London oil explorer at risk of debt default

An oil drilling block managed by Tullow Oil at Lokichar basin in Turkana county, Kenya - Tony Karumba/AFP via Getty

A London-listed oil explorer once celebrated for its exploits in far-flung waters is in danger of defaulting on its debts, credit experts have warned.

Faced with having to make a giant $1.3bn (£1bn) bond repayment from a dwindling cash pile of less than $200m, Tullow Oil has suffered a further debt downgrade from S&P Global, one of the three main ratings agencies.

The bond falls due in May next year, with the company reportedly trying to persuade lenders to agree to a refinancing.

Amid fears of a cash crunch, S&P has slashed Tullow’s credit rating from CCC+ to CCC, a move that plunges it deeper into junk territory and risks pushing the debt-laden company’s borrowing costs even higher.

S&P also raised the possibility of a further downgrade “if the company’s liquidity continues to deteriorate”.

With Tullow grappling with mounting financial pressures, the ratings agency said it “does not expect Tullow Oil to have sufficient liquidity to repay” the $1.3bn bond next year.

The company is on course to spend $100m more than it makes this year, compounding its cash squeeze, S&P’s analysts predicted.

“This in our view exposes the company to heightened refinancing risk and ... the creditors to transactions that we could construe as tantamount to default,” S&P said.

Tullow was once a member of the FTSE 100 index with a market value of more than £14bn, but after a torturous struggle to reduce borrowings built up during a deal binge, it has been reduced to a penny stock.

Shares in Tullow, which were once trading above £13, closed on Friday at less than 11p, leaving it with a market capitalisation of just £155m.

Entrepreneur Aidan Heavey built Tullow from scratch into a sprawling business with operations in more than 20 countries, wooing fund managers in the process.Aidan Heavey built Tullow Oil from scratch to a company with operations in 20 countries - Bethany Clarke/Getty

However, the company built up a vast debt pile as it sought to develop the discoveries and it has been forced into a series of asset sales to raise cash to repay creditors. It is named after Tullow, a small town south of Dublin, where it was founded.

It is selling deposits in Kenya and fields in Gabon, with the proceeds being used to make debt repayments. The exits leave Tullow operating mainly in Ghana, with minor operations in Côte d’Ivoire.

A spokesman for Tullow said: “Tullow is making good progress with plans to refinance its capital structure and is evaluating a range of options.”

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