Tullow Oil tanks after proposing $750m rights issue at 45% discount

Tullow Oil has announced plans to carry out a £607m ($750m) rights issue at a 45% discount to its last closing price as feels it is the "right time to get our balance sheet in order".

Tullow, which also on Friday reported on an readjustment to its farm-down agreement in Uganda, will issue shares at 130p in the 25-for-49 rights issue and expects to reap roughly £586m net of expenses, if shareholders give their approval.

The issue price is a 45% discount to Thursday's closing price of 237.3p.

At the end of last year, Tullow's net debt stood at $4.8bn, having increased 19% despite issuing $300m of convertible bonds, though the company moved into positive free cash flow and still had significant headroom from its bank facilities and free cash of $1.0bn. The 2016 year-end gearing ratio rose from 3.8 to 5.1.

Chief operating officer Paul McDade, who takes over as chief executive in April said: "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.

"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."

Incumbent chief executive Aidan Heavey said: "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."

Shares in Tullow fell 15% on Friday morning, where there are roughly 90% down from their 2012 peak.

Analyst Neil Wilson at ETX Capital said Tullow's gearing remains a concern but wondered if its fortunes were turning around.

"We saw positive free cash flow in Q4 2016 as it began pumping oil from its TEN project in Ghana," he said. "Operating profit is expected to swing back into the black this year from a loss of $500m last year, which was a third straight year of losses. Capex is down by $400m to $500m this year.

"With oil prices coming under renewed pressure from a wobbly OPEC deal and rising US shale production, Tullow will need to hope that prices remain at least around $50 or it might have to go back to investors, cap in hand, again.”

Jamie Constable at broker N+1 Singer said the rights issue "removes any questions over their balance sheet and covenants" as the company is now free cash flow positive. "They can now move the group forward and take advantage of any opportunities that may be out there."

CNOOC takes up option

In January Tullow agreed to farm-down 21.57% of its 33.33% interests in four exploration areas in Uganda to France's Total for a total consideration of $900m.

On Friday, Tullow said China National Offshore Oil Corporation, which is a partner in the project and had a joint operating agreement with Tullow and Total, has exercised its pre-emption rights to acquire 50% of the 21.57% interest being transferred to Total on the same terms and conditions that Tullow agreed with Total.

Tullow said this meant the amount, structure and timing of the consideration payable to Tullow would all be on the same terms, meaning no change for Tullow.

The FTSE 250 oil producer said completion of the farm-down, which would be subject to conditions including the approval of the Ugandan government, would mean it will cease to be an operator in Uganda but will retain its 10 per cent interest in the project once the government has exercised its back-in rights.