Sharks in the Water — Part Four
Following our recent three-part series highlighting supermajors, and before we turn your attention to independent “sharks” — companies with solid balance sheets, long-term growth strategies and cash to spend on acquisitions from stressed rivals we want to offer our best guess as to where the remains of struggling Tullow Oil wind up in the feeding frenzy.
If you’re looking to dive deeper into our Sharks in the Water series and see what we have to say about the independent sharks check out Independent’s Day our white paper that looks at what keeps sharks like Woodside, Aker BP, Canadian Natural Resources, and others—swimming.
When your CEO and exploration director both resign “by mutual agreement,” your latest high-profile exploration wells offer heavy sour oil instead of the light sweet crude your neighbors found, high debt and low commodity prices force the suspension of your dividend, you lay off 35% of your staff and your stock drops 20-fold in a 100-day span, all is not well.
Unfortunately, we believe Tullow may not be cut out for this world, at least not as we had grown to know it: a preeminent global exploration firm with special expertise in the Atlantic Conjugate Margin and a resume that included the world-class Jubilee field development in Ghana. Following disappointing results in Guyana where the company is “thinking carefully about how to proceed.” Tullow’s admirable exploration portfolio seems to be unraveling: write-down of all value in a Jamaican exploration license it is likely to relinquish in July, its Ugandan assets selling to French supermajor Total, a Mauritania exit, dilution or sales of Namibia, Suriname and Kenya assets in the works and declarations of force majeure in Kenya and Côte d’Ivoire.
This is not a game. Real people with kids and spouses, mortgages, and hopes and dreams, will be impacted. We would be sad to see the famed explorer go. It seems only a matter of time before the dreaded announcement that the company has engaged an international investment bank “to assist in evaluating strategic alternatives.” We ask ourselves some questions: Who will buy Tullow? Will it be taken out in one great shark swallow, perhaps by a supermajor or dark horse? Will it be torn to pieces and its portfolio disassembled piecemeal?
We see ExxonMobil or Total as the most likely and able to execute a corporate takeover of Tullow. Either would have a full appreciation for and understanding of the explorer’s specialized expertise in the Atlantic conjugate margin, and both would be keen to take on great assets as well as great people. Between the two, ExxonMobil and Total have interests in 1,847 contracted blocks, but only eight in which Tullow also has interest. Of those eight, seven in Uganda are already destined for Total’s portfolio in a $575 million deal set to close in the second half of 2020. Beyond Uganda there seems to be little block overlap (and thus synergy) between the potential acquirers and Tullow, but at a country-level things look brighter, with ExxonMobil already in seven and Total in nine of Tullow’s 14 countries (see Figure 2). Total, however, has been the more aggressive buyer in Africa where the bulk of Tullow’s portfolio resides, completing nine deals in the past three years to ExxonMobil’s four. If there will be a corporate transaction, our money’s on Total as even the biggest sharks are looking to focus, not dilute, their efforts now.
Separate asset transactions seem more likely, though. With 91 blocks, 51 are operated in Latin America, the Caribbean and Africa — plus a decommissioning effort at the U.K. Thames gas field and satellites — Tullow is a bit like a buffet line with something for everyone. Its stated goal of raising a billion dollars to reduce net debt, strengthen the balance sheet and secure a more conservative capital structure will be more than halfway met by the sale of its Uganda assets to Total, leaving a route for Tullow to survive by strategically shedding assets. Here’s how we think that would play out.
In Suriname and Guyana, we don’t see a clear buyer. Eni is our favorite, as the Italian supermajor must want to plant a flag in an easier Latin American asset than its Venezuelan Perla oil field. But if the oil price drop has blunted Eni’s appetite, an entry here may not rank high compared to its active exploration and production ventures in Mexico and Trinidad & Tobago and Argentina’s Malvinas Basin. Total, a partner in one operated and one non-operated Tullow block in Guyana, will likely be gun-shy following the disappointing Jethro and Joe exploration results and had already re-focused its efforts on Suriname just ahead of Apache’s Maka-1 discovery. Tullow’s Suriname blocks don’t seem to be prime acreage yet, leaving Equinor or Cairn Energy as long-shot candidates to take on additional interest there.
Tullow operates three offshore Argentina blocks, two in partnership with Pluspetrol and Wintershall (see Figure 2 – map). Total, ExxonMobil, Eni and Equinor all have assets in the area. Though we’ve already tagged Total as a “great white” in the acquisition waters, our money is on ExxonMobil and Qatar Petroleum, its partner in three adjacent exploration blocks. Qatar Petroleum would be keen to keep close to the supermajor, in the ongoing hope that relationship leads to further investment in its home country. Beyond that, we see Wintershall potentially picking up interest in the two Tullow blocks where it is already a 27% partner, especially this early in the exploration cycle. The German explorer demonstrated its appetite for Latin American exploration opportunities by picking up four blocks in Brazil’s Potiguar and Ceará basins in 2018, marking its debut in the country.
In Peru, Tullow is unlikely to have suitors following operator Karoon’s disappointing dry hole Marina 1 on Block Z-38, which will probably lead to the block being relinquished within a year. Tullow’s other three blocks in the country are caught up in various stages of political football and probably worthless. Offshore Jamaica, we see Eni as a potential buyer for Tullow’s large Walton Morant license and its undrilled Colibri prospect, though a rank exploration asset such as this will get a low valuation.
Moving to Africa, we assume Tullow will strive to keep its highest-yielding projects, mostly producing fields in Gabon and Côte d’Ivoire. In Côte d’Ivoire, Tullow confirmed it is looking to farm out more equity in its seven onshore blocks where it holds 60% (Figure 3). It’s not inconceivable that 30% partner Cairn, with operating experience in Senegal, might take on more equity or even operatorship from Tullow. Since majors are likely to balk at buying onshore assets with an incomplete 2D seismic survey (contracted to Sinopec Geophysical but suspended due to COVID-19), other interested parties will probably have to be deep-pocketed independents or Chinese explorers, potentially making for a small field and a tough sale.
Tullow always prized its Ghanaian assets, even as it struggled recently to meet production targets. We can’t see the firm pulling out of Ghana completely, but making equity available in any of these countries would help meet the billion-dollar sales target. If so, we would not see Total as a bidder. Despite its apparent interest in Occidental’s assets in Ghana as part of a larger deal that fell apart earlier this year, Total CEO Patrick Pouyanné recently asserted that the explorer was never really that interested in getting involved in the Ghana licenses.
With Total looking to farm out some of its 25% equity in its Kenya licenses with Tullow, it won’t want any more interest. Again, Chinese companies are the best bet for Tullow here, with various ones, including CNOOC, rumored to have been sniffing around the Total opportunity.
In the Comoros, it is anyone’s guess what will happen on Tullow’s three frontier exploration blocks. With its appetite for risk at an all-time low, the firm will choose its strategy here based on the results of 3D seismic acquired in late 2019. The other operators and non-operated participants in the Comoros are all junior companies, none are capable of operating and funding a deepwater well should Tullow decide to withdraw. It will take a new entrant to keep things going here.
Lastly, Tullow’s assets in Namibia will surely be on the block and should garner some interest thanks to the country’s IOC-friendly government and good fiscal terms. The Cormorant 1 well, drilled on Tullow’s Block PEL 37 in 2018, came up dry, prompting India’s ONGC to withdraw from the block, which remains highly exploratory. If Total finds oil in its very large deepwater Venus prospect later this year, there will be plenty of suitors willing to take up Tullow’s interest, likely including ExxonMobil and Portugal’s Galp.
Let us know if you’d like to get on a call and chat about any of this. With our extensive international database and team of 27 international scouts, we’re always game to engage on these and other topics!
Stay tuned for the next several installations of Sharks in the Water, in which we’ll give you our take on some independent E&Ps with potentially large dorsal fins: Aker BP, CNR, Hess, Hunt, Murphy, Suncor, and Woodside.