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Rating Action:

Moody's downgrades Tullow Oil's CFR to Caa1; outlook negative

02 Nov 2020

London, 02 November 2020 -- Moody's Investors Service, ("Moody's") today downgraded Tullow Oil plc's ("Tullow") Corporate Family Rating (CFR) to Caa1 from B3 and the Probability of Default Rating (PDR) to Caa1-PD from B3-PD. Moody's also confirmed the Caa2 ratings assigned to Tullow Oil's senior unsecured notes due in 2022 and in 2025. The outlook on all ratings was changed to negative from ratings under review.

This concludes the review for downgrade initiated by Moody's on 25 March 2020.

RATINGS RATIONALE

Today's rating action reflects Moody's expectation that a more prolonged downturn and slower recovery of the oil prices in the next 12-18 months, compared to previous expectations, will significantly affect Tullow Oil, given the high FCF break-even point of Tullow Oil at approximately $40/bbl. With no or limited sustained recovery in the pricing environment in the next 12-18 months, Moody's does not believe that Tullow Oil's capital structure will be sustainable in the medium term and it remains doubtful that the company will have the resources to repay the $650 million senior unsecured notes maturing in 2022, in the absence of additional disposals (which may weaken the profitability and/or the growth prospects of the company further) or capital injections from shareholders.

While Moody's positively recognizes the measures taken by Tullow Oil in order to sustain its cash flow generation and the successful execution of the disposal of the stake in the Lake Albert Project in Uganda to Total SE, those will not be sufficient to offset the very weak operating environment for oil producers, heightened by the moderately declining production (Moody's expects a production around 65-70kbopd for 2021 and 2022) and the limited hedging book in 2022 with only 3% or production hedged so far at $50/bbl specific to Tullow Oil. These would significantly affect the company cash flow generation going forward as Moody's expects a broadly neutral cash flow generation in 2020 and 2021, on the basis of an average price of $35/bbl in 2020 and $45/bbl in 2021, and an only marginally positive free cash flow in 2022.

Moody's expects the proceeds of the Ugandan assets disposal to be applied towards net debt reduction.

The rating action also takes into account a less diversified business profile, with an increasing concentration of the company's activities in Ghana, following the disposal of Tullow Oil's stake in Uganda (even though no near term production was expected there), the low-cost nature of its existing activities that, while a positive, leaves limited scope for further cost measures, and the relatively short life of its 2P reserves of around 9.5 years, underlining the need to bring new resources to production to offset the decline rates of mature fields.

LIQUIDITY

Following the completion of the bi-annual redetermination in October 2020, the borrowing base amount of Tullow Oil's Reserves Based Lending (RBL) credit facility was set at $1.8 billion for the period through January 2021. The company had around $450 million of liquidity headroom at the start of Q4 2020, including undrawn facilities of around $300 million and freely available cash of $150 million. Following the closing of Tullow Oil's stake in the Lake Albert Development Project, the $500 million proceeds will strengthen liquidity, but Moody's continues to consider Tullow Oil's liquidity as weak, given the significant risk of covenant breaches in 2021.

The RBL Facility contains a gearing covenant, tested at net debt of the Group, as defined in the RBL Facility agreement, to be lower than 3.5x consolidated EBITDAX. The company obtained a relaxation of the testing level to 4.5x in June 2020 and in December 2020 (agreed during the September 2020 redetermination), and Moody's expects the company to comfortably meet the amended test level as of 31 December 2020.

However, Moody's expects the gearing covenant to be breached in June and December 2021, but it also notes that the company has secured waivers from lenders in the past (as obtained for the tests in June 2020 and December 2020) and it may be able to secure additional covenant waivers in 2021.

In addition, in the RBL redetermination in January 2021, Tullow Oil will need to pass a liquidity forecast test showing, to the satisfaction of the majority of the lenders, that Tullow Oil will have sufficient funds available to meet the Group's financial commitments for a period of 18 months. In absence of corrective actions, as already outlined by the company in the H1 2020 results, Moody's does not believe that the company will be in the condition to pass the liquidity forecast test, as the $650 million bond comes due in April 2022. If the liquidity forecast test is not passed and it is not cured within 90 days, or otherwise waived, this breach would constitute an event of default under the RBL facility by April 2021.

RATINGS OUTLOOK

The negative outlook reflects Moody's concern that a prolonged downturn and a slower recovery for oil prices would lead to significantly lower operating profitability and cash flow generation, placing increasing pressure on Tullow's liquidity and leaving the group with an unsustainable capital structure.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

While unlikely at this juncture, Tullow's ratings could be upgraded should a sustained recovery in the economic environment boost operating profitability and FCF generation, allowing the group to strengthen its liquidity profile and permanently reduce Moody's-adjusted gross leverage below 5x. A rating upgrade will also require addressing of the 2022 bond maturity.

Conversely, the ratings could be downgraded should the liquidity position of the group deteriorate post RBL redetermination, the covenants under the RBL be breached and/or further weakening of the operating performance.

Ratings could also be downgraded if the proceeds of the Uganda disposal were distributed to shareholders or used for other corporate purposes, other than debt repayment, beyond the RBL redetermination expected to conclude in January 2021.

STRUCTURAL CONSIDERATIONS

The Caa2 rating on the $650 million due 2022 and $800 million due 2025 senior unsecured notes is one notch below the Caa1 CFR. The reduced differential between the senior unsecured notes and the corporate family rating reflects the lower commitments and availability under the RBL and thus the lower amount of secured liabilities ranking ahead of the senior notes within the capital structure. The notes are subordinated in right of payment to all existing and future senior obligations of the respective guarantors, including their obligations under the RBL facility.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

CORPORATE PROFILE

Headquartered in London (UK), Tullow Oil plc is an independent exploration and production oil and gas company, with its main operated and non-operated production assets located in West Africa (Ghana, Gabon, Equatorial Guinea, Côte d'Ivoire) as well as contingent resources in Kenya. The company holds 73 licences across 14 countries. In 2020, the company expects an average production (on a working interest basis) of approximately 75 thousand barrels of oil equivalent. As of June 2020, the group's 2P (proved plus probable) reserves amounted to 244.5 million barrels of oil equivalent. Tullow Oil is listed on the London, Irish and Ghana Stock Exchanges.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Danilo Ruocco
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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