The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
Firstly, Tullow's CFO is moving on! We're not aware of who his replacement will be. Secondly, the 2025 Bonds are subordinated debt. I cannot imagine that the 700+ pages of the prospectus that was issued with them (and with the main facility) would not have a section precluding the purchase of these bonds with Company funds. After all, how would I feel as a senior debt holder if the company went under, having used some of its cash to repurchase subordinate debt? What would have happened to my security? That having been said, a yield of 16%+ is very attractive so it depends on your risk appetite. You could buy the bond and hold to redemption in 2025. Minimum investment amount is $200,000 and, assuming that is nominal, the actual investment would be c$160k or GBP120k. Your choice. AIMO/DYOR
I asked Matt at IR: Does that mean that the average of $86 is for all barrels sold in January, after paying away the amounts due where the realised price exceeds the hedge caps? He replied: Yes, that is correct and inclusive of quality differentials.
This review was not bad. It did note continuing reliance on Ghana and the dependence on the sovereign rating status of that country. However, the key takeaway, to me, was that:
Current rating of B3 is based on debt of $2.1bn and daily production of c60,000 bopd. The ratio of the first to the second is 35,000. They suggested that a reduction in the ratio to 30,000 could justify an improved rating, assuming $270m retained cash flow to debt.
With production at 60,000 bopd, the debt level needs only to reduce to $1.8bn to achieve this ratio, a reduction of $300m. Alternatively, a production increase to 70,000 bopd would also result in the same target being reached, with $2.1bn of debt. So, if current production is c60,000 bopd, the completion of the pre-emption rights exercise could increase production by c5,000 bopd to 65,000. The resultant debt level that Moody’s would be looking at would be $1.95bn, a $150m reduction from the debt level at end 2021. That sounds within reach.
AIMO DYOR
With 50% of the Orange Basin block (2B), Eco will need considerable cash to pay for the proposed well. Any idea how they plan to fund this? If it is a placement, will the warrants being issued also be proportionately ratcheted up, resulting in further dilution?
Is there not another 6k bops due to Tullow when the recently exercised option comes through. That’s unhedged and so it would be worth the full amount per barrel. Furthermore, do the oil reserves not increase in value if they are believed to be worth more?
Seekingalpha, thanks for the comment. I felt that, with RD's comment that the expected decline for TEN in 2021 was 20-25% while the actual decline was c30%, there was not a lot of upside in that part of the operation. It would be good if the picture improved re TEN but experience so far has not been great and RD has referred to the TEN complexity on a number of occasions. Let's hope for better news on TEN, going forward. It would be nice to think that Tullow can find a way to unlock more value from that asset. DYOR.
Update from Rahul was good.
1. Cashflow: 2022 FCF at $75/bbl is $100k. This is because he is using the operating cash to invest $270m in capex in Ghana (as well as $80m elsewhere). That will result in INCREASED production in 2023. Jubilee could be producing 100k bopd by end ’23 per Rahul.
2. Impact on debt: RD said that he cannot pay debt early so the option was leave it in the bank or use it to avail of opportunities with positive returns. He is choosing the latter.
3. Debt: RD said they will start to look at refinancing in 2023. The increased production should help considerably with that process, reducing debt and the related cost.
Other upside areas include:
1. successful exercise of Occidental/Kosmos pre-emption rights – will increase Jubilee stake from 35.48% to 38.9%. At 100k bopd and $80 bbl this is worth an extra $100m per annum. That would double the FCF estimate of $100m for 2022, while still having the planned capex.
2. finding a Kenya partner – firming up the real value of the prospect. Upside – who knows?
3. drilling in Guyana – Kanuku drill will be spudded in Q2 – Upside – who knows?
4. finding a Guyana partner – this could de-risk future exploration. Upside – who knows?
Hedging:
2022: downside limited to $51/bbl. Cap at $78/bbl. This is for 42.5k bopd. This leaves (with 58k median guidance for 2022) 15.5k unhedged, which becomes 20.5k if/when the pre-emption rights are successfully exercised. Cashflow is based on $75/bbl assumption. Thus, every $10 above this could be worth an extra $75m annually.
2023: 33.1k bopd hedged with cap of $75/bbl and floor of $55/bbl. This should leave up to 50% of 2023 production (assumed) with upside.
Overall, not a bad picture. Base becoming more solid, with reasonable upside.
DYOR
The news today was that Azvalor Asset Management SGIIC SA holding went from 8.004% to 9.041% on or around 11 November, an increase of 14.84m shares. They now hold 129m shares. The price closed at 46.39p on 11/11. 5.8m shares were traded on 11 November, 4.4m traded on 10 November, 4.4m traded on 9/11 and 4.8m traded on 8/11. They have now built quite a position and do not appear to have loaned the shares to shorters. Initial stake bought around 18 May 2021 (price around 53.78p). How did they manage to buy these c15m shares without the share price increasing materially, particularly in view of the low volume of trades over that period? Any ideas?
Other key shareholdings include Samuel Dossou-Aworet with 184m shares, L&G with 129m shares, RWC with 71m shares and Genesis Asset Mgmt with 69m shares. These five (if my research is correct - it may not be!) total over 40% of issued shares in the company and are clearly in a position to influence how the business moves forward. One would imagine they are not unhappy with the steady progress being made. All in my opinion. Do your own research.
Golden200, at c34 minutes Rahul says "There is a process under way right now looking at potentially farming down a stake in Kanuku. We have not done anything on Orinduik yet."
At 53 minutes Rahul says "We are not planning to drill in Orinduik next year".
This is a disappointing message as it does sound like we should not expect Orinduik drilling next year unless something further happens. If Eco and the other partners are unhappy with that they may push to see when it will happen or when Tullow will look at a farm-down on Oriduik. Orinduik does, of course, hold Joe and Jethro and something may yet happen with them. Sorry I didn't ask what would have to change for them to be worth developing. There may be value in them yet.
Hi Destitutebroker, it looks like I was correct, after all! The Pictet Asset Management S.A. short position of 1.27% has disappeared today, and does not show in the FCA history spreadsheet either. I first wrote to the FCA at 7:33am on 29 September and it has taken until 6 October for the position to be corrected. I'm still waiting to hear from them in response to my questions. Anyway, the shorts appear to be continuing to buy back shares to close their positions, including a reduction of c1.3m shares in the shorted position of Capital Fund Management S.A. yesterday . That's got to be good for shareholders.
Hi DestituteBroker, thanks for the additional info. Does that mean that the 1.8m UT at 16:35 yesterday represents a net sell of 1.8m shares but may, for example, have been 4m bought and 5.8m sold to get a net sell of 1.8m?
On the issue of Pictet, I am persisting with the FCA as I find it hard to imagine that they would have opened a new short position of that scale with the oil price so buoyant. I suspect it was an error and, as the FCA are custodians of that date, I expect to get an answer from them as to what happened. To quote the message from the FCA (that is just below this screen) "Posting . . . information that is false or misleading, may constitute market abuse." - I am merely asking them to clarify information that they are publishing.
Hi Destitudebroker. Thanks for trying to explain. However, the data that I looked at the day that it showed the Pictet short position changes, had to be incorrect. The total increase in shorts on that date exceeded the total shares deemed to be either buys or sells on that date. That ignores the fact that some of the shares traded that day would not have related to Pictet. I am still awaiting an informative response from the FCA but suspect that the second Pictet change i.e. the increase from 0 to 1.27% should not exist. That would mean that the shorts should have had a meaningful reduction which will hopefully be picked up when the data is corrected (if my theory is correct). Separately, it's good to see that Capital Fund Management SA yesterday bought back 560k shares to reduce it's short position. The overall short position appears to be reducing and that, hopefully, will result in a more transparent picture for the Tullow share price going forward.
The Advfn trades for the day show 3 x c2m shares sold after hours. However, the stock exchange data shows only 2 deals. One has the trade flag "P" and the subsequent one has the trade flag AMND P which is described as " New trade, cancelled or amended". So that could just be a correction or a cancellation. As the trade value is fractionally different it may simply be a correction to the price at which the deal was done. So, the uncrossed trade at 16:35 (for 1.8m shares) may have been a net sale but the subsequent transactions may have been either one sell of 2m shares or a sale and cancellation of 2m shares. Very confusing but the Advfn and the London Stock Exchange numbers do not tally.
The apparent error in the short positions for Tullow published by the FCA, custodians of that data, re the change in shorts masks the fact that Pictet reduced their position by 0.11% and Odey reduced their position by 0.33%, a total reduction of over 6 million shares in the past couple of days. It looks as if at least two of the short sellers are getting uncomfortable with their exposure to the potential increase in the Tullow SP. If their pattern of a phased exit continues, this means that they will be continuing to look to buy shares in the coming days and weeks. Thus, LTH should gain some solace from the likelihood that these position reversals will put upward pressure on the share price as well as clearing out the overhang of shorted positions that have shadowed the company for some time.
I've already written to and spoken with the FCA on this. The number they published as being sold short on the day that Pictet changed their positions was in excess of the total shares traded in Tullow (not just sold) on that date, according to the London Stock Exchange data. I've asked the FCA to explain their data and to tell me what controls they use to ensure the data they publish is correct.