Moody’s Investors Service (“Moody’s”) has today affirmed the B3 corporate family rating (CFR) and B3-PD probability of default rating (PDR) of Tullow Oil plc (Tullow Oil or the company).
Concurrently, Moody’s has affirmed the B2 rating of the $1,800 million guaranteed senior secured first lien notes due in 2026 and the Caa2 rating on the $800 million guaranteed senior unsecured notes due 2025.
The rating outlook is stable.Today’s rating action follows Moody’s downgrade of Ghana’s long-term issuer and senior unsecured debt ratings to Caa1 from B3. Moody’s has lowered Ghana’s local currency (LC) and foreign currency (FC) country ceiling to respectively B1 and B2 from Ba3 and B1.
RATINGS RATIONALE
The affirmation of Tullow Oil’s ratings reflects Moody’s view that the company can be rated one notch above the sovereign rating despite generating 70% of its daily production from oil fields in Ghana.
Tullow Oil benefits from a degree of insulation from economic and financial disruptions potentially arising in case of sovereign distress, owing to: (i) its offshore production and direct sales of crude oil outside of the African continent, (ii) the limited exposure to foreign exchange risk supported by US dollar revenues, (iii) an established and diversified financing framework, independent of the Ghanaian domestic banking system and (iv) protection from adverse changes in tax regimes through stabilisation clauses included in the petroleum agreements.
At the same time, the company’s operations are concentrated in two lowly rated countries of Ghana (Caa1 stable) and Gabon (Caa1 stable) with Ghana accounting for 70% of Tullow Oil’s average daily hydrocarbon production and 83% of proven and probable commercial reserves.
The company does not generate any meaningful cash flows outside of these two countries therefore constraining any future rating upside to one notch above the rating of Ghana.
The rating affirmation also reflects the expectation that Tullow Oil’s credit metrics will continue to meet Moody’s requirements for the B3 rating, supported by stable hydrocarbon volumes, maintenance of a competitive cost profile and continued adherence to a prudent financial policy framework.
However, the rating action also considers the company’s small scale, a financial profile characterised by high leverage and the very high negative exposure to carbon transition risk.
LIQUIDITY
Tullow Oil’s liquidity position is good. Moody’s assessment considers the company’s (i) projected positive Free Cash Flow (FCF) generation under a $65-60/bbl Brent price scenario in 2022-2023, (ii) around $200 million of average cash balances, and (iii) access to a committed $500 million cash tranche of the Revolving Credit Facility (RCF), which is currently undrawn and expected to remain unutilised. Internally generated cash flows and available cash should cover all of Tullow Oil’s funding needs over the next 12-18 months, including the annual $100 million amortization of the senior secured notes due in May each year, starting in 2022.
STRUCTURAL CONSIDERATIONS
The $1,800 million guaranteed senior secured notes due 2026 are rated B2, one notch above the B3 CFR, as they benefit from guarantees by, and share pledges over, all material subsidiaries of Tullow Oil and are therefore essentially secured by all the reserves of the group.
While the notes rank pari passu with a $500 million cash tranche of the Revolving Credit Facility (RCF) due December 2024, in an enforcement scenario the RCF ranks ahead of the guaranteed senior secured notes. The Caa2 rating on the $800 million guaranteed senior unsecured notes is two notches below the B3 CFR, reflecting the high amount of secured debt ranking ahead of the guaranteed senior unsecured notes.
RATINGS OUTLOOK
The stable outlook reflects Moody’s expectation that Tullow Oil will continue to conservatively manage its balance sheet, while securing commodity hedges on a substantial part of its production and keeping its leverage comfortably within the boundaries of the B3 rating guidance. Moody’s also expect the company to maintain a good liquidity profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of Tullow Oil’s ratings is unlikely, given the significant exposure to Ghana (Caa1 stable) that constrains the company’s CFR.
Subject to an upgrade of the Ghanaian sovereign rating, positive rating pressure could result from rising operating profitability and improving FCF generation accompanied by a strong liquidity profile. For an upgrade Moody’s requires substantial deleveraging, such that E&P debt to average daily production falls below $30,000 and retained cash flow to gross debt improves to at least 15%.
Conversely, Tullow Oil’s ratings could come under negative pressure if the company’s E&P debt to total average daily production remains sustainably above $60,000 or if retained cash flow to debt falls below 10%. Weakening liquidity including a failure to address the 2025 maturities at least 12 months in advance could also lead to a downgrade. Tullow Oil’s ratings would be downgraded also following a downgrade of Ghana’s sovereign rating.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Independent Exploration and Production published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1284973. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
PROFILE
Headquartered in London (UK), Tullow Oil plc is an independent exploration and production oil and gas company, with assets located in West Africa (Ghana, Gabon, Côte d’Ivoire) as well as contingent resources in Kenya and Guyana.
The company holds over 30 licenses across 8 countries and produced around 60 barrels of oil equivalent per day in 2021.
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.
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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.
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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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
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