Friday 23 March 2018

Tullow Oil may breach banking loan covenants

Heavey's oil firm starting talks over €3bn debts

TULLOW BOSS: Aidan Heavey
TULLOW BOSS: Aidan Heavey
Sarah McCabe

Sarah McCabe

Tullow Oil is facing a breach of the terms of its biggest loan facility after racking up debts of more than €3bn while oil prices plummeted.

Tullow Oil has admitted there is a chance it will breach a key covenant on its main loan facility next year. The company will enter talks with its lenders on the facility next month.

"There is a possibility, if oil prices stay at this level, that we could breach it next year" chief executive Aidan Heavey told the Sunday Independent.

Tullow has poured borrowed money into a huge oil asset in Ghana, known as the TEN field, in an effort to get it into production. It is the single biggest owner of African oil acreage.

But the price of oil has halved in the past year, falling from $107 a barrel to $50 a barrel since June - slashing the value of Tullow's output and prompting spending cuts across the oil industry.

This could push its debt to more than 3.5 times its earnings - which is a limit set by its lenders, a so-called covenant. Breaching these loan conditions could potentially see Tullow's bankers able to call in their debt. However Tullow has downplayed this possibility.

"This would be remedied shortly after, when TEN [its major Ghana oil asset] comes on stream," Heavey said of the potential breach of its covenants. "And we are not going to anyway."

Last week, Tullow Chief operating officer Paul McDade indicated that the banks would waive any breach "for a period" rather than demanding immediate repayment of the debt. "We have a strong relationship with our banks," he said. "There are ongoing conversations."

Tullow's bankers include ABN Amro, Bank of America Merrill Lynch, Commonwealth Bank of Australia, Credit Agricole Corporate & Investment Bank, Danske Bank, Deutsche Bank, HSBC Bank, ING, Societe Generale, SMBC and The Royal Bank of Scotland

The company's share price is down around 55pc in the last year and fell further this week as concern about its debt grew.

"The higher perceived risk is reflected in the share price performance over the past year" said Goodbody stockbrokers analyst Gerry Hennigan.

"In theory the banks could call in their loans.

"In reality, they will probably provide a degree of flexibility and agree a higher covenant threshold in exchange for higher interest rates, costing Tullow more at a time when it is trying to reign in spending," said Hennigan.

"It is possible that these lenders will adjust the amount they are prepared to make available to Tullow," said Davy stockbrokers analyst Caren Crowley.

"If the amount is reduced drastically, so to will the company's investment plans."

Tullow this week revealed plans for sweeping cost cuts alongside its 2014 results, which reported its first loss in 15 years - of some $2bn.

It has suspended its dividend and intends to save $500m from a variety of measures, including job cuts.


Tullow employs 160 people at its headquarters in Leopardstown in Dublin. Whether the cuts will affect this office is not yet clear.

Mr Heavey described the office as "key" and said the company would not let talent go easily. Tullow will benefit from early cost cutting, Heavey said. "We are about six months ahead." But the company's debt will continue to increase into 2016, Goodbody's Hennigan said.

"Even if oil prices rise, Tullow's debt profile will still rise. They committed to a major development before prices and as a result are locked in to those contracts.

"The timing was unfortunate. The asset in Ghana won't start producing until 2016. If there is any slippage in that timeline their debt will increase even further.

Sunday Indo Business

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