Total ups stake in Uganda oil project via $900m deal with UK’s Tullow

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by: Nathalie Thomas

French energy major Total will raise its stake in a significant oil development in Uganda in east Africa through a deal with Tullow Oil, the UK-listed but Africa-focused exploration company.

Total, which has been active in Uganda since 1955, has agreed to buy a further 21.57 per cent stake in the Lake Albert oil project, which is situated close to the country’s border with the Democratic Republic of the Congo and is expected to produce as many as 230,000 barrels of oil a day at full production.

The transaction is a further sign of confidence returning to the global oil and gas industry following two and a half years of low oil prices.

Total’s interest in the project will increase to 54.9 per cent following completion of the deal, which also involves the transfer of operating licences. The French oil major has been involved with Lake Albert since 2011 when both it and China’s Cnooc acquired previous interests in the project from Tullow.

Shares in Tullow Oil jumped 9 per cent shortly after the deal was announced at 15:30 UK time but have since settled to trade up 2.74 per cent on the day at publication time at 333.6p.

Al Stanton, analyst at RBC Capital Markets, said the deal price was in line with analysts’ expectations and would limit Tullow’s capital expenditure commitments in the medium term. Mr Stanton noted the deal is structured to be “tax efficient”.

Total will pay Tullow $100m in cash upon completion of the deal, which will be subject to government approval, plus two further cash payments of $50m each at other milestones, including when the final investment decision is reached.

Tullow will also receive a $700m deferred payment, which it intends to use towards its remaining share of the development costs and the costs of an associated pipeline scheme to export oil through Tanzania. The cost of the pipeline project has been estimated at around $3.5bn and is expected to be funded through a combination of debt and equity.

Tullow will retain an 11.76 per cent holding in the Lake Albert project and the pipeline, although it expects this stake to further reduce to 10 per cent when the government of Uganda exercises a right to back in to the project.

The UK company, which has forged ahead with capital intensive projects even in the face of weak oil prices, said it would book a pre-tax write-off of $400m in its full year results following the latest deal with Total.

Aidan Heavey, chief executive of Tullow Oil, said:

Today’s agreement will allow the Lake Albert Development to move ahead swiftly, increasing the likelihood of FID [final investment decision] in 2017 and First Oil by the end of 2020. I am particularly pleased that Tullow’s long-term commitment to and presence in Uganda is guaranteed by this transaction and that we will remain an active investor in Uganda’s oil and gas sector. The deal will secure future cash flow for the Group from one of the industry’s few truly low cost development projects without any additional cash requirements expected. We will work closely with the Government of Uganda, its associated agencies and with Total and CNOOC to move this transaction forward as smoothly as possible over the coming months.

Tullow had net debt of $4.7bn at the end of June last year but gave itself additional head room by raising $300m the following month through a convertible bond issue.

It reached a milestone in July when it sold the first output from Ten, a big offshore development in Ghana, which will allow it to start reducing its debt pile.

After several years of pain amid weak oil prices, a couple of the European majors, namely BP and Total, have recently shifted their focus to growth, going on a something of a spending spree before the end of 2016.

Analysts at Barclays said the deal with Tullow was further evidence that Total is “strengthening” its portfolio for after 2020 “increasing both its resource base and its range of options for that period”.

Total also has considerable downstream operations in Uganda, operating more than 150 petrol stations across the country.

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