Tullow Oil to divest Kenya business to Gulf Energy for $120m with future royalties, back-in rights

Why is Tullow Oil exiting its Kenya operations now?

Tullow Oil plc has signed a heads of terms agreement to divest its entire Kenyan portfolio to Gulf Energy Ltd in a deal valued at a minimum of $120 million. The agreement, executed through Tullow’s wholly owned subsidiary, Tullow Overseas Holdings BV, includes a multi-tranche payment structure and potential royalty-linked earnings. The decision marks a strategic shift in Tullow Oil’s operational focus and financial restructuring, as the company seeks to reduce debt exposure and reallocate capital to its core producing assets.

The sale includes Tullow Kenya BV, which holds the company’s full working interest in Kenya. With this transaction, Tullow transfers all past and future liabilities associated with the Kenyan assets to Gulf Energy. The move comes as Tullow intensifies its efforts to streamline operations, following a broader divestment strategy that recently included the $300 million sale of assets in Gabon.

This transaction is classified as a significant event under UK Listing Rule 7, which came into effect on 29 July 2024, requiring further disclosures as definitive agreements are finalised.

What does the $120 million consideration structure involve?

The transaction is structured across multiple payment tranches, designed to align with project development milestones and market conditions. The first tranche involves an immediate $40 million cash payment upon completion of the deal, expected in 2025. A second tranche of $40 million will be due upon approval of the Field Development Plan (FDP) or by 30 June 2026, whichever occurs sooner.

The third tranche consists of deferred payments totaling $40 million, to be paid quarterly at $2 million per quarter starting from the third quarter of 2028. These payments are conditional upon the Dated Brent oil price averaging at least $65 per barrel in the preceding quarter. Should the full $40 million not be paid by 30 June 2033, the balance will be settled in a single bullet payment, regardless of oil price levels.

In addition to fixed consideration, Tullow is eligible for quarterly royalty payments calculated at $0.50 per barrel on 80% of total production, subject to production thresholds and oil price conditions.

How does this align with Tullow’s financial strategy and stock market performance?

Tullow Oil’s exit from the Kenyan market is part of a wider strategy to bolster its financial position and improve capital discipline. Interim Chief Executive Officer and Chief Financial Officer Richard Miller stated that the deal is expected to contribute $80 million in near-term cash receipts, while also reducing exposure to future development costs. He added that the combined proceeds from Kenya and Gabon transactions position the company well for refinancing efforts.

Tullow’s move comes at a time of heightened investor scrutiny. On the London Stock Exchange (LSE: TLW), the company’s stock closed at GBX 13.86 on April 15, 2025, up 3.74% from the previous session. However, year-to-date, the stock has fallen by nearly 38% from GBX 21.33, reflecting investor concerns over long-term growth, debt levels, and asset monetisation timelines.

Analyst sentiment on Tullow Oil remains neutral, with a consensus rating of “Hold” based on a mix of buy and sell calls. According to MarketBeat, the company’s news sentiment score stands at -0.05, reflecting mixed perceptions in recent media coverage. Tullow’s current price-to-earnings (P/E) ratio of 4.86 suggests that the stock may be undervalued relative to broader market averages. However, its dividend payout ratio—reportedly exceeding 470%—raises questions about sustainability and future dividend policy.

Notably, insider buying activity has been observed in recent weeks, with non-executive director Roald Goethe increasing his stake in the company. Such purchases may indicate internal confidence in Tullow’s medium-term prospects as it repositions itself with a leaner, more focused asset base.

Investment sentiment remains divided. Risk-tolerant investors may view the current valuation as an entry point, especially with debt reduction efforts underway and potential royalty streams in place. Conversely, conservative investors may prefer to await further clarity on refinancing progress and development outcomes tied to the Kenyan and other upstream assets.

What is the strategic value of Gulf Energy as the buyer?

Gulf Energy Ltd, the acquiring party, is a Kenya-based energy infrastructure firm with operations spanning oil marketing, trading, and logistics. Its acquisition of Tullow’s Kenyan assets could reinvigorate the East African country’s upstream oil ambitions, which have faced delays due to capital constraints and infrastructure development hurdles. Gulf Energy’s domestic presence may offer advantages in navigating regulatory approvals and aligning with national development strategies.

Tullow’s involvement in Kenya dates back to early discoveries in the South Lokichar Basin over a decade ago. Despite the basin’s commercial viability, project development had been slow due to the lack of pipeline infrastructure and regulatory headwinds. The transfer of assets to a locally established entity like Gulf Energy may present an opportunity to re-energise progress toward field development and eventual export.

What are the deal’s regulatory and timeline milestones?

The transaction remains subject to multiple conditions precedent, including necessary regulatory approvals and delivery of satisfactory payment guarantees for the second and third tranches. Finalisation of a full Sale and Purchase Agreement (SPA) is expected in the coming months, with deal completion targeted for 2025. Tullow will provide further market updates once definitive documentation is signed.

Given its classification under UK Listing Rule 7, the transaction is considered material to Tullow’s financial disclosures, prompting mandatory market notifications once binding commitments are in place.

What is the potential long-term impact on Kenya’s oil development?

The sale could reset the trajectory of Kenya’s upstream sector. With Gulf Energy at the helm, the South Lokichar Basin project could move toward final investment decision (FID) and field development plan approval. The new ownership structure may also unlock financing avenues previously unavailable to Tullow due to its capital constraints.

For Kenya, this development represents a chance to capitalise on domestic hydrocarbon resources after years of delay. Successful execution could catalyse investments in export pipelines, terminals, and auxiliary infrastructure necessary to monetise crude production on a commercial scale.

Meanwhile, Tullow retains an option to re-enter the project with a 30% interest in future development phases, should it elect to do so. This back-in right provides optionality without upfront capital risk, preserving exposure to potential long-term value creation tied to resource maturation and market conditions.

Where does this leave Tullow in the global energy landscape?

Tullow Oil’s strategy mirrors a broader industry trend of divesting frontier and early-stage assets in favour of core production operations with clearer cash flow visibility. In an environment shaped by energy transition policies, volatile oil prices, and investor demand for capital discipline, companies like Tullow are repositioning for resilience rather than expansion.

By exiting Kenya and completing the Gabon divestment, Tullow enhances its ability to meet financial obligations and pursue refinancing. The company’s recent moves, coupled with insider buying and a neutral analyst outlook, suggest a stabilising trajectory, albeit with challenges ahead in execution and stakeholder engagement.

As the global oil and gas sector continues to evolve, Tullow’s strategic decisions—anchored in asset optimisation and financial recalibration—will be critical to sustaining shareholder value.