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Uganda: Still not safe for investors to go back into the water with Tullow Oil

By David Whitehouse
Posted on Tuesday, 10 September 2019 15:10

A boy herds goats in front of a Tullow Oil drilling rig in Bulisa, in the Bunyora region of Uganda. Photo by Barry Malone.

The collapse of Tullow’s agreement worth $900m to sell a stake in the Lake Albert, Uganda project to Total and China’s CNOOC leaves the company needing to raise cash to keep its debt-reduction programme on track.

Debt at Tullow, which ballooned as a result of the oil price slump that began in 2014, currently stands at $2.9bn.

The company, which also has interests in Kenya, Ghana, Guyana, Comoros, Argentina, Namibia and Côte d’Ivoire, said in July it aims to drive debt below $2bn in the near term.

Tullow still has hopes of salvaging the Uganda farm-down agreement, which failed due to the tax treatment for Total and CNOOC.

  • Asked if it was possible if Uganda could change its tax approach to encourage Total and CNOOC to return to the deal, Tullow spokesman George Cazenove said: “We are confident that the government and the partners want to get this project going and discussions to that end are on-going.”

Uganda isn’t the only problem that Tullow is facing.

  • The company in July revised down its 2019 production outlook due to delays in the completion of the Tweneboa, Enyenra and Ntomme (TEN) well offshore Ghana.
  • In its Uganda Upstream Assessment report, Okwi & Partners says that the farm-down was “imperative to bring in much-needed investment in development, particularly in light of Tullow’s cash calls in its operations elsewhere in Africa and South America.”
  • Tullow lacks the financial capacity to meet cash calls for Lake Albert development with its 33.3% operated stake, according to Harriet Okwi.
  • It’s unclear whether the Ugandan authorities will make a tax concession to revive the deal, she says.
  • Tullow said that it still wants to reduce its stake in the Uganda project to about 10%.
  • Cazenove says Tullow could fund the Uganda project at 33% if it wanted to, but “it doesn’t fit within our portfolio of assets at that level.” “

Expensive dividends

Like Kenmare Resources, a much smaller company which mines in Mozambique, Tullow has calculated that paying a modest dividend is a cost-efficient way of keeping shareholders onside. Tullow said in July that it will resume dividend payments that were suspended as oil plummeted in 2015.

Debt repayments don’t generate such good PR as dividends, but they do more to strengthen companies with stretched balance sheets. Dividends from highly indebted companies with big operating risks are a bit like the offers from the bank to have a month off from your mortgage repayments. It feels good for a while, but comes at a high price.

  • Tullow’s last annual report from March says that the company is exposed to erosion of its balance sheet and revenues due to oil price volatility and may face unexpected operational costs.

Okwi expects Tullow Oil to commence a new sales process or raise funds by other means to advance the project.

  • The Tullow dispute in Uganda is disruptive as foreign direct investment had been expected in the near term, Okwi says.
  • International contractors and local SMEs alike made investments to position themselves to supply the Lake Albert Development.
  • Other oil majors such as Total, Okwi says, are likely to shift attention to other jurisdictions until the dispute is resolved.

Bottom Line: The high-risk context means that Tullow shareholders would be better served by debt reduction rather than dividends.


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