Saturday 1 October 2016

Tullow Oil stock soars on back of positive review from its lenders

Published 02/10/2015 | 02:30

Aidan Heavey chief executive of Tullow Oil
Aidan Heavey chief executive of Tullow Oil

Tullow Oil shares have surged after the company's banks left loan agreements unchanged following an update on the oil explorer's reserves.

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Lenders maintained credit lines following the evaluation of reserves, which the company said demonstrates their continued support despite a period of low oil prices.

The Irish-founded, UK-based and Africa-focused oil explorer's available debt capacity remained unchanged at $3.7bn (€3.31bn) following a routine six-month review of its reserve-based lending. Shares of the company climbed as much as 13pc after the result was announced - the biggest one-day gain in four years.

"The fact that the capacity has been maintained shows the banks have more comfort around the strength of the resource base," Alex Topouzoglou, an analyst at Exane BNP Paribas, said by e-mail. "This is positive" because there is a risk in the current market that banks will reduce lending capacity as they take a more cautious view on the oil price, he said.

Shares in Tullow Oil fell more than 50pc in the third quarter, the steepest quarterly loss on record, as oil slumped to a six-year low and fears about the strength of the global economy wiped almost $11 trillion off global equity markets.

The company's net debt stood at $3.6bn in the first half, equivalent to 94pc of its total equity.

"Today's announcement demonstrates the robustness of Tullow's debt-capital structure and emphasises the strong support that we are receiving from our relationship banks," Ian Springett, Tullow's chief financial officer, said in a statement.

Reserve-based lending is a type of financing where a loan is secured by undeveloped reserves, with debt being repaid using the proceeds from sales of resources in a field.

"Investors are mostly concerned about debt, the fear of a rights issue and the ability to fund growth," said Kate Sloan, an analyst at Macquarie Bank Ltd, who increased the company's target price to 242 pence from 239 pence on September 29. "It's the same for all those leveraged explorers and producers, there are worries about debt levels for all of them," she said.

Shares of the company gained as much as 13pc to 190.90 pence, the biggest increase since September 9, 2011. They were up 9.9pc at 185.40 pence at 12:11 pm in London.

More than £2bn has been wiped off Tullow's value so far in 2015 as the cost of a barrel of oil went into freefall.

Goldman Sachs warned last month that global oversupply in the oil market is even more dramatic than expected and could push prices to as low as $20 a barrel.

Analaysts at the same global bank have tipped Tullow Oil as a potential takeover target, because of the sharp drop in share price.

Tullow boss Aiden Heavey ruled out the possibility of a takeover during the summer, including, he said, because a deal which would have to be agreed by each of the African countries where his business operates, would be too complicated. (Additional reporting Bloomberg)

Irish Independent

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