Tullow Oil: Reserve cash

Reserves-based lending for oil and gas independents is nothing new. But the Tullow Oil borrowing base deal – signed on 22 August 2005 – broke new ground in terms of size and asset spread. The deal is both the largest borrowing base facility out of the European independent oil and gas sector to date, and the first where, in time, up to 70% of the assets backing the funding will be non-OECD based.

The deal brings together five years of financing and three previous deals by Tullow. Founded in Tullow, Ireland, in 1985 by CEO Aiden Heavey, the Irish/UK listed independent closed its first major financing in 2001. The CIBC-led deal backed a £200 million acquisition of producing gas fields and related infrastructure in the UK southern North Sea from BP.

The high-profile Energy Africa deal followed in 2004 with ABN Amro and BNP Paribas arranging and underwriting $300 million of both acquisition and reserves-based borrowing to part-fund Tullow's $500 million buy: as a complementary transaction, Tullow also paid $70 million for a 50% share of African Petroleum Investment Limited in Energy Africa Gabon Holdings Limited, a joint venture between Energy Africa and African Petroleum Investment Limited in Gabon.

The third deal closed in March last year – a £200 million bridging loan for the buy-out of the Schooner and Ketch North Sea gas fields from Exxon, arranged by BNP Paribas, ABN Amro and Bank of Scotland.
With a balanced portfolio of UK gas and African oil, as Tom Hickey, CFO at Tullow, says, Tullow "wanted to put all the facilities into one and make the most of the portfolio effect."

The non-OECD element is what distinguishes the Tullow deal from others. There have been larger reserves base deals for independents, but only in OECD countries. And past pure African content deals have typically been for assets in one country with the debt priced accordingly. Even the original Energy Africa financing was a series of specific loans for different assets country-by-country rather than a true portfolio effect.

Tullow uses the portfolio diversification to good effect via debt pricing linked to a margin grid. The $850 million seven-year financing comprises $800 million of senior debt and a $50 million junior facility. Margin on the senior debt ranges from110bp-225bp over Libor depending on a combination of the amount drawn down and the percentage of the borrowing base contributed by West African assets. The junior facility is priced at a premium of 125bp over the prevailing senior debt pricing at any given time.

Given past pure African single asset reserves based deals have priced around 450bp, the portfolio effect on Tullow, even at the margin peak of 225bp when 70% of the reserves would be non-OECD, is very competitive. But market timing and high bank liquidity were as influential on the cost of debt as the financial engineering.

Despite what appears to be very aggressive pricing the deal had a 100% hit rate in syndication – symptomatic of the liquid bank market – when launched by mandated lead arrangers BNP Paribas, Bank of Scotland and ABN Amro. Seventeen banks were invited to participate and 16 came in (the final bank was invited out of corporate courtesy and expected to decline).

Bank appetite was so healthy that Tullow considered upsizing the deal, but in the event stuck to the original plan. Banks that joined in syndication were: HVB, Royal Bank of Scotland and SMBC as lead arrangers, followed by Bank of Tokyo-Mitsubishi, Barclays, BayernLB, Calyon, DZ Bank, Lloyds TSB, Mizuho, Natexis, National Australia Bank, NIB Capital, Societe Generale CIB, Standard Chartered and WestLB.

Market timing was also crucial to the valuation of Tullow's reserves Not only had oil prices soared since the $39 per barrel at the time of the original Energy Africa acquisition, but Tullow's reserves in Gabon had doubled since the previous year. Furthermore, the deal features a capex addback whereby the NPV of the assets is added to forecast capex over the next 12 months, thereby giving a truer and higher value of assets.

Despite the bullish oil and gas market, the deal features a number of safety measures that give lenders and sponsor comfort. Although looking increasingly redundant as high oil prices settle in for the long term, the $50 million junior facility is a useful standby for Tullow if commodities prices were to fall.

For lenders, the security package is a mix of recourse to assets and control of cashflows in jurisdictions where enforceable, and share security (shares of the subsidiaries that operate any given field) where enforcing security rights would be more difficult. The loan also has a 20% reserve tail (meaning the full loan is repaid if 80% of reserves are used up).

The Tullow deal looks set to become the way forward for larger independents. The fallout from the Ramco Seven Heads financing – on which lenders ANZ and HBoS are though to be out of pocket to the tune of around £40 million – will make lenders more wary of single asset deals. Furthermore, a number of independents are diversifying into new markets. Tullow itself is moving into South East Asia and, in addition to refinancing existing debt across Tullow's three previous deals, its portfolio facility will fund that expansion.

Tullow Oil
Status: Signed 22 August 2005
Description: Reserves base portfolio financing
Size: $850 million
Sponsor: Tullow Oil
Mandated lead arrangers:
BNP Paribas, ABN Amro, Bank of Scotland
Lead arrangers: HVB; Royal Bank of Scotland; SMBC
Participants: Bank of Tokyo-Mitsubishi, Barclays, BayernLB, Calyon, DZ Bank, Lloyds TSB, Mizuho, Natexis, National Australia Bank, NIB Capital, Societe Generale CIB, Standard Chartered, WestLB
Sponsor counsel: Norton Rose
Lender counsel: Herbert Smith
Consultants: Energy Resources Consultants