Total agrees to buy Tullow's Ugandan oil project stake for $575 million

London — Tullow Oil has agreed to sell all its Ugandan oil block interests to Total for $575 million in a deal that also clears up a tax dispute with the government hanging over the country's maiden oil project, the companies said Thursday.

Under the terms of the deal, Total will acquire all of Tullow's existing 33.33% stake in each of the Lake Albert project licenses EA1, EA1A, EA2 and EA3A, and the proposed export pipeline system.

The terms of the sale have been discussed with the Ugandan government and tax authorities and an agreement in principle has been reached on the tax treatment of the transaction, Total said.

"This acquisition will enable us, together with our partner CNOOC, to now move the project forward toward FID, driving costs down to deliver a robust long-term project," Total CEO Patrick Pouyanne said in a statement.

In addition to an initial $500 million in cash and a further $75 million when the final investment decision on the project is taken, conditional payments will be made to Tullow linked to production and oil price, which will be triggered when Brent prices are above $62/b, Total said.

Delayed FID

Led by Total, the go-ahead for the Lake Albert oil development project has been delayed for years, in part due to a long-running dispute over tax and fiscal terms with the government.

A $900-million deal for Tullow to sell part of its 33.33% stake in the project to Total and China's CNOOC expired last year following long delays over agreeing fiscal and commercial terms with the government.

The companies had been waiting on the farm-down deal to kick-start the $20-billion oil development which includes a $3.55-billion crude export pipeline and the drilling of over 500 wells to produce 230,000 b/d.

In February, Total said it expected the FID to take place in "2020 or after" despite official hopes by the Ugandan government that the partners would approve the project in early 2020. Uganda has said it expects first oil from Lake Albert in 2023 but most market watchers see that as optimistic.

Total is currently the operator of Block 1 and Block 1A and China's CNOOC is the operator of Block 3A, while Tullow operates Block 2. CNOOC has pre-emption rights to acquire half of the Ugandan interests on the same terms and conditions as Total.

Troubled Tullow

Cash-strapped Tullow said the deal marked the first step in efforts to raise over $1 billion to reduce debt and strengthen its balance sheet after a series of operational setbacks raised concerns over its survival.

In December its share price collapsed after CEO Paul McDade and Chief Exploration Officer Angus McCoss both resigned following disappointing exploration results, a major reserves writedown at its a flagship field in Ghana and a lower oil price outlook. Last month it slashed 35% of its staff and suspended dividend payments as oil prices plummeted.

Stock watchers said the deal with Total was a key lifeline for the explorer which was faced with breaching its debt covenants this year and valued the assets at more than expected. Tullow's shares surged over 30% after the announcement in early London trading.

"Tullow has achieved a decent price in a tough market at a difficult time," The Royal Bank of Canada said in a note. "However, its 'survival strategy' requires the depletion of its opportunity set to pay down debt."

During the first quarter, Tullow said its production was line with expectations, averaging 75,800 b/d. Tullow's full-year guidance remains 70,000–80,000 b/d.

The explorer, whose new CEO, Rahul Dhir from Delonex, was announced this week, said 60% of its 2020 sales revenues were hedged with an oil price floor of $57/b and 40% of 2021 sales were hedged with a floor of $53/b.

It said, to date, the coronavirus pandemic had not affected its production facilities although some work had been suspended in Kenya and seismic work in Cote d'Ivoire had been interrupted.