RBC Capital downgrades Tullow Oil after 'premature' rights issue
Analysts at RBC Capital Markets downgraded Tullow Oil on concerns about the oil and gas explorer's bid to shrink its debt burden through a rights issue.
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RBC believes that the rights issue should insure Tullow’s survival, but that it draws out any share price recovery and so it ‘downgraded its stock to ‘sector perform’ from ‘outperform’ and cut its target price to 275p from 400p.
On 17 March, Tullow announced that it planned to raise £607m through a rights issue of 467m shares, where existing shareholders will be able to buy 25 new shares for every 39 shares they own at 130p each, a 45% discount on the closing price on 16 March.
RBC said that although Brent crude’s slide back to $50 per barrel was testing investors’ confidence, it believed that Tullow was turning a corner, and the resumption of ‘normal’ service at its sites would help accelerate its financial recovery while an oil price recovery in the second half of the 2017 financial year and sectorwide success with the drill-bit could have stimulated investor interest.
The rights issue appeared to be “premature” following on from following on from July's $300m convertible loan and January's $900m disposal of the Uganda business.
“Although Tullow is dealing with unprecedented levels of debt, few shareholders would have expected the company to announce a $750m fundraising on the heels of a $900m disposal”.
By doing this, Tullow has highlighted a problem with the ‘create value/harvest value' strategy, when sellers are looking to limit capital gains tax and buyers are avoiding large upfront payments.
RBC expects the share issue will dilute the impact of future newsflow, as Tullow’s exploration team will need to work harder, to move 1.5bn shares, which could have negative implications for Tullow’s 2018 exploration-led growth strategy.
As Tullow continues to de-risk its projects with its 'material stakes in material projects' its is becoming a more credible takeover target,according to RBC, with major oil companies more than able to address Tullow's debt issue without selling key assets.
Shares in Tullow Oil were down 1.04% to 199.70p at 0853 GMT.