive better pricing.
I hear management came across well in investor meetings and messaged that delivering the turnaround plan will focus on existing high IRR projects (as opposed to old days TLW frontier exploration). Investors also liked the oil price downside protection in place under the hedging program.
Now that the financing is settled, seems to me that further upward progress on the SP price is all about the production numbers at Jubilee and TEN. The Maersk Venturer drilling program can't happen fast enough.
@Phoenixy: the bonds will not be bought by banks but by asset managers, insurance companies and hedge funds etc. Banks just arrange the process. The process will be quick - I would expect this will be priced and done at the latest by the end of next week. The announcement today clears the way for TLW to set up meetings with investors and I expect they will build a book of demand after just 3-4 business days of meetings. Once the book is built TLW will formally launch and price it same day and receive the $$ a few days later. Markets are strong right now: Ghana raised $3billion last month. It will get done.
On the RBL, I think banks still do them, ESG pressure aside, but I always thought the TLW RBL messy with the twice-yearly redeterminations and in TLWs case the very subjective 12-month forward looking liquidity test which led to the going concern qualification: management far better off getting rid of it and moving to a simple revolving credit facility.
The senior secured refinancing announced today is exactly in line with what I said management should do back in March. They have also killed off the RBL and with it the uncertainty over the bi-annual redeterminations and the forward liquidity coverage test. The new bonds will be senior secured and will be rated B3 by Moody’s, 2 notches above the current unsecured debt, so the coupon should likely be in the 7% area. Moody’s also placed the corporate Caa1 rating on review for an upgrade. No going concern qualifications related to refinancing anymore. I imagine S&P will follow a similar approach.
Once the bonds are issued in the next few days, TLW will have taken all refinancing risk off the table until 2025: so plenty of time to deliver the turnaround plan.
The only downside is for holders of the 2025s who are senior unsecured and so will be subordinated to the new bond and bank facility, but they still mature 1 year ahead of the new debt, and as the business delivers the 2025s should pull to par.
@Lemming99: there is a further $42m p.a. in interest cost savings that kick in shortly.
TLW has $985m cash ($805 at Dec + $180 mm EG sale), plus I estimate $270m undrawn RBL capacity. Assuming TLW retains $600m liquidity ($270m RBL and $330m cash), TLW has $655m available to pay down debt. TLW will repay the 6.625% $300m convert in July saving $19.875m p.a. , and calls $355m of the 6.25% $650m bond due April 2022, saving a further $22.18m p.a.