Annual Report and Accounts

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Notes to Editors

Tullow Oil plc

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.

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Website: www.Tullowoil.com

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                

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.

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.

* 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.

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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