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Overshoot to the downside?

lse:tlw

#3

My hopes are for a takeover, I have no real interest in Tullow turning themselves around. The corporate governance is terrible, they’ve kept shareholders in the dark with a lack of transparency and they’ve destroyed shareholder value.

However, the equity trades at a massive discount to NAV, the bonds only shrugged yesterday, whilst the 70% drop based on only 5% of the shares being traded feels more like the market showing what happens when you essentially keep your shareholders in the dark.

The question is, would institutional holders be so disillusioned with the company that they’d accept a low ball offer?

tullow

No debt next year and only $300m in 2021, plenty of time to sort their act out.


#4

I tried to get in for a trade this morning with a limit order @40p before the open but I went too low.

@42p might have squeezed in in which case I would sold already and been happy to turn a tranche over for 5%+ in a single day.

Have no interest in the company otherwise, except they seem to have a fantastic ability to destroy shareholder value in a very short space of time. As you say, if you treat shareholders badly and keep them in the dark - then release bad news - you’re much less likely to get a sympathetic hearing rom the markets.

Small oilers seem to be particularly bad in this way I’ve noted over the years… I’d have thought TLW had got too big for that sort of junior AIM-level antic. Apparently not!


#5

The announcement was definitely surprising, I was reviewing the RNS feed yesterday morning and knew it was going to carnage. The problem is, however good your research is you can’t plan for events like these were the company release bucket load of bad news at the same time. It shouldn’t happen with a company Tullow’s size and that’s where the problem lies.

I do think they’re now a prime takeover target, yes a suitor might want to wait and get clarity on what’s happening with the assets, but if they wait they have the risk of the equity trending back upwards and the opportunity is gone. The production portfolio and huge Ugandan asset might see someone try their luck.

Bonds had a worse day today, will be watching them closely.


#6

Bonds were down again yesterday, which makes me worry much more than when the equity is down. Taken half off for a very good profit.

Need to read the bond prospect to make sure I’m not missing anything with the covenants that is making the bonds react in this way.


#7

With respect, I will differ @Beatley.

I have always believed that sooner or later Tullow would be swallowed by France’s Total. Now that its MC is only £740 million (same as AIM’s Hurricane, BTW) for 80,000 or so BOD plus Uganda (that Total has wanted for a while), I really believe it is just a matter of time until the bid comes in.

I sold out in late 2018 but the sp crash this week was too good an opportunity to miss; so back in I’ve come.


#8

Hi TheEcologist,

Not sure what we differ on? I’m holding the other half for the very same reasons but have reduced my exposure due to the weakness with the bonds.

The discount to NAV is huge so wouldn’t be surprised if rumours start to circulating about Total or others making an offer. If it doesn’t materialise over the next couple of months I’ll likely sell up, I have too many concerns to become a long-term holder.


#9

Out for another 50% of remaining holding, still think there’s a good chance of takeover but can’t ignore a 30% return in 4 days.


#10

Apologies if posted elsewhere:

https://www.ii.co.uk/analysis-commentary/stockwatch-why-fears-tullow-oils-demise-are-overdone-ii509955?utm_source=IBMW&utm_medium=email&utm_campaign=ii_weekend_round_up_newsletter_141219&utm_content=&spMailingID=8105365&spUserID=MTIxNjc2ODE0Nzg5S0&spJobID=1412302718&spReportId=MTQxMjMwMjcxOAS2


#11

Added a few more here, back up to 50% of the original purchase.

I think it’s a terrible company, the corporate governance is utterly horrendous, when I new CEO comes in they need cull everyone that has been complicit in the lack of transparency that has destroyed the trust of shareholders.

However, if there aren’t any right downs in the year end results this is simply too cheap. The board has send the reserves position is unaffected so if there is, it should only be minimal. You can’t have a company trading at 1/3rd of NAV without attracting interest.

I find it hard to believe that given the interest in the acreage they have in Guyana that they won’t find a decent sized field at some point, my investment case isn’t based on that but it would be a nice to have.

Looking at the accounts, G&A costs of $100m will likely be cut to the bone by the new CEO. Premier oil is now the right comparison in terms of market cap whose G&A costs are less than $10m a year.

In short, resolve the corporate governance issues, maximise production, sell Kenya, farmout Uganda (same as lapsed deal), cut G&A costs and find oil in Guyana.

Looking for 120p as a mid term hold.


#12

I held a small position at 144p and was caught out on 9 December. I have slowly averaged with a few buys to be sub 75p. I am holding off until the report but like those above I just can not see this company not being fully taken over. I have worked out a takeover price around the 100-103p mark which seemed reasonable when compared with other takeovers but no two oil companies are really the same.


#13

How are you working out your takeover price, Tony? The big question is, would the board recommend an offer to shareholders around at that price?! That’s 30% less than the rights issue price just a few years ago. Maybe the potential buyers would go hostile?! Personally, I think many holders would jump at £1 based on the destruction of shareholder value over the last few year. I’d very much support one, but being a recent holder that’s easy for me to say, I’m sure there are lots with much higher averages that would like to give the board the chance to turn it around.

Potential takeover aside, what are you expecting with the outcome of the review on Wednesday? The business is in a tricky situation, they’ve got some fantastic assets but with a huge debt pile that based on the numbers they’ve given us won’t be paid back at maturity. Net debt to EBITDA is climbing with with the lower production base and they’ve got massive trust issues. If they’re going to turn this around it’s going to take some bold moves that’s for sure.


#14

Hi Beatley

I have looked at quite a few metrics from calculating value from reserves and resources of oil using the 50%, 10% multiples on stages of discovery, to flowing barrels take over prices and comparison to asset sales of oil just in the ground and undeveloped. I arrive broadly at the same place of what is reasonable value. There are also prices of some assets like in Uganda were no tax would be due up to 516M than it gets slammed really hard with CGT and its like that in several Africa countries.

I would not see that price as hostile if it was from Total or a company of that size. Tullow would be able to pay back all its bond funders and quite a few institutions would be able to de-risk most of their portfolios and see it as a means to invest perhaps less in oil in their institutional funds. I think a vote to accept at 105p for a takeover would prove quite strong and allow the new buyer to deliver what Tullow found and built to date.

All the above is just opinion.

Tony


#15

Thanks for your thoughts Tony, they do echo my own in a lot of ways, obviously it’s impossible to know what’s going through the mind of the major institutional holders, but we will find out if an offer does come in.

Update due on Wednesday, will be good to get a glimpse into what’s be going on behind the scenes.


#16

What did you think to the results, Tony? In my opinion, I thought they were fairly neutral, the write-offs never look good, but they are just accounting semantics at the end of the day. I certainly wasn’t expecting the share price volatility that we got, but managed to make a few quid over the last two days so not complaining.

Nothing much from the review so will be interesting to see what happens in March, most likely a traders paradise until then, so will be looking to take advantage if I can,

Lots to be concerned about but I’ll take a view after the results in March as to whether I become a long-term holder or not.

Whilst we’re waiting, if Total want to come in and buy the company for a reasonable price (a reasonable price being one that’s significantly about my average) then that would be great :slight_smile:


#17

https://www.bourse.lu/security/US899415AE32/266318 The bond holders liked it.

I thought it was moderately positive. I have not played any positions until it hit 55p today. I sold 1/7 of my holding potentially in a losing position as the average down is just above 70p to act as a short to buy back lower if they drop the price in a volatile way once again. If that position gets stopped out in the next 30 days I would take the loss and just sell out 3p higher on what I have got left. Overall I am staying with the view that share is to return to the 85-90p region eventually.


#18

What did you think was positive about the update? Apart from the details about the impairments there was no new information, which is why the huge dropped surprised me somewhat.

Investors can draw their own conclusions from the bonds, but a 7% bond trading in the 80’s should be a cause for concern, well it is for me anyway.

What’s painfully obvious is that the debt won’t be paid back at maturity and will need to be extended. The problem with that is Tullow have lost market confidence, who wants to roll over a bond with a company that has a complete lack of transparency?! These issues are there to be solved of course, but you can’t argue with the market pricing these at multi decade lows, for noe at least.


#19

Hi Beatley

I will write about the re-opening of the Uganda farm down on Monday. A lot of issues are going to get resolved on that front imop in the next 8 weeks.

I was happy with the 2P data on reserves and resources being confirmed.
Tony


#20

Hi Tony,

What do you mean when you say you’ll write about the re-opening of Uganda farm down on Monday? As it stands, I’m only aware that there are on-going discussions between the relevant parties. I am optimistic they’ll be a positive outcome, Uganda can’t afford for this to become a stuck asset, but given this has been going on for years, why do you believe they’ll be progress in the next 8 weeks?


#21

A lot of activity is building up in the Uganda press after the visit by TOTAl I think CEO, with the President. The Ugandan President and his tax dept have tried it on with capital gains tax. Tullow following Chevron and other oil majors have all downgraded future oil assets to $65 a barrel. So if Uganda thought their oil was so valuable as to be hit with CGT, they have got a $100M write down tax bill presented from Tullow on that asset. We await how tax authorities in Uganda now justify a higher oil price long term when the oil majors say the opposite. Another argument the Government has ran with is that any costs/loss incurred can not be deferred in future tax and that argument has to be binned as well as nobody can borrow money or issue bonds under that kind of project regime.

In a nutshell Uganda has to find an off ramp in the dispute to get the project started. They have to decide soon as the Tullow review will probably prioritise another project. All opinion of course. Tony


#22

There is an off ramp for the President of Uganda. Lets seen if he is smart enough to find it and if he applies it will CNOOC, TOTAL and Tullow agree with it. I am not going to divulge what it is.

Tony