Thursday 19 April 2018

Can Aidan Heavey rescue Tullow Oil?

Aidan Heavey's Tullow Oil must stare down its lenders as it continues to pour billions into oil assets while prices plummet. Can its Lamborghini owning boss turn the oil company's fortune around?

Tullow boss Aidan Heavey. Photo: Mark Condren
Tullow boss Aidan Heavey. Photo: Mark Condren
Sarah McCabe

Sarah McCabe

Tullow Oil will remember 2014 as one hell of a bad year.

The oil company's 2014 results, released last Wednesday, made for grim reading. The value of crude oil has fallen by 50pc since June, plummeting from $107 a barrel to under $50. Against this backdrop Aidan Heavey's Carlow-born exploration company made a loss - a staggering $2bn one - for the first time in 15 years. Shares in the company are down around 55pc in one year - and two-thirds compared to 2011.

Drastic cost-cutting measures were outlined. Tullow suspended its dividend payment, saving £180m in one simple swoop while leaving shareholders with a final payout for the 2014 financial year of just 4p a share.

Its exploration drilling budget was slashed to $200m from a previous target of $1bn. Plans for $500m worth of cost savings over the next year were outlined, almost certainly including job losses.

While listed on the London Stock Exchange, Tullow employs about 160 people in Ireland at its offices in Leopardstown in south Dublin. Their employment status is not yet clear.

Speaking to the Sunday Independent on Friday, Heavey said Dublin was a key office with a lot of talent that no sensible company would let go of easily.

But are all these measures enough to convince Tullow's lenders not to get the heebie jeebies?

The company is massively in debt. It ended 2014 with $3.14bn in outstanding loans. The reason it is so in debt is because Tullow owns about 1.2bn barrels of oil assets, mostly in west and east Africa, and is only producing oil from 10pc of them. It is pouring money into projects in Ghana, Uganda and Kenya in a rush to get them into production. A lot of hope is invested in its TEN project in Ghana, which is expected to start generating cash next year.

"It will be a dramatic change to cash flow," said Heavey.

The sharp-suited former Aer Lingus accountant has been at the helm for almost two decades, so he has weathered a few oil price dips before. From its first licence on a field in Senegal, he has grown Tullow into the biggest single holder of African oil acreage.

Heavey and his team are due to meet with the providers of Tullow's main loan facility in March. This is one of two annual meetings. The lenders are a consortium of about 30 different parties, most of them banks. The loan facility they are meeting about was agreed on the basis of oil selling for around $70bn a barrel.

They must be a little nervous. Tullow now looks like it could break a crucial loan covenant - a major warning bell for lenders that gives them rights to change loan terms. The covenant will be breached if its net debt exceeds 3.5 times its earnings.

"There is a possibility, if oil prices stay at this level, that we could breach it next year," said Heavey, playing down the idea. "But this would be remedied shortly after, when TEN comes on stream. And we are not going to anyway...

"There won't be any reduction in our debt facility. Covenants are just a mechanism that banks use to manage debt.

"Even if our debt goes up to $4bn it will be very small in comparison to our assets and the security that our banks have. We could sell off a portion of our assets and clear our debt tomorrow."

Others are not so sure. "It is possible that these lenders will adjust the amount they are prepared to make available to Tullow," said Caren Crowley, analyst at Davy stockbrokers.

"This facility was decided based on a price for oil of around $60 to $70 a barrel. There is a possibility they will reassess it in light of the slump in oil prices. If the amount they make available to Tullow is reduced drastically, so to will the company's investment plans."

Compounding the problem are signs that current low oil prices may not just persist - they may get worse.

Ben van Beurden, the chief executive of Royal Dutch Shell and arguably the sector's most senior executive, said last week that prices will probably stay at the current six-year low for the rest of 2015. The oil industry should not expect a quick rebound, he added.

Oil-exporting cartel Opec, which pumps a third of the world's crude, shocked markets last November when it decided to allow oil prices to go into free fall after its members agreed to keep their production levels unchanged.

Despite concerns over the economic impact of weak oil prices from Venezuela, Nigeria and Iran, Opec isn't expected to meet again until June.

But Heavey is optimistic. He doesn't think prices will stay at $50 for the rest of 2014. "No. Everyone is budgeting for it... but we don't realistically expect it to stay at that price. The reason why is countries, not companies.

Oil companies can cope with producing oil at this price better than oil-producing countries; we adjust quickly and cut costs quickly whereas the countries have major capital budgets that they can't reduced easily. So it won't be allowed to continue. The Gulf states are hurting, capital projects have been cut. I think it will gradually increase.

"We could see a 50pc increase between now and the end of the year." The price of a barrel of oil could still fall below $50 a barrel in the short term, he concedes, "and it probably will". "We've budgeted for that."

Tullow was the first of its competitors to start cost cutting, he said. "We started early, we began a restructuring programme last year, which will be finished by March. The industry had been changing for several years, with the bulk of investment favouring shale, so we responded quickly. We are about six months ahead."

But big fish are catching up. Oil giants such as BP, Chevron and Exxon Mobil have all announced major spending cuts over the past month. Shell, Britain's largest company by market value, has said it will cut its spending by $15bn over the next three years and has shelved a petrochemicals project in Qatar.

"Shell brought in $45bn last year and spent $30bn to $35bn of that on capital expenditure and $12bn on dividends," said Richard Griffith of Cannacord Genuity.

"This year it will only generate $30bn and so will have to pay its dividend out of debt [Shell's dividend is sacrosanct]. Another year of that and we would probably see Shell being uber-aggressive with service companies and suppliers. Bring that same set of circumstances down to Tullow's size - Tullow is a twentieth or a thirtieth of the size of Shell. It has the same problems, but smaller numbers, which means less flexibility."

Al Stanton, analyst at RBC, said: "In the worst-case scenario, if the price of oil falls to $40 a barrel and stays there for a year, they will be looking again at every dollar they spend - starting with head office travel and flowing right down through the business.

"Every bit of non-generative cash spending gets cut; every bit of spending that does not generate 1.5 times what you invested gets cut."

But strangely enough there is an upside to low oil prices. Heavey expects "significant" cost reductions to eventually emerge from the meltdown in oil prices, as service providers fight harder for less business. Drilling costs are coming down by 50pc, while other costs should fall by 30pc to 40pc, he has said.

Analysts agree that there could be a lot to gain. "Best-case scenario: the oil price slump puts pressure on the industry to cut costs, and you have a situation in six months or a year where costs are going down and revenues going up, and companies are strengthening their balances more quickly than expected" said Stanton.

"Let's face it, the industry got a little fat. You can make an analogy with forest fires. They are not welcome, but many emerge stronger on the other side and I think there is an element of that associated with this industry. For the better companies - and I would include Tullow in that group - it could be a good thing.

"Let's be clear - Tullow's stuff in Ghana are very good assets. They cost about $10 a barrel to produce oil from, so there is a lot of profit to be made even if oil is only selling at $50.

"Tullow is not in the same dilemma that some North Sea producers are in, where your operating costs are $40 or $50 dollars a barrel."

For Heavey, that's what it is all about. "We have some of the best assets in the oil industry. Next year TEN will come on stream and we will be producing 100,000 barrels of oil a day in West Africa. We are 50pc through the project, we have drilled all the wells, the riskiest part. We are ahead of schedule."

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