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Thanks Slift. What is the logic of booking a cost impaiment because future oil prices are lower but not recognise the benefit of contracted future hedges. The future hedges are incremental cash and improve assets.
No, hedge prices will not affect impairments.
Impairments (and write offs) are just for assets and it's simply for the balance sheet.
It makes the balance sheet look bad, but unless there are proper write offs, impairments are recovable as oil price shifts (and as a result the values of assets goes up).
Hi Slift, thanks that makes sense.
Are hedged prices used in the impairment forward curve ie should the 2020 and 2021 price be higher and impairment cost lower?
Hi Longish,
Potentially.
The long term oil price assumption is what the oil price may be in 5 years time.
Even a $5 drop in long term price assumption will only attribute circa. <$250m impairment.
I don't believe Tullow will decrease this long term price assumption any further unless there's evidence for depressed oil prices for a longer period of time.
I think the bigger factor is the short term forward curve price. Currently at $38/barrel for 2020 and $42 for 2021.
We may see some of the impairments recovered before the end of the year when there's upgrades in these forward curve prices.
If there is a downgrade to $55, an upgrade in forward curve prices will offset the impairments.
Will we get another impairment charge in H2? If BP is using $55, will tlw group policy change from $60 to $55?
Ther are a few things that could happen:
IR / Takeover / Merger / Even a small share buyback if they manage to achieve the Billion dollar target.
When they have Uganda money in the bank, we may see more interest from other companies. But I can't see any IR at the level they are at present.
Slift/Bashrisks,
Shareholders didnât vote against a rights issue, they voted against the option for new shares to be issued within the company that would be dilutive to current equity holders. Resolution 13 gives Tullow options to sweeten deals with creditors, it was only to a value of ÂŁ50m, but still not great for equity.
The opposition to resolution 13 is good sign, shareholders would obviously prefer a rights issue (that isnât dilutive if you take up your rights) over any equity dilution. Or in other words, they still see value in the companyâs assets.
On another point, the negative balance sheet is meaningless, but the optics are terrible. Would expect a rights issue before year end unless something else is happening in the background that weâre not aware of.
With TLWs ability to generate cash and reserve rich, a merger, takeover, JV look possible if the other entity is cash poor and results in more robust balance sheets
Maybe thats too much to do whilst the $1bn portfolio management activity is incomplete? TLWs corporate bandwidth has reduced with restructuring
Another scenario where some shares are allotted may be in the case of a merger with another company and what is being allotted has to do with bringing providing the other company shareholders with Tullow shares at an agreed ratio. For example if Kosmos Energy or Premier Oil was to merge with Tullow and the allotted shares go for the most part to the new shareholders of those previous company. At some point we may see a lot of mergers and acquisitions of companies to give greater stability and efficiency where it works extremely well to do a merger.
Worst case scenario RI wouldâve been only way out back in Q1, but obviously with hedges and recent oil price hike has come to rescue so with the oil price in mid forties and Uganda sold off I think for near future RI is off the table.
Hi BashRisks,
I believe there was circa. 30% that voted against. Since majority still voted for it, the company still has the option to allot shares. Tullow did state that they also communicated with shareholders that voted against, but will want the flexibility of being able to allot shares should they have to.
So yes, very unlikely to see a rights issue.
Hi Slift
Didnât the board oready vote against the rights issue earlier in the year?
I would hope they donât do a rights issue because the share price is oready too low and plus they have 1.4 billion shares circulating which is oready huge amount.
GLA
Hi slarti_bartfast,
I don't see Tullow issuing rights at the current share price. It will be very dilutive. I'd imagine a lot of shareholders will also be against it.
But idk what the forward strategy is for the business. September H1 results will give more insight into this.
Hi Slift,
'some of the $1.4b H1 impairments are recovered before the year end as the forward curve oil price is increased in line with oil price'
Do you think a rights issue a serious option (in tandum with an oil price rise) if for example, the new ceo wanted to buy something/ increase enterprise value?
Hi slarti_bartfast,
Yes, the impairment would leave TLW with a negative balance sheet.
IMO, the impairment was expected (or at least for 2020).
I was thinking a max of $1.2b impairment for this year.
It's likely that some of the $1.4b H1 impairments are recovered before the year end as the forward curve oil price is increased in line with oil price predictions.
Slift.
The $1.4Bn H1 impairment was not expected. Does this leave TLW with a negative balance sheet?