Tullow Oil (LSE: TLW) shocked the market at the end of last week. The company announced that it was undertaking a $790m rights issue in an attempt to shore up its balance sheet that’s been left in tatters after years of hefty capital spending and low oil prices.
The rights issue announcement came from out of nowhere, but the capital raising wasn’t wholly unexpected. Tullow has been struggling since the price of oil plunged below $100 a barrel in 2014. So far, the company has managed to dodge any cash calls thanks to management’s quick reactions in slashing costs. However, as it turns out, these cost cuts have not been enough and now, with the price of oil once again on the back foot, it looks as if management is panicking.
Cash crunch
The sheer size of the rights issue says a lot about Tullow’s financial position. The cash call, which amounts to £607m, is being done at 130p, a 45% discount to the firm’s share price before the announcement. The issue is being done on a 25 for 49 basis, so for every 49 shares investors currently own they’ll be able to subscribe for an additional 25.
With a market value of only £1.8bn at time of writing, the cash raised from the issue will comprise nearly half of Tullow’s market value after the deal. Furthermore, the discount of 45% to Tullow’s prevailing share price shows how desperate the company is to win over investors.
Debt mountain
Tullow is saddled with $4.8bn debt and is pulling all available levers to try and reduce this mountain.
As well as the rights issue, Tullow announced it would reduce its stake in the Lake Albert oil project in Uganda earlier this year. The $900m deal is being struck to help the company finance the development of the project. Tullow also issued $300m in long-term bonds last year to reduce its dependence on bank lending. Management recently started discussions with its banks over refinancing a $3.3bn reserve-based lending facility.
It looks as if Tullow is now in the same position that Premier Oil (LSE: PMO) was a few month ago. Premier’s management has always maintained that the company has the full support of its lenders, despite the fact that its debt refinancing was dragged out for more than six months. However, unlike Tullow, Premier hasn’t (yet) asked shareholders to help finance the business. The company successfully reached an agreement with its lenders last month, avoiding significant equity dilution.
Running out of time
Premier’s £2.2bn debt mountain is a lot smaller than that of Tullow, but compared to the company’s size (market cap of £320m) it is relatively significant.
So, the fact that lenders have been prepared to give Premier some leeway, while Tullow has been forced to ask for extra cash is concerning. The latter’s management is adamant that the rights issue was not pushed by lenders, but it’s difficult to believe that the issue was not in some way influenced by ongoing debt discussions. These actions lead me to believe that perhaps Tullow is in a tighter financial position than it is willing to admit.
