Just In: Total Acquires Tullow Entire Interests in the Uganda Lake Albert Project for US$575 million; Capital Gains Cut to $14m

Tullow and Total E&P Uganda B.V. (Total Uganda) have signed a Sale and Purchase Agreement (SPA), with an effective date of 1 January 2020 in which Tullow has agreed to transfer its entire interests in Blocks 1, 1A, 2 and 3A in Uganda and the proposed East African Crude Oil Pipeline (EACOP) System (the Uganda Interests) to Total Uganda for a cash consideration of US$575 million plus potential contingent payments after first oil (the Transaction).

Tullow is currently the operator of Block 2. Total Uganda is currently operator of Block 1 and Block 1A and CNOOC Uganda Limited (CNOOC) is operator of Block 3A.

The Cash Consideration consists of US$500 million payable at completion and US$75 million payable following Final Investment Decision of the Lake Albert Development Project.  

Additional cash consideration may be received by Tullow in the form of contingent payments which will be payable on upstream revenues from the Lake Albert Development Project, depending on the average annual Brent price once production commences.

Tullow said in a statement on Thursday morning that together with Total they had “supportive discussions with the Government of Uganda and the Uganda Revenue Authority in recent weeks, including to agree the principles of the tax treatment of the Transaction.”

This includes the position on Ugandan tax on capital gains, which is to be remitted by Total Uganda on behalf of Tullow Uganda, and which is expected to be US$14.6 million in respect of the Cash Consideration.  

This marks the end of a bitter fight between government and the oil companies over the tax on the capital gains which had delayed the Final Investment Decision (FID).

Tullow was required to pay $167m (Shs600b) capital gains tax while the buying Total and CNOOC were also supposed to meet certain taxes for the deal to conclude.

Talks between oil companies and President Museveni must have borne fruit considering that URA had insisted on the tax to be paid.

“We are pleased to announce that a new agreement has been reached with Tullow to acquire their entire interests in the Lake Albert development project for less than 2$/bbl in line with our strategy of acquiring long-term resources at low cost, and that we have an agreement with the Uganda government on the fiscal framework,” said Patrick Pouyanné, Total Chairman and CEO in an email to ChimpReports today morning.

“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,” he added.

Tullow Uganda and Total Uganda now intend to sign a binding tax agreement with the Government of Uganda and the URA that reflects these principles which will enable the Transaction to complete.

Challenges

However, the transaction is subject to the approval of Tullow’s shareholders, to customary regulatory and government approvals and to CNOOC’s right to exercise pre-emption on 50% of the transaction.

Tullow said the transaction will strengthen it’s balance sheet as part of its financial strategy to move to a more conservative capital structure.

Tullow’s capital expenditure in respect of the Uganda Interests between the Effective Date and completion of the Transaction will be recovered through the SPA completion adjustments.

“The Transaction will remove all future capital expenditure associated with the Lake Albert Development Project whilst retaining exposure via contingent consideration linked to production and the oil price through the contingent cash payments described above.

Under the UK Listing Rules, this is a Class 1 transaction and is therefore conditional on approval by Tullow’s shareholders, by a simple majority of voting rights in favour. Tullow has consulted with shareholders holding approximately 27.5 % in aggregate of Tullow’s issued share capital and is pleased to report that they have indicated their support for the Transaction,” said the oil firm.

Dorothy Thompson, Tullow’s Executive Chair, commented today:

“Tullow has been a pioneering explorer in Uganda over many years and we are very proud of the role we have played in the founding and development of Uganda’s oil industry. We wish all Ugandans and our joint venture partners well as they take this important project forward,” he said.

“This deal is important for Tullow and forms the first step of our programme of portfolio management. It represents an excellent start towards our previously announced target of raising in excess of US$1 billion to strengthen the balance sheet and secure a more conservative capital structure. 

We have already made good progress with the Government of Uganda and the Uganda Revenue Authority in moving this Transaction forward, including by agreeing the principles on tax treatment, and we will work closely with the Government, Total and CNOOC over the coming months to reach completion as quickly as possible. We have also received strong support from our leading shareholders and look forward to receiving formal approval of this deal.” 

Summary of the terms of the Transaction

A Sale and Purchase Agreement (the SPA) with an Effective Date of 1 January 2020 has been signed in which Tullow Uganda Limited and Tullow Uganda Operations Pty Ltd. (together, Tullow Uganda) have agreed to transfer to Total Uganda for cash consideration the entirety of Tullow’s 33.3334% interests in each of the assets comprising the Lake Albert Development Project, being (i) the production sharing agreements for each of Blocks 1, 1A, 2 and 3A and the licences in Uganda and certain other contracts related thereto (the Upstream Segment) and (ii) the proposed East African Crude Oil Pipeline System (the Midstream Segment).

The SPA is based on the transfer of interests from Tullow Uganda to Total Uganda in exchange for cash at completion, deferred consideration to be paid as and when the Upstream Segment and Midstream Segment of the Lake Albert Development Project reach FID and contingent payments determined on the basis of future oil prices.

The total consideration for the Transaction is structured as follows: 

• US$575 million in cash, consisting of US$500 million on completion of the Transaction and US$75 million at FID of the Upstream and Midstream Segments.  
• Contingent annual payments to be paid on upstream revenues from the Uganda Interests (reduced to 28.3334% following exercise by Uganda National Oil Company (UNOC) of its back-in rights – see below) calculated as follows: (i) no payment if the average annual Brent price is less than or equal to US$62 per barrel, (ii) 1.25% (net of tax) if the average annual Brent price is greater than US$62 per barrel or (iii) 2.5% (net of tax) if the average annual Brent price is greater than US$70 per barrel.
• The reimbursement of joint venture costs incurred and paid by Tullow Uganda from the Effective Date to completion of the Transaction in respect of the Uganda Interests.