Tullow Oil (LON:TLW)
Tullow Oil (TLW) have announced this morning a fully underwritten rights issue to raise approximately £607m through a 25 for 49 rights issue of c467m new shares at a price of 130p per share.
This represents a discount of c45% and c35% to the current share price and TERP respectively. This will allow TLW to lower its gearing ratio to a level it is more comfortable at, its aim is for less than 2.5x net debt/EBITDAX, which had grown to 5.1x at 31 December 2016. Reducing its level of debt will allow TLW to improve both its operational and financial flexibility which will enable it to grow the company in the next 3 to 5 years.
One of the stated use of proceeds made by TLW this morning is to “drill high impact, potentially high return prospects across Tullow's African and South American portfolio”. Therefore, we view this to be particularly positive for TLW’s partners across its licences, in particular Eco (Atlantic) Oil & Gas (ECO)# which has a 40% working interest in the TLW operated Orinduik Block in Guyana, adjacent to the giant Liza and Payara discoveries made by ExxonMobil (XOM). TLW and ECO are about to conduct a 3D seismic survey over the Orinduik Block, which TLW estimates to contain prospective resources of 900mmboe, to refine the targets and scope out new leads. The fact that TLW have stated it plans to drill in the next 3-5 years across this portfolio is extremely positive and is ahead of our estimates.
ECO is also a partner with TLW in Namibia where TLW is contingently carrying ECO for the costs of one well on the Cooper Block. We, therefore, re-iterate our BUY recommendation and 25p TP on ECO.
We also note this morning Range Resources (RRL) positive set of interim results for the six months ended 31 December 2016. Operationally production was unchanged for the period at 495bopd compared to the six months prior. An independent reserves audit showed 2P reserves increased to 24.4mmboe and water injection has been ongoing on two waterflood projects, with production commencing on one of these as a result.
Financially, revenues had increased by 38% YoY to US$3.8m (H2 16: US$2.8m) largely due to higher oil prices. Whilst operating expenses improved 9% YoY to US$40/bbl. RRL also has a strong cash position of US$20.6m (H2 16: US$13m) with no debt repayments due in the next 15 months.
We view this as positive read across for LGO Energy (LGO)# which following the restructuring of its balance sheet in December 2016 now appears to have turned the corner and preserved its reputation as an operator in Trinidad. It is now refocusing its efforts on the Goudron Field development plan, including its own water injection programme. We maintain our BUY recommendation and 22p TP on LGO.