FT: Tullow and Premier Oil11 Mar 2020 09:57
Not sure if this was posted up yesterday:
It’s the debt. It’s always the debt that brings a company down.
Among the biggest losers of Monday’s market turmoil were small-cap UK energy stocks. Premier Oil fell 57 per cent, EnQuest and Tullow Oil by about a third. Cairn Energy, Energean and Hurricane all suffered.
Crude has recovered a little. The companies’ share prices have fallen more and bounced back less or not at all. The question is who can survive an oil price stuck below $40. Break even for most is above $50, assuming dividends and capital spending remain intact.
We have been here before. The last price crash started in 2014. Producers were still feeling it two years later. Premier and EnQuest spent 2016 in negotiations with lenders. Then, Premier had to balance $2.8bn of debt with capital-intensive projects during an oil price slump. Now, it is trying to balance a $2.9bn refinancing — with almost $900m of acquisitions announced in January — during an oil price slump.
Premier had too much debt before the latest ructions. It knew that. It has been paying it down. Not fast enough. The timing is terrible. Another couple of months and Premier would have restructured its debt and completed the $500m cash call. As it is, Premier’s lenders have signed off, but it has not secured shareholder backing. The chances of it doing so now are vanishingly slim. Premier’s market cap is barely $300m.
Tullow’s timing is equally unfortunate. It has results out on Thursday. But it has already warned of a $1.5bn writedown because of lower long-term crude prices. And that was based on a downgrade from $75 a barrel to $65 a barrel, not current levels.
Tullow has until next year before its debt falls due. If Premier’s new debt deal goes through, the debt maturity is pushed out until 2023. Covenant tests can still make life tricky, though. Capex will have to be cut. That is most difficult for Tullow and easier for debt-free Cairn.
Most lenders will be loath to let either Premier’s or Tullow’s wells to run dry. That said, hedge fund Asia Research & Capital Management has a huge 17 per cent short in Premier’s shares, to insure the hedgie’s holding of Premier’s debt. It is the oil group’s biggest lender. The short no longer looks so silly.
Sign In
Follow the stocks
