Kenya’s oil path remains slippery on Tullow woes

By John Otini
Wednesday, September 16th, 2020
Tanker trucks used to haul crude oil for export from the port of Mombasa last year. Photo/PD/File
In summary

British oil explorer Tullow Oil has reported Sh140 billion loss in the six months to June and warned it may default on its debt, raising concerns about its capacity to undertake Kenya projects.

Tullow swung sharply to a loss in the first half of 2020 after writing off more than Sh9 billion of exploration costs in Kenya and Uganda, having reported a profit of Sh2.68 billion at the same period last year.

The London-listed firm warned it risked defaulting on a Sh6.5 billion debt facility if it does not resolve a potential liquidity shortfall by January.

In its earning filings, the company warned that “if it was unable to show it had sufficient funds for the 18 months to July 2022 or resolve the forecast liquidity shortfall within 90 days of failing the January test, there will be an event of default by the end of April 2021”. 

However, the oil explorer said it has put off the sale of Kenya assets to conduct a comprehensive review of the project including a consideration for alternatives to exit.

“Separately, the farm down process has been suspended while the Joint Venture Partners complete a comprehensive review of the development concept to ensure it continues to be robust at low oil prices, and also consider the strategic alternatives for the asset,” it said.

Its debt also increased to Sh300 billion from Sh290 billion at the same period last year, while free cash flow was negative.

The company blamed lack of cash on redundancy costs, tax and necessary capex.

Potential shortfall

The oil firm said actions under consideration to address the potential shortfall included refinancing the senior notes due in April 2022 or convertible bonds due in July next year.

Other options under review include seeking to “secure new liquidity from banks or capital markets investors”. 

Tullow’s ability to secure funding will be difficult due to the current depressed crude oil prices.

Crude prices tumbled from $70 a barrel to $20 a barrel rendering oil business unsustainable even though Tullow had underlying “diseases” before Covid-19.

Tullow is yet to declare a final investment decision (FID) on the project, with the decision now likely to emerge around the end of the extended exploration period in December 2021.

The company wrote off a total of Sh9.4 billion of exploration costs, compared to just a Sh8.1 billion write-off a year before.

This Sh9.4 billion figure included a Sh4.3 billion write-off for Kenya Blocks 10BB and 13T due to a reduced long-term oil price assumption.

Chief executive Rahul Dhir, who joined the group on July 1 from rival Africa-focused oil and gas group Delonex Energy, has ordered a “comprehensive review” of the company’s “portfolio, growth prospects and capital structure”, which he expects to lay out at a capital markets day “towards the end” of this year.

“Since my arrival as CEO, we have been developing new plans for our business, with the support of our joint venture partners and expert advisors,” he said.

“These plans will deliver enhanced value from our assets to benefit all our stakeholders including our host countries and investors.

We will host a capital markets Day towards the end of 2020 at which we will update the market on these plans to deliver on Tullow’s true potential,” he said.

Tullow wrote off Sh4.12 billion in Uganda in relation to a sale and purchase agreement with Total Uganda. 

Under the agreement, Tullow agreed to transfer its interest in blocks Blocks 1, 1A, 2 and 3A in Uganda as well as the proposed East African crude oil pipeline system to Total.

Cost of sales

Revenues fell 16 per cent to Sh7.3 billion in the recent half from Sh8.72 billion a year before, while cost of sales rose 51 per cent to Sh5.67 billion from Sh3.75 billion. 

Tullow said production has been strong going into the second half and so narrowed its full-year guidance to 73,000 to 77,000 barrels of oil per day. 

Production averaged 77,700 barrels per day in the first half, in line with company expectations though down from 86,300 barrels per day a year before.

Shares in Tullow were down 10 per cent following the announcement after falling 70 per cent last December.

Dhir told the Financial Times last week there was no “silver bullet” to solving Tullow’s difficulties but he stressed the company was also making progress in slashing its cost base and insisted the board had “conviction there is potential in the business” once its capital structure was addressed.