Tullow Oil plc (LON:TLW) has struck a deal to sell more than two thirds of its interest in the Lake Albert project in Uganda to Total for US$900mln.
It will now retain 10% of the project which is planned to yield some 230,000 barrels of oil per day once developed.
The US$900mln deal delivers some US$200mln of cash, with US$100mln upfront, so it doesn’t make an immediate difference to the oiler’s debt pile.
Tullow owes nearly US$5bn - much of the money spent on oil field development - and this has been seen as the big risk from an investor’s point of view.
Whilst the upfront cash payment doesn’t address too much of the debt, City analysts say the other element of the deal helps de-risk the group.
TEN, offshore Ghana, is ramping up to 80,000 barrels per day following its start-up in 2016. The project - along with the neighbouring Jubilee field and its other operations - allows Tullow to generate more than half a billion of cash flow which in theory covers debt payments and will see the company deleverage organically.
The concern for investors has been that Tullow has other plans and other commitments which would also require capital spending.
Yesterday’s deal addresses that. Total has agreed to pay some US$700mln of Tullow’s remaining development costs in Uganda and that means it won’t have to spend any of its own money on the now 10% owned asset.
Analysts like the farm-out deal
Caren Crowley, analyst at Dublin based broker Davy, in a note, said: “We like the deal.
“It ensures that Tullow is less likely to get back on the capex treadmill before it has time to repair its balance sheet.”
Deutsche Bank analyst David Mirzai said: “Tullow’s net debt peaked at close to US$5bn in fourth quarter 2016 and the company expects to deleverage naturally as the capex from its TEN project rolls off and production volumes ramp-up.
“There was some concern that another greenfield development project would come along and absorb a large part of the c.$5-600m of annual free cash flow we forecast over the next few years.”
Elsewhere, Jefferies analyst Mark Wilson was less convinced, saying: “The structure of the deal (less cash, more carry) does not address immediate balance sheet de-leverage beyond $100m cash and surely places more importance on Ghana production reality.”
Wilson does not, however, that the Total deal does significantly de-risk the Uganda project sanction as it removes any uncertainty that Tullow could fund its share of development.
The City and private investors will now wait for a further update and analyst from Tullow on Wednesday.
Tullow boss says it is time to pay down debt
"First oil at the TEN field, offshore Ghana, on 18 August 2016 was a key milestone for Tullow. Our major capital commitments came to an end and our low cost West Africa oil production is increasing substantially,” said Aidan Heavey, Tullow chief executive.
“As a result, we will start to generate free cash flow in this quarter and will begin the process of deleveraging our balance sheet.”
Heavey added: “As we exit 2016, we are well placed to begin the process of both refinancing and paying down our debt in 2017 while also focusing on growth through our exploration programmes in Africa and South America and the commercialisation of our assets in East Africa."