Member Info for Tonyb33

Hi Guys

@TornadoTony here

I am a banker of many years standing and I have been reading the Tullows accounts with great relish.

A further thing I have spotted. Tullow has two cost centres Ghana and London. Ghana sells oil London contains the Treasury Book. This causes the following problem. At $65 oil Tullow was simply a debt recovery program for the debt holder. Hence the key strategic risk was the price of oil falling.

As such the downside risk as insurance resulting in Oil profits but treasury book losses. However as the losses and gains are in two different locations the hedging loss was not a tax deductible against the oil profits. Hence the horrendous tax rate because the profit was reduced by the hedging costs but tax was charged on the non hedge cost.

However what Tullow has is a great big set of tax losses on its treasury book. Now here is the good bit for those of you still reading.

As the Brent spot goes up it drags the price of futures with it Dec 26 is currently 86.46 Dec 27 is 77.4 Dec 28 77.46 Dec 29 72.71

I calculate that every day the gulf is closed Spot Brent goes up by $3 so all of those prices rise too (but not by the same amount slightly less)

The treasury then has to do the following to radically change the value of the company

1, When spot hits $200 lock in the next 3 years output with financial futures for 100% of production

2. Get the auditors in revalue the oil field based on these new values not the current ones which are all below $65. The new value will also reflect the 14 years added to the lease which is not in the prior year valuation

3. The depreciation charge which is based on the comparison of audited value year on year goes negative because instead of falling in value with depletion the field is massively more valuable.

Now here is the really important bit

The company will have a guaranteed cashflow from the hedging at $20-30 above base case for three years thats an additional $436m pa

This is more important still

The company takes these locked in numbers so not only does the depreciation go the interest charge at 17% drops

Now the most amazing bit

At some stage the war will end thats why the people who bought at 8p are cashing in at 13p.

So if you are locked in with futures what happens the oil co loses money but the treasury book makes money. But as it has massive tax losses all the money it makes is tax free!!

Hi guys

@TornadoTony back again.

You are simply asking the wrong questions

Have a look at the history of Aristotle Onassis his last deal was to cut the USA out of Arab oil. He did a deal with the bankrupt German shipyards to build oil tankers and made agreements with the Arabs to ship their own oil. In return the USA attempted to ferment strikes in German ship yards and strong armed the powers that be to boycott his tankers that were heavily mortgaged.

As he owned a substantial proportion of the worlds tankers all of the rest of the world fleet were chartered. At one stage he was the worlds poorest man. Then guess what happened Nasser closed the Suez canal. This meant all takers had to reroute and every western country became short of oil for two days a week. Now the strategic position had changed do you think Onassis looked at the posted charter rates for tankers?? just as you are looking at the price of Brent??

No his solution was simple you want to charter the tanker the fee is the mortgage on the tanker take it or your lights go off.

The solution to the Tullow debt problem is the same. Australia has 20 days fuel. It has closed all but two of its refineries.

When or if the war ends, the strait will need to be checked for mines (the latest estimate by J P Morgan is 60% chance by May2026) after ceasefire Lloyds insurance demands a minimum period of 10 days before a tanker moves its 28 days to Australia. Europe will not accept Russian Oil Middle East os locked so its USA or Africa. Tullow no longer has oil it has a world class strategic asset. The simple solution that Mr Onassis used Tullow will sell onetime deal all of our output to December 2026 you clear our debt. Make up you mind as Iran is currently destroying the Saudi Oil fields

Its very simple

Every day this war goes on the price of oil should rise by $3 a barrel. At $200 a barrel someone will notice that the company has a valuation of one months oil production. This will be in a world without oil

Chances are it will be someone from the Far East because they will have run out of oil. At that stage said oriental will buy Tullow simply to be able to actually fill his oil tanker. if you look at the prices in Dubai or India they are prices for delivery of actual oil not paper trading prices. They are 440 a barrel above brent. Further strategically the longer this goes on more and more companies will be looking for non Middle east oil reserves. The current prices are based on estimates like the recent Goldman one which believes the war will end on Friday. Meanwhile JP Morgans new estimate there is only a 60% chance it will be over by May. If May Oil will be at $200 + and Tullow will be making massive inroads into its debt pile. Its valuation will be transformed.

Further even if it ends in May by that time all Middle East oil production will be closed down it will take months to restart it and the oil future prices will be in three figures out to 2028. It will be simply a matter to lock in production to 2028 and refinance what is left of the debt at dramatically lower capital balances and interest rates

The UAE have an economy based on oil tourism and a major airport hub. Last weekend US missiles from UAE hit Kharg Island Irans oil port.

The UAE are fortunate their oil hub Fujairah is not in the strait of Hormuz its beyond the strait in the strait of Oman.

I think Iran was a little miffed hence missiles into Dubai airport and Fujairah. No one is booking a holiday to Dubai the freight is being rerouted and the oil flow has stopped

Hi xxnjr I will wait until I can see the 2025 accounts. Its a bit more exciting than that. Its two separate transactions. its an operating lease replaced by a sale and lease agreement.

Old agreement operating lease under IAS17 the treatment was straight line expense ie $130m pa

Under IFRS16 the treatment would be to PV the 15 x $130 at whatever the bank would charges them on an equivalent agreement so the NPV of 15 payments of $130 is $692.14m. That would be you asset and liability. You then depreciate 692.14/over 15 your annual depreciation. Your liability is treated as a loan at 17%. so you charge 17% on the capital sum and lower it by the loan payments like a loan. But just like a loan the early periods are all interest the later all capital. So the effect is you pay $130m rent but in year 1 you would charge 692.14/15 plus 692.14 x 17% ie 46.14 plus 117.66 equals $163m so the $33m is an extra charge in year 1. By year 12 these advance charges build up so early termination results in the excess advanced charges being released as a profit.

You then book the sale and lease back as a normal HP agreement as a seperate transaction

I am thinking of becoming a stock analyst it seems an easy job. You just copy and paste stuff from the company website and presumably have the rest of the day off. Recently Canaccord Genuity posted a valuation on Tullow noting the value of their oil field portfolio.

Canaccord noted that an updated CPR valued Jubilee 2P reserves at $1.37bn, with negative value assigned to its TEN and Cote D'Ivoire assets.

This is what they missed

1. The valuations are based on a PV of the drilled wells to end of the oil lease based on an estimated oil price for the next 5 years

2. The valuation for TEN excluded its gas because a gas agreement was not in place. Note this report was sent on on 4th March 2028 on this date Qatar supplier of 20% of world's nat gas shut in production. I would imagine TEN will get a gas agreement very shortly, they might have mentioned it

3. The valuation was based on an old oilfield lease lease the new lease is 14 years longer if you change the lease length the lease valuation now includes oil for an additional 14 years which dramatically changes the valuation

4. The valuation Report has the projected oil prices that range from $61.29 in 2026 to $66.24 by 2030. I suppose Canaccord does not have the internet and missed out on news of the new gulf war and the new price of oil.

if you put the new numbers in the calculation and value of the fields changes dramatically. Further the profit and loss changes too because the difference of field valuation year on year is treated as a depreciation expense in the accounts, the fact that the field value will dramatically rise will mean the depreciation charge will dramatically fall.

Anyway these guys valued the company at 13p a share well done lads

One other interesting issue in the accounts is the leased oil servicing platform. It is currently accounted for under IFRS16. Fortunately I live and breath IFRS16. IFRS16 is an accounting standard that presents an asset that is leased as as asset that you purchased on credit. To create this fantasy you take the lease payments discount them based on your current cost of capital to a PV and create an asset (Right of Use Asset)and a matching liability (Lease liability). Because Tullow was in problems the interest rate used would be extortionate. The treatment of the asset is straight line expense. The treatment of the liability is to charge interest on it at the notional rent and reduce it by lease payments.

Now to those of you who are still awake what is the significance. Well it front loads the expense in earlier accounting years and a reduced charge in later years. So if you early terminate the lease you get a profit recovery in the financial year in the difference in value between the lease asset and lease liability this will be tens if not hundreds of millions of dollars watch to see the values in the 2025 accounts. Yes Tullow has announced that they are buying the equipment in 2027

Re the debt repayment. The guidance at $65 a barrel was $180m of income before debt payments. The recent guidance said at $100 oil for Mar-Dec 26 you could double it. The original $180 was presumably $100m profit plus $40m debt recovery from Ghana Government and $40m on sale of assets (now received). The current Brent futures positions out to Dec 26 means you could almost lock in $95 at todays prices, if spot Brent rises to $120 then you could lock in $100 to end of year and $85 to end of 2027.

The Sen and Junior notes are booked at eye watering rates but they do have a golden lining the ability to redeem at book value plus accrued interest. At these prices Tullow will actually make a profit this year debt interest including all the penalty charges and PIK notes comes to about $200m. The plan was 2026 Cash $180m income $100m interest $200m loss $100m. Now with extra income you might get a profit. You could also guarantee next year would be profitable by locking current prices which are currently $20 a barrel over 2027 budget.

The other key element is the depreciation charge this is worked from a PV based on proven reserves assumed Brent prices from 2026 of $61.29 to 2030 $66.24. The timeline of the reserves was also based on the old lease terms (which have now been extended ten years). You put in current Brent crude futures prices the extended lease period plus the reserves from the 4 wells drilled this year and the asset value is massively higher (and depreciation charge lower)

These notes can be redeemed at par with a better financial position its possible that the company could pay off 20% and refinance the rest at lower rates

The 2024 Accounts had a policy of hedging nearest 6 months to 60% and further 6 months to 55%. However I would have imagined that the treasury team would have sold these hedges once the first missile landed on Iran. The hedging is based on Brent but Ghana oil is getting a better price than Brent. A further thing appears that the question is not what the price is but whether you have actually got any oil. I am told that prices for current actual delivery are at significant prices over market indexes.

To put it into context if this goes on another 2 weeks the tankers that lifted from the middle East two weeks get to China thats it and there is a one month air gap if the war ends in two weeks. A very large tanker contains 1 m barrels of oil at $200 a barrel the whole current value of Tullow will be worth one tanker of oil. A tanker that they currently fill monthly. You could buy the company fill a single tanker get it to the Far East and recover your money in that single transaction