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Total grabs a Ugandan bargain

Major shows that distressed-seller opportunities are out there for buyers with more robust balance sheets

Total will buy the 33pc share of Ugandan oil development assets held by embattled Anglo-Irish producer Tullow Oil, the latter announced on Thursday. And the price is a stark illustration of the potential bargains out there for buyers that can execute during the current challenging conditions.

The French firm, which already holds a one-third stake, will pay $575mn for Tullow’s stake, although there may be contingent payments after first oil, should the oil price at that time be above a certain level. The other partner in the Lake Albert project, China’s Cnooc, also has a pre-emption right to take up half of the stake Total has agreed to buy.

Bargain price

Tullow agreed in January 2017 to sell a 21.57pc stake in its Uganda assets to Total and Cnooc, retaining just over 10pc. But the deal eventually fell apart in the summer of 2018 due to the failure of all three parties to agree every aspect of the tax treatment with the Ugandan government.

“Tullow and Total now intend to sign a binding tax agreement with the government of Uganda and the Uganda Revenue Authority” Tullow

And the price Total and Cnooc were prepared to pay at that point? $900mn. Comparing headline figures, $575mn for the full 33.3pc stake represents Total paying just 40pc of what it was prepared to shell out in 2017.

Clearly, the macro environment has changed dramatically in recent months. But the new price also reflects the weakening of the seller’s position.

In March, Tullow’s directors “concluded that there is a material uncertainty that may cast significant doubt that the group will be able to operate as a going concern”. They were concerned its lenders might not approve the bi-annual reserves-based lending (RBL) redetermination liquidity assessments—or any covenant amendment that might subsequently be required—given the risks around Tullow being unable to sufficiently progress any planned portfolio management activities.

Tullow completed its RBL redetermination in early April with $1.9bn of debt capacity approved by the lending syndicate—meaning the firm had c.$700mn liquidity headroom of undrawn facilities and free cash at the start of the second quarter.

But “material uncertainty [over Tullow as a going concern] remains in place”, the firm says. Thursday’s deal mitigates that risk somewhat, but Tullow’s “directors recognise that further portfolio management beyond this transaction will be required to remove this material uncertainty”.

The sale “represents an excellent start towards [Tullow’s] previously announced target of raising in excess of $1bin to strengthen the balance sheet”, says its executive chair Dorothy Thompson. Other opportunistic buyers are likely to take note.

Government agreement

One other interesting aspect of the deal is the tax issue, given that it torpedoed the previous Tullow-Total-Cnooc agreement. “Supportive discussions” have been held between Tullow, Total and the Ugandan government and tax authorities, the seller says, with agreement on the principles of the tax treatment of the deal. “Tullow and Total now intend to sign a binding tax agreement with the government of Uganda and the Uganda Revenue Authority that reflects these principles [and] which will enable the transaction to complete,” says Tullow.

$575mn Amount Total is set to pay Tullow for 33.3pc stake

This could suggest that the Ugandan authorities recognise that the oil industry environment has changes and they too will have to be more co-operative in their approach to try to ensure that the prospect—with its potential material boost to state coffers—moves ahead. It will be interesting to see if some of Uganda’s peers in the ranks of fledgling African oil-producing nations take note and also soften some of their own red lines.

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