Shares in Tullow Oil fall as debt plan revealed

Shares plunged in Tullow Oil following the surprise announcement it was issuing a £607m (€695m) sales share at a vastly discounted price, writes Padraig Hoare.

The Irish-founded exploration company offered an issue price of 130 pence yesterday for new ordinary shares, a discount of 45% to the closing price on the previous day.

Shares in the company fell almost 15% following the announcement, which took analysts by surprise.

Chief operating officer Paul McDade said the company had begun to reduce its debt.

“Tullow has taken a number of significant steps since 2014 to re-set and restructure the business to ensure the group is well positioned to meet the challenge of lower oil prices. As a result, we are now producing positive free cash flow and have begun the process of reducing our debt,” he said.

He said the share issue meant it could focus on growing the business in Africa and South America.

With oil prices stabilising above $50 a barrel and better financial flexibility, Tullow plans to explore its existing fields in Ghana and Kenya as well as in Surinam later this year, he added.

“Tullow has a strong set of low cost production, development and exploration assets in Africa and South America and by accelerating the reduction of our gearing through this rights issue, we will be able to focus on growing our business by investing more across our portfolio and taking advantage of opportunities that industry conditions present,” he said.

The announcement comes months after it was confirmed founder and chief executive Aidan Heavey is to step down.

The 63-year-old founded the company in Tullow, Co Carlow in 1986. Mr Heavey will remain as chairman with Mr McDade taking over as CEO in late April.

Mr Heavey said following yesterday’s announcement: “Tullow and its staff have worked exceptionally hard over the past three years to re-set the business comprehensively in the face of the toughest conditions I have known in the oil sector.

“This is the right time to get our balance sheet in order and this offering will give Paul and the management team the necessary financial and operational flexibility to grow our business even if oil prices remain low.”

In February the company reported a post-tax loss of almost €560m for 2016, representing its third loss-making year. The company’s 2016 revenues fell by 19% to €1.2bn.

Accounting charges of approximately €650m that drove the 2016 loss brought to €3.7bn the amount Tullow has incurred in exploration expenses, impairments and charges in the past four years.

Oil prices fell sharply in mid-2014 just as the London-listed oil producer was investing heavily in an offshore oil project in Ghana.

It has cut almost half of its employees and is also selling a stake in a project in Uganda for around €840m.

One analyst said the debt reduction and the 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.

The rights issue was fully underwritten by Barclays, JP Morgan and other banks.

Tullow has interests in more than 110 exploration and licences in 19 countries.

This story first appeared in the Irish Examiner

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