Thursday 27 April 2017

Tullow shares plunge after shock €600m rights issue

Founder Aidan Heavey to move roles at Tullow Oil in April.
Founder Aidan Heavey to move roles at Tullow Oil in April.
Donal O'Donovan

Donal O'Donovan

Tullow Oil plans to raise €607m by selling shares at a discount, in a deal that will cut the Anglo-Irish oil explorer's debt pile and invest in drilling sites.

The planned rights issue comes just before Tullow Oil's founder, Aidan Heavey, is due to step down as chief executive in April when he'll become chairman of the African-focused exploration group.

The deal caught markets off guard, with shares in London down the most in eight months in early trading yesterday, in the immediate aftermath of the announcement. The issue price for the new shares at 130 pence each is a 45pc discount to the closing price on March 16.

However, the deal has the backing of several major shareholders and the issue is fully underwritten by Barclays Bank and JP Morgan Securities, Tullow said.

Analysts at Bernstein also noted that management are also fully subscribing to the deal.

The additional capital from the rights issue "removes any final questions about our financial strength", chief operating officer Paul McDade, who is also Tullow's ceo-designate, said.

It will leave the company "in a much better position to take advantage of the potential we have and growth opportunities" in Africa and South America.

Low oil prices have forced Tullow to limit investment over the past two years. It has cut the number of employees by almost half.

Tullow has been squeezed as a result of money borrowed on the markets to develop a field off the coast of Ghana and the collapse in the price of crude oil from mid 2014. The Tweneboa-Enyenra-Ntomme, or TEN, project came on stream in August, and Tullow says capital-spending commitments will now drop as cash flow rises.

Nevertheless, concerns about its debt levels have contributed to a 24pc drop in the company's share price this year, before yesterday's announcement. The company has had to repeatedly state it is not a takeover target. But one analyst yesterday said the debt reduction and dilution of the share price could make Tullow an acquisition target.

"If you're a major looking to buy reserves of scale, Tullow's valuation is probably not that far away from what you'd think is reasonable," RBC Capital Markets analyst Al Stanton said.

Shares in the company fell as much as 16pc in London trading yesterday, the biggest drop since July. They were down 37.5 pence to 199.8 pence each by midday.

"Following the sale of its Ugandan assets to Total with limited cash upfront, there was increasing risk of a potential rights issue with the company having limited other levers to pull in order to accelerate the de-leveraging process," Michael Alsford, an analyst at Citigroup, said in a note to clients. The rights issue should be "sufficient" to refinance its debt this year and de-lever in the next two years, he said.

Analysts at Bernstein said the capital raise means Tullow will have resources to grow as the market recovers.

"We interpret this as a company emerging from the down-cycle and ready to get back to growth. Self-help measures since 2014 will reduce costs by $600m and debt would have fallen organically but taken longer. Tullow don't want to wait," the firm said in an investor note.

The rights issue will help Tullow reduce its ratio of net debt to earnings before interest, taxes, depreciation, depletion, amortisation and exploration costs to its target of 2.5 times from more than 5-times-costs at the end of last year, Paul McDade said, without giving a timetable.

In January this year Tullow sold a stake in its Ugandan oil rights, the Lake Albert development, to French oil giant Total in a deal valued at $900m. The Total deal only included $100m in upfront cash, with the balance made up of the French group's contribution to future costs.

Tullow said yesterday that China's state oil company Cnooc would exercise its right to acquire half of the 21.6pc holding being sold to Total.

Tullow doesn't plan to sell the rest of its stake in Uganda, and is hoping the project will start contributing cash flow when it comes on stream by 2021, Paul McDade said.

Uganda has an estimated 1.7bn barrels of recoverable oil at fields in the Lake Albert basin. The resources could be developed at a total cost of about $20 a barrel, including capital expenditure on drilling and pipeline construction plus operating costs, Paul McDade said.

On world markets oil prices fell below $50 a barrel this week, after US shale producers ramped up production, despite efforts by OPEC, the organisation of traditional oil-producing nations, to cap supply. (Additional reporting Bloomberg and Reuters)

Irish Independent

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