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Tullow Oil to hit financial reset with US$790mln rights issue

It is a hugely dilutive move but will provide the reset need for Tullow Oil's balance sheet to support new investment in growth projects.
Tullow oil workers
New shares will sold at a 45% discount to yesterday's closing price

Tullow Oil plc (LON:TLW) is the next oily cab off the refinancing rank, with plans to raise US$790mln of new funds through a rights issue.

Existing shareholders will receive rights to buy 25 new shares for every 39 shares they own, at a purchase price of 130p per share - a huge 45% discount to Thursday’s closing price – and it will bring in an anticipated £607mln (US$790mln).

It comes ahead of management changes, with chief operating officer Paul McDade set to takeover from current chief executive Aidan Heavey, and will deliver a much-needed shot in the arm for the group’s finances.

"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,” Heavey said in a statement.

“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."

The capital injection puts Tullow on a footing to again advance growth projects.

Tullow highlights that oil market conditions in recent years have seen its gearing rise above its target, of 2.5x earnings (EBITDA excluding exploration), with the ratio above 5x at the end of 2016.

The oiler says it has continued to generate free cash flow and repay debt, but, it has lost financial flexibility.

It earmarks some of the rights issue proceeds for investments in new drilling opportunities, further exploration and appraisal programmes around the Jubilee and TEN fields offshore Ghana.

Tullow also plans to invest in more exploration and appraisal activity in Kenya, to further build and prove up its resource base.

High impact, and potentially high return, drilling projects in Africa and South America will also be funded.

Paul McDade said: “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."

Tullow also provided investors with an update on ongoing trading, saying that oil prices have remained generally stable (with Brent averaging US$55.74 to the end of February) and the group’s underlying cash operating costs are materially in line with those seen in 2016.

The rights issue is underwritten by the investment banking arm of Barclays, while JP Morgan, Morgan Stanley are also involved in the funding alongside BNP Paribas, Crédit Agricole CIB and Société Générale.

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