Tullow Oil has launched a $300m convertible bond offering to shore up financing for its big exploration projects in Africa and reduce dependence on lending facilities linked to the volatile price of oil.
Like many in the industry, Tullow has in the past relied heavily on reserve-based lending, which uses a company’s oil and gas reserves as collateral for borrowing.
However, the fall in oil prices over the past two years has caused cuts in this form of credit as the value of reserves has fallen.
The proposed will provide more working capital for at a time when the UK-listed group is preparing to pump the first oil from its Ten field off the Ghanaian coast while pressing ahead with projects in Uganda and Kenya. But Tullow said the main motivation was a desire to diversify its sources of funding rather than a need for more cash.
Net debt at the end of June was $4.7bn, about 4.7 times last year’s earnings before interest, tax, depreciation, amortisation and exploration costs. Tullow has said it expects this to begin falling once its Ten field comes on stream.
Shares in Tullow fell as much as 16 per cent after the bond issue was announced on Wednesday. Analysts attributed this mainly to technical reasons related to funds shorting the stock as a hedge against the bonds.
Stephane Foucaud, analyst at FirstEnergy, said the fundraising was a sensible move to reduce the sensitivity of Tullow’s debt to oil prices.
In common with many industry peers, Tullow has been under pressure from , but Mr Foucaud said the worst had passed.
“Tullow is approaching a turning point where the big capital expenditure will be behind them,” he said. “The profile of the company is changing from an old, higher cost structure to a new one.”
Analysts said the convertible bonds provided a more stable form of finance than reserve-based lending, which is subject to — and potentially its credit limit — every six months.
Some banks, including BNP Paribas, have since the oil price crash, tightening the squeeze on producers.
The recent partial recovery in oil prices to about $50 a barrel has eased the pressure, but Mr Foucaud said companies were still struggling with high cost bases set in a vanished era of higher prices.
Tullow said its bonds would carry a coupon of between 5.875 and 6.625 per cent a year payable semi-annually in arrears. The bonds will be convertible into ordinary shares with an initial conversion price at a premium of 30-35 per cent above the volume weighted average price on July 6.
The first interest payment is due in January 2017, and any unconverted or unredeemed bonds will be due in 2021. Barclays and BNP Paribas are acting as joint global co-ordinators and joint bookrunners.
