Tullow Oil Ratings Placed On CreditWatch Negative On Risk Of Distressed Exchange Offer
- U.K.-based oil and gas exploration and production company Tullow Oil PLC (Tullow) expects its oil production in 2021 to decline to about 63,000 barrels of oil per day, well below our previous expectations.
- With lower cash flows in 2021 and less focus on the previously announced $1 billion divestment program, Tullow's ability to meet the looming maturity of about $650 million of debt in April 2022 is becoming less clear. We see this as increasing the chance of a distressed exchange offer in the coming quarters.
- We are therefore placing our 'CCC+' long-term issuer credit rating on Tullow and our 'CCC+' issue ratings on its debt instruments on CreditWatch with negative implications.
- The CreditWatch negative placement reflects the possibility that we may lower the ratings to 'SD' (selective default) upon completion of a distressed exchange offer, if Tullow were to engage in one.
LONDON (S&P Global Ratings) Feb. 5, 2021—S&P Global Ratings today took the rating actions listed above.
Lower oil production than we expected for 2021 and less focus on the $1 billion divestment program increase the probability of a distressed exchange offer later this year. On Jan. 27, 2021, Tullow shared an update on its expectations for 2021, and we now anticipate that the company's results in 2021 will likely be weaker than our previous forecast. The company expects that oil production will decline to 60,000-66,000 barrels of oil per day (bopd) in 2021, compared with our previous expectation of 68,000-72,000 bopd and production of 74,900 bopd in 2020. We estimate that lower production may lead to Tullow's S&P Global Ratings-adjusted EBITDA declining to $640 million-$700 million in 2021. This is down by about $80 million compared with our previous projections, and will translate into negative free cash flow. Moreover, we do not expect production to rebound significantly in 2022, and forecast it at about 65,000 bopd.
We continue to assume that Tullow will successfully negotiate a redetermination of its reserve-based lending (RBL) facility. Tullow continues to work with its banks on redetermining its RBL facility. The completion of the redetermination has been pushed back by one month, to February 2021. The company's explanation for the delay is the additional time required to go through its new business plan and operating strategy. We continue to assume a successful negotiation with the RBL lenders with limited impact on Tullow's current liquidity position, even if the overall size of the facility was reduced.
We believe that additional divestments are essential to finance Tullow's upcoming debt maturities. The completion of the sale of assets in Uganda for $575 million in 2020 was a major milestone to secure Tullow's liquidity needs in 2021. However, we believe that additional divestments are essential to meet the sizable maturity of the $650 million notes due April 2022. In our view, given the reduced focus on its divestment program, the company will have to rely on the capital markets to refinance the maturing $650 million notes. The yield on these notes is about 21%, which reflects Tullow's limited ability to tap the capital markets. We understand that Tullow is discussing different options with its creditors. At this stage, we cannot completely rule out a distressed exchange offer in the next few months. Such an offer would lead us to lower our ratings on Tullow to 'SD'(selective default) upon completion.
The CreditWatch placement signals that we may lower our ratings on Tullow and its debt instruments to 'SD' in the coming months if the company launches and completes a distressed exchange offer. The negative CreditWatch also reflects the possibility of us lowering the ratings if, by mid-2021, we see a lack of progress with Tullow refinancing the $650 million notes due April 2022.
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Related Research
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