--UPDATE, ADDS FURTHER BROKER COMMENT--
Tullow Oil (LON:TLW) advanced around 10% in early deals after revealing it had come out unscathed from a six-monthly review of its reserves based lending.
Lenders have left Tullow’s credit facilities unchanged, the company said.
The oil firm therefore still has some US$3.7bn of debt capacity. Tullow added that, as of September 30, it had cash and undrawn credit amounting to US$2.1bn of ‘headroom’ with no near term debt maturities.
It comes after Tullow renegotiated its debt covenants in March, when it also raised US$450mln of new capital.
Reserves based lending is an issue that oil investors will likely hear a lot about in the coming months, amid the continued lower oil price environment.
For the uninitiated, reserves based lending - or RBL - facilities could be thought of as essentially an asset backed loan whereby companies use oil in the ground as collateral in order to finance development activity (which in turn allows the oil to be produced and sold).
The trouble, for some companies, is that because of dramatically lower crude prices the oil in the ground may no longer have sufficient value to cover the loans – and as periodic RBL reviews come around the ‘mortgage’ taken out on the reserves may soon be in negative territory.
In North America’s shale plays the use of RBL financing has been particularly prevalent. It has been used as an alternative to traditional lending, which is based on the financial performance of already producing assets.
There, it was seen as one of the key drivers to the boom. But, it is also now seen as a key risk to a possible further collapse.
Broker RFC Ambrian, in a recent note, reckoned many US operators may not survive into the next financial year if they cannot come to new arrangements with RBL lenders.
“Apparently the ‘spring’ redetermination of borrowing bases wasn’t too bad, but the ‘fall’ ones look a bit of a car crash,” the broker said.
Today’s statement from Tullow, which is underpinned by production at the giant Jubilee field offshore Ghana, however, shows that its RBL facilities are not currently a problem.
Ian Springett, Tullow chief financial officer, emphasised the company had a robust debt to capital structure, and said the company benefits from strong support from its banks.
“Generating such significant liquidity at this time reflects our prudent hedging programme and the quality of our producing and development assets,” Springett added.
“We are fully funded to meet all of our commitments including the ongoing investment in the TEN development.
“This important project remains on schedule and on budget to deliver first oil and significant additional cash flow in mid-2016."
Located just 20 kilometres from Jubilee, TEN - the Tweneboa, Enyenra and Ntomme discoveries – is Tullow’s second major development. Through its initial phase TEN is expected to produce 300mln barrels oil equivalent, at a rate of 80,000 barrels per day.
First oil from TEN is scheduled for mid-2016, and the project has an estimated capital cost of nearly US$5bn.
Caren Crowley, analyst at Dublin broker Davy, in a note, said: “We view an unchanged borrowing base as a successful outcome to these talks with the group fully funded to meet all its commitments.”
In London, Tullow was up 18.4p, just over 10%, trading at 187.4p.
“While positive drilling news nearly always get a good investor response, today’s gains most likely derive from a collective sigh of relief given mounting concerns about debt loads in the E&P space,” said Mike van Dulken, analyst at Accendo Markets.
Investec analyst Brian Gallagher, meanwhile, questioned whether renewed access to debt was what Tullow’s capital structure needed right now.
“We don’t dispute that access to debt is important,” he said in a note.
“However we urge equity holders to step back and consider the broader capital structure and their place within it. The ongoing cost also needs to be considered.
“Yes, debt is cheap right now, but will it be forever?”
Gallagher today repeated a ‘sell’ recommendation for Tullow.