Annual Financial Report

RNS Number : 8466T

Tullow Oil PLC

30 March 2021

 

TULLOW OIL PLC

Annual report and accounts

Tullow Oil plc ("Tullow" or the "Company")

30 March 2021 - Following the release on 10 March 2021 of the Company's preliminary full year results announcement for the year ended 31 December 2020 (the "Preliminary Announcement"), the Company announces it has published its Annual Report and Accounts for this period (the "Annual Report and Accounts").

A copy of the Annual Reports and Accounts are available to view on the Company's website: www.tullowoil.com

The Company is also pleased to announce it has published its Sustainability Report and Climate Risk & Resilience Report, which is also available on the Company's website: www.tullowoil.com .

The Company's 2021 Annual General Meeting will be on a date to be confirmed in due course.

In accordance with Disclosure Guidance and Transparency Rule 6.3.5(2)(b), additional information is set out in the appendices to this announcement. This information is extracted in full unedited text from the Annual Report and Accounts.

The Preliminary Announcement included a set of condensed financial statements and a fair review of the development and performance of the business and position of the Company and its group.

In accordance with Listing Rule 9.6.1, a copy of the Annual Report and Accounts have been submitted to the Financial Conduct Authority via the National Storage Mechanism and will be available for viewing shortly at

https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

In addition, all of the above documents have been submitted to Euronext Dublin and the Ghana Stock Exchange, and therefore will shortly be available for inspection at Euronext Dublin (Exchange Buildings, Foster Place, Dublin 2) and will be available to shareholders located in Ghana by contacting the Company's registrar: Central Securities Depository (GH) Limited, 4th Floor, Cedi House, PMB CT 465 Cantonments, Accra, Ghana (Telephone: [phone]).

CONTACTS
Tullow Oil plc (London) ([phone]) George Cazenove (Media) Matthew Evans and Chris Perry (Investors)	Murrays (Dublin) ([phone]) Pat Walsh Joe Heron

 

Notes to editors

Tullow is an independent oil & gas, exploration and production group which is quoted on the London, Irish and Ghanaian stock exchanges (symbol: TLW) and is a constituent of the FTSE250 index. The Group has interests in over 50 exploration and production licences across 11 countries including Ghana where it operates the Jubilee and TEN fields. In March 2021, Tullow committed to becoming Net Zero on its Scope 1 and 2 emissions by 2030.

Follow Tullow on:

Twitter: www.twitter.com/TullowOilplc  

YouTube: www.youtube.com/TullowOilplc  

Facebook: www.facebook.com/TullowOilplc  

LinkedIn: www.linkedin.com/company/Tullow-Oil  

Appendices

Appendix A : Directors' responsibility statement

The following directors' responsibility statement is extracted from the Annual Report and Accounts (page 79).

Directors' responsibility statement required by DTR 4.1.12R

The Directors confirm, to the best of their knowledge:

- that the consolidated Financial Statements, prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and IFRSs adopted pursuant to Regulation (EC) No.1606/2002 as it applies in the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Parent Company and undertakings included in the consolidation taken as a whole;

- that the Annual Report, including the Strategic Report, includes a fair review of the development and performance of the business and the position of the Company and undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

- that they consider the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position, performance, business model and strategy.

By order of the Board  

Rahul Dhir Les Wood
Chief Executive Chair Chief Financial Officer

9 March 2021  9 March 2021

Appendix B:  A description of the principal risks and uncertainties that the Company faces

The following description of the principal risks and uncertainties that the Company faces is extracted from the Annual Report and Accounts (pages 31 to 35).

Risk appetite

The Board sets Tullow's risk appetite and acceptable risk tolerance levels for each of the principal risk categories. In considering Tullow's risk appetite, the Board reviewed the risk process, the assessment of enterprise level risks and the existing controls and mitigating actions that drive towards residual risk. During this process, the Board articulated which risks Tullow should not tolerate, which should be managed to an acceptable level and which should be accepted in order to deliver our business strategy.

The risk appetite is reviewed at least annually by the Board to ensure that it reflects the current external and market conditions. The Board last reviewed the risk appetites in February 2020. The Senior Leadership Team reviewed the risk appetite statements in February 2021 against the revised principal risks and the Board will next review the risk appetite statements in March 2021.

Internal control

A foundation of effective governance, risk management and control has been established throughout the organisation. Core to this is our Integrated Management System (IMS) which sets out all mandatory policies, standards and controls necessary to manage our activities and associated risks. The effectiveness of the internal control framework is reviewed through the risk management process and challenged as described above. In addition to this, the Senior Leadership Team and Audit Committee perform an annual review of the effectiveness of internal control.

Nature of assurance

· Assurance activities are put in place across the three lines of defence to assure against key risks. These specifically focus on areas where there are internal/external changes, control failures and historical issues.

· Business leadership acts as the first line of defence and is responsible for ensuring their key risks are being managed effectively and that adequate controls are in place to manage those risks.

· Group oversight acts as a second line of defence and as well as setting functional standards is responsible for ensuring compliance with them. They obtain assurance through periodic reporting and focused assurance reviews. They are also responsible for identifying and managing risks that fall under their remit. Given the change in business structure and reporting lines the assurance provided over the second line of defence is currently under review.

· Internal Audit acts as the third line of defence and is responsible for providing independent assurance through its risk-based internal audit programme. The Internal Audit Plan and outputs are reviewed by the Audit Committee. Agreed actions for improving the control environment and managing risk are owned by assigned individuals and monitored through Tullow's performance review process. The Audit Committee monitors the implementation for recommendations arising.

· Tullow's risk management and assurance processes provide the Board and the Management Team with reasonable, but not absolute, assurance that our assets and reputation are protected.

 

Evolution of Tullow's management of risk and control

Organisational and strategic changes made throughout the year have redefined ownership and point of decision making across the business. The changes aimed to promote accountability and challenge at a senior level and remove the need for multiple layers of review as Tullow becomes a more agile business.

During 2020 the risk management and control framework has been evolved to align to the new ways of working and this will continue to evolve into 2021. Although the controls have been in place to mitigate key risks throughout 2020 the nature of these controls has changed and the business has launched a programme of transformation to review key processes and the IMS to make sure it continues to be fit-for-purpose for the new business structure.

The risk framework has been realigned to the new business reporting lines and senior risk owners have been identified to ensure that a greater culture of risk awareness and challenge is instilled throughout the business with an increased focus on mitigating actions. This will continue into 2021 including updating the accountability framework and reviewing the assurance processes in place over the newly defined key controls.

Tullow's risk profile

The Company risk profile has been closely monitored throughout the year, with consideration given to the risks to delivering the Business Plan as well as whether the COVID-19 pandemic or oil price volatility resulted in any new risks or changes to existing risks. Risks associated with COVID-19 have been considered and managed across all principal risk categories.

Strategy risk                                 Link to 2021 scorecard - Business Plan Implementation
Risk of failure to deliver operations, development and subsurface objectives	Risk owner: Rahul Dhir
Risk details	Risk mitigations
Tullow has developed a Business Plan to deliver material value and cash flow. This will help Tullow reduce leverage and create value for our shareholders. The success of the plan is reliant on delivery of clear targets and disciplined allocation of capital and our human resources. Failure to achieve the objectives will impair value and loss of shareholder confidence and support. Key execution risks not addressed elsewhere include: · Lack of ability to increase oil production and replenish our resource base will reduce our ability to deliver value and cash flow and could ultimately impair our ability to reduce leverage · Operational and subsurface challenges prevent us from achieving our planned oil production · Ghana gas market constraints reduce our planned gas offtake which would impact oil production and our ability to reduce flaring · Unable to progress the preparation of FDP in Kenya and therefore any exercise to unlock Kenyan potential · Inability to unlock the potential in emerging basins may reduce value creation opportunities · High concentration risk in Ghana and Gabon	· Well defined and integrated plan to deliver the necessary inputs needed to achieve Business Plan objectives · Clear KPIs and accountability defined · Ongoing business performance review process to monitor performance · Large portfolio of high-return drilling and investment opportunities defined with JV support in Ghana and across non-operated assets · Improvements in facilities' reliability through targeted interventions · Simplified well design and reduced completion complexity · Integrated planning across subsurface, drilling and projects teams · Alignment with Government of Ghana on gas offtake for 2021 with longer term negotiations under way · Active engagement with JV and Government of Kenya to progress preparation of FDP in Kenya · Exploration plan in place for emerging basins, particularly Argentina, Guyana and Suriname
Risk of failure to deliver commercially attractive projects and operations due to sustained low oil price	Risk owner: Les Wood
Risk details	Risk mitigations
The nature of the industry within which we operate means the volatility of oil price is always a risk that Tullow remains exposed to. · Prolonged low oil price and increased volatility would lead to a decrease in asset values and reduced access to funding	· Cost base reduced substantially to be viable in a lower oil price environment · 60 per cent of 2021 oil entitlement hedged at an average floor price of $48/bbl. · Proven, tested and successful business continuity process and plans in place for managing COVID-19

 

Stakeholder risk  Link to 2021 scorecard - Leadership
Risk of disruption to business due to inability to manage stakeholder relations	Risk owner: Rahul Dhir
Risk details	Risk mitigations
The value of our assets and cash flow generation may be eroded by unreasonable financial/fiscal demands by host governments or actions that impair contract sanctity. There is a risk of political interference in our operations that may impact our ability to award contracts to the appropriate service providers. Inability to manage relations with key ministries, regulators and the wider community could result in delays in relevant approvals and community ill will.	· Well defined plan to engage proactively with all key stakeholders: all relevant stakeholders identified, and relationship accountabilities defined · Communication plan developed to educate stakeholders on the broader impact of the Business Plan on the nation. · Reliance on robust stabilisation clauses in all our Petroleum Agreements. · Tax advice obtained

Climate change risk   Link to 2021 scorecard - Sustainability
Risk of failure to manage impact of climate change	Risk owner: Julia Ross
Risk details	Risk mitigations
The climate agenda is an increasing area of focus globally, particularly for Tullow as we evolve the business and work towards improving our approach to environmental impact. Failure to manage the impact of climate change arising from evolving policies and increased volatility and downside risk in oil prices could affect the commerciality of our portfolio, lead to loss of licence to operate and result in limited access to/increased cost of capital. · There may be challenges to delivering a suitable strategy to address climate change due to limited resources available	· Cross-functional team established to identify opportunities to reduce carbon emissions across our operations and/or  investment in nature-based carbon removal projects to offset emissions impact · 2030 Net Zero (Scope 1 & 2) commitment and pathway identified to decarbonise our Ghana assets · Long term gas offtake options support elimination of flaring · Enhanced understanding of climate related financial risks including TCFD climate disclosure in our Annual Report · Stress test the portfolio to ensure its resilience to IEA's · Sustainable Development scenario

EHS or security risk  Link to scorecard - Safety, Production and Business Plan Implementation
Risk of asset integrity breach or major production failure	Risk owner: Wissam Al-Monthiry
Risk details	Risk mitigations
The nature of our operations will always have an inherent risk of a major incident resulting in fatalities, loss of production, and/or extensive damage to facilities, the environment or communities. The nature of our business at the moment means that we are reliant on several key operated assets as well as our non-operated and exploration portfolio. · A large gas release/asset integrity breach due to a topside event resulting in a Major Accident Event may occur, which may lead to injury to personnel, a prolonged production outage and potential significant environmental damage	· Asset and well integrity and maintenance programmes with regular internal verification and external assurance · Independently Verified Safety Case Document establishing quantitative risk estimate assuming effective systems and risk tolerance thresholds · FPSO periodic planned shutdowns to carry out required · inspection, maintenance, repair and modification work · Inherently Safer Design principles application in engineering modifications · Assurance and Compliance management including Class · Increased level of assurance activity on the FPSO with Tullow Offshore field managers undertaking significant assurance activities offshore           Comprehensive all-risk insurance in place

 

Financial risk  Link to 2021 scorecard - Financial Performance and Capital Structure
Risk of insufficient liquidity and funding capacity	Risk owner: Les Wood
Risk details	Risk mitigations
Tullow remains exposed to erosion of its balance sheet and revenues due to oil price volatility, unexpected operational incidents, ongoing costs associated with the COVID-19 pandemic, failure to complete portfolio options and inability to refinance. · Tullow may have difficulty securing a resolution of debt maturities due to failure to deliver its Business Plan, which may lead to insufficient liquidity and potential impact on funding capacity	· Range of high-quality assets that could be sold as part of portfolio management to unlock capital and pay down debt · Leverage targets and minimum headroom policy approved by the Board · 2020 year-end undrawn facility headroom and free cash of $1.1 billion · Dynamic working capital and cash flow management including ability to flex capital investment           Solid foundation to address debt maturities
Risk that we fail to deliver a sustainable capital structure	Risk owner: Les Wood
Risk details	Risk mitigations
· Tullow's ability to deliver the Business Plan is dependent on developing a timely and sustainable capital structure. · Tullow may have challenges in the timely delivery of a sustainable capital structure; this could impact the ability to cover debt servicing costs over an extended period or continued operations as the capital structure is being implemented. Both scenarios could potentially negatively impact the ability to deliver the Business Plan.	· Plan to prioritise investments with high returns and short payback · Solid foundation to address debt maturities · RBL redetermination plan in place · Plan to drive gearing to 1x-2x with appropriate liquidity headroom

Organisation risk  Link to 2021 scorecard - Business Plan Implementation and Leadership
Risk that the transformation plan fails to support the strategy and deliver cost savings	Risk owner: Julia Ross
Risk details	Risk mitigations
· Tullow may be unable to maintain or improve operational performance and pursue growth if the Company is unable to evolve, maintain and sustain its organisational capabilities and deliver identified cost savings and successfully fully implement its planned transformational organisation change. · The objectives/cost savings of the Transformation Project may not be achieved. This may result in a negative impact on cash flow and an organisation that is no longer fit-for-purpose from a cost perspective	· Transformation team established which includes external advisors · Bottom-up review with external consultant · Transformation plan developed and key milestones identified and tracked · Organisation restructured; headcount reduced by 53 per cent and outsourcing of certain routine activities · Cost-driven performance management being implemented
Risk that the people strategy and culture do not support the strategy	Risk owner: Julia Ross
Risk details	Risk mitigations
Tullow's success depends on the quality of talent it can attract and retain and a strong ethically minded and performance-focused culture. · Tullow may be unable to attract and retain suitably experienced individuals which could lead to a lack of sufficient resource and capability to deliver core business activities. This may result in an inability to meet strategic objectives and increased constraints on the capacity and moral of remaining staff.	· Revised Employee Value Proposition (EVP) launched in 2020 aligning to restructured organisation · New approach to performance management being implemented across the organisation · A renewed focus on Diversity and Inclusion · Review in progress to update succession plans for senior and critical roles · Focus on health and wellbeing; rolling wellness programme
Conduct risk  Link to scorecard - Business Plan Implementation and Leadership
Risk of major compliance breach	Risk owner: Mike Walsh
Risk details	Risk mitigations
Tullow maintains high ethical standards across the business without which the company could be exposed to increased risk of non-compliance and bribery and corruption legislation or contractual obligations along with other applicable business conduct requirements. · In particular, an unforeseen material compliance breach could lead to regulatory action, an unsettled litigation/dispute or additional failure litigation that may result in unplanned cash outflow, penalty/fines and a loss of stakeholder confidence in management.	· Annual Code of Ethical Conduct staff eLearning and code certification process · Third-party due diligence procedures and assurance processes in place · Misconduct and loss reporting standard and associated procedures in place · Well established Anti-Bribery and Corruption governance · Process in place for GDPR investigations · Anti-tax evasion risk assessment undertaken with clear mitigation actions identified · Recorded and investigated 52 concerns raised, of which 50 cases are closed. Appropriate actions have been taken including employee dismissal (for serious breaches).

 

Cyber risk  Link to 2021 scoreboard - Business Plan Implementation and Leadership
Risk of major cyber attack	Risk owner: Mike Walsh
Risk details	Risk mitigations
The external cyber threat environment is continuously evolving and intensifying; therefore, this is an ongoing risk that requires constant monitoring and management. · Tullow may suffer an external cyber-attack which could have far reaching consequences for the business. This could result in loss of sensitive personal or commercial data or allow external parties to limit our ability to operate, seize production or potentially trigger a major incident	· Advanced security operations centre in place providing 24/7 network and device monitoring · Security incident event management systems in place. · Security awareness programme in place · Joint Tullow/MODEC industrial control system security programme in place · Corporate security programme in place · Annual mandatory security and GDPR awareness training · Staff susceptibility to phishing regularly tested

Viability statement

In accordance with the provisions of the UK Corporate Governance Code, the Board has assessed the prospects and the viability of the Group over a longer period than the 12 months required by the 'going concern' provision. The Board assesses the business over a number of time horizons for different reasons, including the following: Annual Corporate Budget (i.e. 2021), Two-year Forecast (i.e. 2021-2022), Five-year Corporate Business Plan (i.e. 2021-2025), and Long-term Plan. The Board conducted the review for the purposes of the Viability Statement over a three-year period. The three-year period was selected for the following reasons:

i.  in light of the current highly volatile market environment the Group considers the Group's facility and free cash headroom, debt: equity mix, and other financial ratios, over a three-year period as opposed to the five-year Corporate Business Plan period;

ii.  the current contractual maturity of the Group's $300 million Convertible Notes due in July 2021 and $650 million  Senior Notes due in April 2022 fall within a three-year period and as such the three-year period is largely aligned with Tullow's funding cycle; and

iii.  this also aligns with the current transitional business cycle with the significant projected increase in production and operating cash flow generation in 2023 following a period of significant capital investment in the Group's producing assets.

Notwithstanding this fact the Group will continue to monitor the business over all time horizons noted above. As noted on pages 22 to 23 in the Group's going concern assessment, the Directors have concluded that the uncertainties associated with implementing a Refinancing Proposal and obtaining amendments or waivers in respect of future forecast covenant breaches or, in the event a Refinancing Proposal does complete, the revised covenants are subsequently breached, are material uncertainties that may cast significant doubt that the Group will be able to continue as a going concern.

On a longer-term basis, when considering the Viability Statement under the Base Case assumptions and a combination of reasonably plausible low case scenarios over the three-year period, the same uncertainties exist. However, the Base Case assumes that the Group's Refinancing Proposal is successfully completed, and the Group obtains amendments or waivers in respect of future forecast covenant breaches or, in the event a Refinancing Proposal is implemented, the Group obtains amendments or waivers in respect of any breaches of revised covenants, which results in, the Group forecasting liquidity headroom over the three-year period. The Group has additional mitigating actions available to it should the combination of reasonably plausible low case scenarios arise, including reductions to capital investment, protection of oil price volatility through hedging, further portfolio management and, if required, raising additional capital. The Directors are committed to delivering a refinancing proposal, and further mitigating actions if a combination of reasonably plausible low case scenarios arises, and they therefore believe that the Group continues to be viable over the three-year assessment period.

Tullow has also assessed its viability in line with the IEA's Sustainable Development Scenarios; see page 19 for details.

 

Principal risks*	Base assumption	Downside scenario
Strategy risks	Production is assumed to be in line with the Business Plan. Oil price: 2021: $50/bbl, 2022: $55/bbl, 2023+: $55/bbl.	8 per cent reduction in production. Oil price: 2021: $45/bbl, 2022: $47.5/bbl, 2023+: $50/bbl.
Stakeholder risks	Associated with host government stakeholders the Group has included $87 million outflow associated with tax exposures (refer to page 107 to 108 for a description of the Group's uncertain tax positions).	Exposure beyond the $87 million included in the Base Case is either not anticipated to occur within the three-year assessment period or is not reasonably plausible to occur at all.
Climate change risk	The key impact of climate change on the Groups' portfolio of assets is reflected in oil prices, which are assumed as: 2021: $50/bbl, 2022: $55/bbl and 2023+: $55/bbl.	In a downside scenario the Group has assumed a reduction in the Base Case assumption which is below the current IEA SDS scenario of: 2021: $45/bbl, 2022: $47.5/bbl, 2023+: $50/bbl.
EHS or security risks	Production, operating costs and capital investment are assumed to be in line with the Business Plan.	8 per cent reduction in production
Financial risks	Contractual maturities of debt instruments. However, the refinancing proposal is assumed as a mitigating action.	Contractual maturities of debt instruments. However, the refinancing proposal is assumed as a mitigating action.

* For detailed information on risk mitigation, assurance and progress in 2020 refer to discussion of the detailed risks above.

For Organisational Risk, Conduct Risk and Cyber Risk the Group has assessed that there is no reasonably plausible scenario that can be modelled in isolation or in combination with other risks from a cash flow perspective.

Liquidity risk management and going concern

Assessment period and assumptions

The Group closely monitors and carefully manages its liquidity risk. Cash flow forecasts are regularly updated, and sensitivities run for different scenarios, including, but not limited to, changes in commodity price and different forecasts for the Group's producing assets. The Directors consider the Going Concern assessment period to be 13 months to April 2022, thereby including the maturity of the $650 million Senior Notes due in April 2022 in the assessment. Management has applied the following oil price assumptions for the Going Concern assessment:

• Base Case: $50/bbl for 2021 and $55/bbl for 2022, and

• Low Case:  $45/bbl for 2021 and $50/bbl for 2022.

The Low Case includes, amongst other downside assumptions, an 8% production decrease compared to the Base Case as well as deferred receipts from portfolio management and increased outflows associated with ongoing disputes. No mitigating actions have been included in either case.

The Base Case and Low Case scenarios forecast sufficient financial headroom for the 12 months from approval of the 2020 Annual Report and Accounts on 10 March 2021. However, both scenarios forecast a liquidity shortfall in April 2022 following the repayment of the $650 million Senior Notes due in April 2022, which falls within the liquidity forecast test periods in respect of the February 2021, September 2021 and March 2022 RBL redeterminations. Both cases assume amendments or waivers are received for any forecast Liquidity Forecast Test or gearing covenant breach as described below.

Refinancing Proposal

The Base Case and Low Case scenarios forecast a liquidity shortfall in April 2022, which could result in a failure to pass the Liquidity Forecast Test, as described below, in respect of the February 2021, September 2021 and March 2022 RBL redeterminations, and the gearing covenant tests, as described below, in respect of 30 June 2021 and 31 December 2021. The Group's management has therefore commenced discussions with its existing and potential new creditors, the objective of which is to raise new funding and/or agree certain amendments to the terms, including the covenants and/or maturity dates, of some or all of the RBL Facility, the Convertible Bonds, the 2022 Senior Notes and the 2025 Senior Notes with, if necessary, such amendments being approved by shareholders (Refinancing Proposal). Whilst the Directors believe that a Refinancing Proposal would be in the commercial interests of all stakeholders, there can be no certainty that the creditors and, if necessary, shareholders will agree to a Refinancing Proposal, implementation of which is therefore outside the control of the Group.

Liquidity Forecast Test covenant compliance

As part of each RBL redetermination process the Group is required to demonstrate to the reasonable satisfaction of the relevant majority of its lenders under the RBL Facility that it has, or will have, sufficient funds available to meet the Group's financial commitments for a period of 18 months starting from the first month immediately following the relevant RBL redetermination (Liquidity Forecast Test).

On 26 February 2021 the Group submitted a Liquidity Forecast Test to the lenders in respect of the February 2021 RBL redetermination. The Directors concluded that the information submitted to the lenders under the RBL Facility, which is different from the Base Case and the Low Case scenarios described above and includes mitigating actions, fulfilled the requirements of the Liquidity Forecast Test. At the date of approving the 2020 Annual Report and Accounts, an approval in respect of this test is yet to be received, therefore a risk remains that the Group could fail this test.

If the lenders under the RBL Facility were to conclude that the information submitted does not fulfil the requirements of the Liquidity Forecast Test and the Group was unable to cure the resulting default by the end of April 2021, there would be an event of default. Such event of default would allow the lenders under the RBL Facility, at their discretion, to cancel the RBL Facility and demand that all outstanding borrowings under the RBL Facility be repaid and/or enforce their security rights. This would in turn trigger other creditors' rights to call cross-defaults under the other financing arrangements of the Group (namely the Convertible Bonds, the 2022 Senior Notes and the 2025 Senior Notes) which could result in the entirety of the Group's borrowings potentially becoming immediately repayable by the end of April 2021. While discussions in respect of a Refinancing Proposal are continuing the Directors believe that, if required, a waiver of such a potential event of default in respect of the Liquidity Forecast Test could be agreed with the lenders under the RBL Facility.

The Group is also required to submit Liquidity Forecast Tests in respect of the September 2021 and March 2022 RBL redeterminations. The Base Case and Low Case scenarios forecast, before mitigations, a potential liquidity shortfall and therefore a potential failure of these tests. However, the Directors believe that a Refinancing Proposal could be implemented in time for the September 2021 RBL redetermination such that no shortfall will be forecast as part of the Liquidity Forecast Tests in September 2021 and March 2022. If no Refinancing Proposal has been implemented, and refinancing discussions were no longer continuing, by September 2021 there would be a significant risk of the Group entering into, or being in, insolvency proceedings, the implications of which are described in the section Implications and material uncertainties below.

Gearing covenant compliance

The RBL Facility contains a gearing covenant which is tested for each 12-month period ending on 30 June and 31 December each year, and which requires that net debt of the Group as defined in the RBL Facility agreement is lower than 3.5 times consolidated EBITDAX  (earnings before interest tax, depreciation and exploration write-offs) for each relevant 12-month period. Under both the Base Case and the Low Case scenarios, the Group's gearing is forecast to be in excess of the RBL gearing covenant when calculated at 30 June 2021 and 31 December 2021, the two testing dates falling within the Going Concern assessment period.

The Group has requested an amendment in respect of these gearing covenant testing dates as part of the Refinancing Proposal described above. In the event that such amendments are not agreed on time for the testing date falling on 30 June 2021, the Directors would expect to request a waiver or amendment for that testing date only in the first instance, and if needed for the testing date falling on 31 December 2021 in the second half of the year. The Directors believe that the Group would be able to secure such amendments or waivers, which would be both consistent with past practice and the Directors' reasonable expectation of the commercial interests of the Group and its lenders.

If the Group is unable to agree an amendment or waiver of the gearing covenant, if required, in respect of the 30 June 2021 testing date, the Directors will deliver to the relevant lenders a notification of non-compliance, which is required to be delivered as soon as the Group's unaudited financial statements for the half year ended 30 June are available, but no later than 28 September 2021. If a subsequent 75-day period expires without the Company having resolved the non-compliance there will be an event of default under the RBL Facility by mid-December 2021.

Implications and material uncertainties

The Directors note that implementing a Refinancing Proposal or obtaining amendments or waivers in respect of covenant breaches is outside the control of the Group. If the Directors are unable to implement a Refinancing Proposal or, if necessary, obtain amendments or waivers in respect of covenant breaches, the ability of the Group to continue trading would depend upon the Group being able to negotiate a financial restructuring proposal with its creditors and, if necessary, that proposal being approved by shareholders. Whilst the Board would seek to negotiate such a financial restructuring proposal with its creditors, there is no certainty that the creditors would engage with the Board in those circumstances. There would therefore be a significant risk of the Group entering into insolvency proceedings, which the Directors consider would likely result in limited or no value being returned to shareholders.

The Directors have concluded that the uncertainties associated with implementing a Refinancing Proposal and obtaining amendments or waivers in respect of covenant breaches or, in the event a Refinancing Proposal is implemented, the revised covenants are subsequently breached, are material uncertainties that may cast significant doubt that the Group will be able to continue as a Going Concern. Notwithstanding these material uncertainties, the Board's confidence in the Group's ability to implement a Refinancing Proposal supports the preparation of the financial statements on a Going Concern basis. The financial statements do not include the adjustments that would result if the Group were unable to continue as a Going Concern.

Appendix C:  Related party transactions

The following related party transactions are extracted from the Annual Report and Accounts (page 135).

The Directors of Tullow Oil plc are considered to be the only key management personnel as defined by IAS 24 Related Party Disclosures.

	2020 $m	2019 $m
Short term employee benefits	2.7	3.1
Post-employment benefits	0.2	0.5
Share-based payments	2.3	3.2
	5.2	6.8

 

Short term employee benefits

These amounts comprise fees paid to the Directors in respect of salary and benefits earned during the relevant financial year, plus bonuses awarded for the year.

Post-employment benefits

These amounts comprise amounts paid into the pension schemes of the Directors.

Share-based payments

This is the cost to the Group of Directors' participation in share-based payment plans, as measured by the fair value of options and shares granted, accounted for in accordance with IFRS 2 Share-based Payment.

There are no other related party transactions. Further details regarding transactions with the Directors of Tullow Oil plc are disclosed in the Remuneration Report on pages 57 to 73. 

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