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Deutsche Bank says Tullow Oil’s surprise rights issue is attractively priced

“The decision to raise funds at this stage may come as a surprise and should prompt questions as to what has changed in 1Q17 to prompt this action now?”
Two oil workers for Tullow Oil
Tullow is selling new shares at 130p

Deutsche Bank says Tullow Oil plc’s (LON:TLW) US$790mln rights issue may have come as a surprise to investors, but, the recapitalisation is attractively priced.

At the end of last week Tullow announced existing shareholders will receive rights to buy 25 new shares for every 39 shares they own, at a purchase price of 130p per share - a huge 45% discount to Thursday’s closing price.

The rights issue aims to alleviate debt pressure and re-funds the group so that it can put its attention on growth projects.

Tullow told investors that proceeds will go to new drilling opportunities, further exploration and appraisal programmes around the Jubilee and TEN fields offshore Ghana.

It plans to invest in more exploration and appraisal activity in Kenya, to further build and prove up its resource base. High impact, and potentially high return, drilling projects in Africa and South America will also be funded.

In a note, Deutsche analyst David Mirzai said: “The decision to raise funds at this stage may come as a surprise and should prompt questions as to what has changed in 1Q17 to prompt this action now?”

Mirzai expects an amount of discontent from equity holders regarding the timing, i.e. that a rights issue wasn’t committed to earlier when Tullow’s price was higher.

“Nonetheless, we think that the rights issue has been attractively priced for existing shareholders and believe the c.15% short position will also provide an outlet for any excess on the fully underwritten rights.”

“Tullow believes the equity raise will give it the necessary financial and operational flexibility to grow the business even if oil prices remain low.”

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