TLW
🛢️ Tullow Oil operates with significant inherent risks, including its focus on oil exploration and production, operations in Ghana, high dependency on oil prices, and substantial debt.
💰 A specific distressed debt situation involving Tullow’s Senior Unsecured bonds offered a lucrative opportunity due to a unique refinancing event supported by Glencore and insider actions, highlighting the importance of analyzing special situations.
🎲 Investing in Tullow, particularly its equity, involves navigating complex factors like oil price volatility, geopolitical risks, and the company’s capital structure, making it a play on ‘optionality value’ rather than straightforward fundamentals.
@Academiadeinversion:
“Tullow is a rather curious situation because it has all the factors that investors hate. Well, Tullow is an oil company; that’s already a red flag. They operate oil fields in Ghana, in the middle of Africa; that’s another red flag. And they are very dependent on the price of oil, not at all hedged; another red flag. And finally, with very, very high indebtedness. So, it brings together four factors that make investors hate Tullow. This also allows, curiously, paradigmatically, for there to be a lot of value, mainly because many people refuse to look at Tullow for one of those four reasons. Despite how ugly it is and how unattractive, curiously the main investor in Tullow is the agent of AzValor; Parames is in another operator that operates the same fields, but no, the people at AzValor are the main equity holder in Tullow. What Tullow had was a situation where there were two classes of debt: one senior secured debt—let’s say it’s the first debtor that has access to the company’s value—and another senior unsecured debt. Senior unsecured, in that order of priority when distributing value, was second, and finally, there was also the equity, which is where AzValor was. The interesting part about Tullow was that the bonds were at a moment of quite high distress. The first lien, I think, reached the 60s; the second lien reached the 30s. And Tullow receives a capital investment from the trader Glencore. Glencore provides a credit line to Tullow of 400 million, which would allow it one of two things: either help in refinancing its first lien notes or help in refinancing its second lien notes. The catch was that the second liens matured before the first liens. The second liens matured in 2025, while the first liens mature in this 2026. The board finds itself in a situation where it has money at its disposal and can make the decision to screw over the first lien and use Glencore’s money to refinance the second lien, or screw over the second lien, put the company into a kind of premature restructuring before 2025, and use its money to partly save the senior secured notes that matured in 2026. There we were, somewhat in that discussion we were having with Tullow. Two analyses had to be done. The first analysis to be done was how much Tullow itself was worth. This wasn’t easy, right? Because it has a lot to do with the price of oil. A thesis had to be developed on the price of oil, and then, based on that, a thesis had to be developed on how much Tullow’s assets were worth, considering different oil price scenarios. Well, one could conclude that with a barrel of oil at $60, Tullow could be in the range of 1.8 to 2 billion. The debt, in many of those scenarios, was covered by value if one had a more optimistic view on the price of oil, and other times not. And once one had the value of that asset, it was important to assign the value to the different classes of debt, as we were commenting: the first lien, second lien, and the equity holder. The third component of complexity was how Tullow’s team would react—that people risk—how the board and the CEO would react when using Glencore’s money. Were they going to use it to favor the first lien? Were they going to use it to favor the senior unsecured? What was going to be the outcome for both types of bonds? The equity seemed to trade more with an optionality value than anything else. Well, at some point in December 2024, the Tullow board, one of the members, starts making very active public statements saying they are going to rescue the senior secured with Glencore’s money, and he even starts, on his own initiative, to buy bonds. This is rare for board of directors members. It’s normal to see them buying equity, but the board member himself starts buying bonds. So, this is a clear signal of that type of intention and how the game is going to be resolved. The bonds at that time, when the board member started buying them, were in the 60s. The maturity of the bonds was March 2025. That is, at that time the bonds were to be repaid at 100 cents, and meanwhile, the bonds were paying a 10% coupon. So, we are talking about a significant return in 3 months, which is equivalent to making a 20% return on that investment. The fun part about Tullow, and the interesting part about Tullow, was seeing how the board reacted to different incentives. Of course, the senior secured threw their hands up in horror when it began to be hinted that the senior unsecured were going to benefit from this. But by betting on the winning horse, one could have a very, very interesting return. And this is where that analysis of the reaction of people was, and how to understand that analysis of how the game theory was going to play out and how it was going to develop. So, Tullow was a very good investment if one entered the senior unsecured. One could take their money from 60, 70 cents to 100 cents in a matter of months, earning a very interesting coupon, which is what ended up happening. The company repaid the senior unsecured with Glencore’s money, and now they are waiting to resolve how they are going to repay the senior secured that has been left hanging, and Glencore’s money has already been used.”
Watch the exact part of the video where Martínez from @Academiadeinversion talks about Tullow Oil plc here:
Watch the video on YouTube
Read more articles by the world’s top analysts on Tullow Oil plc (TLW) at the following link. TLW stock.
