Oil companies typically raise equity to fund exploration (a risky business) and then borrow to pay for development activity (rather less so). Tullow Oil stuck to this template at the end of January with the largestever accelerated bookbuild of new shares by a non-financial UK company.
Tullow, quoted in London and Dublin, has grown rapidly over the past five years, becoming one of europe’s biggest oil independents. Over that time, its market value has leapt from about £300m ($464m) to near the £10bn mark. Active in 23 countries, including parts of europe, south asia and south america, it is now focusing on Africa, where it has made important discoveries in Ghana and Uganda and hopes to make more.
“Tullow has been very successful in recent times,” says the company’s chief financial officer, Ian Springett, a former BP stalwart who served as the oil major’s CFO in the Americas. “Exploring for oil and gas is still relatively expensive, and development calls for even bigger sums of money. So the more successful you are, the more assets you need.”
At the start of 2009, the firm put in place a reserve-based lending facility of $2bn, secured upon proven reserves. Given its current core price/reserve assumptions, it now has access to about $1.7bn of that. It established a $250m revolving credit facility to fund development at Ghana’s Jubilee field, among other projects. and it also raised £402m via a placing of ordinary shares to fund the 2009 exploration programme.
Ugandan dealIn January 2010, it was announced that tullow would exercise pre-emption rights over the sale of Heritage Oil’s Ugandan assets. Tullow is Heritage’s 50% partner in two ugandan blocks and was acting to prevent the sale of the outstanding interests to Italy’s Eni (which has been rumoured as a likely bidder for Tullow itself ). Though approval is still needed from the Ugandan government, the purchase price is $1.35bn on completion with another $150m deferred.
Tullow promptly put in place $1.5bn of funding with its core relationship banks but obviously felt, in line with the principle above, that it would do better to raise the money in equity. “We had been due to look at our capital structure, to see how we could better balance the business,” says Mr Springett. “the Ugandan pre-emption helped to bring that process forward. We have raised so little equity, but we also have the desire to spend a chunk of exploration money each year. So it made more sense to bring [any equity raising] forward, rather than waiting.”
A standard rights issue would have taken longer, which was deemed undesirable, so the company opted for an accelerated bookbuild, with Bank of america Merrill Lynch and RBS Hoare Govett as joint global co-ordinators, BNP Paribas and Calyon as joint bookrunners and Natixis as co-lead manager. It used a ‘cash box’ structure which allows companies to raise up to 10% of their share capital without recourse to all shareholders. “We had discussions with a number of key shareholders, who gave us their approval,” Mr springett notes. “The feedback was very good – they understood the link between success, funding and future delivery.”
Many of those investors have been on the share register for 10 years or more, which was important to the transaction’s success, according to Mr Springett. “We have a very strong relationship with them, and that made the deal doable,” he says.
Financial flexibilityWith pre-marketing, the exercise was completed in a little over a week, during which time equity markets were less than sparkling. Tullow didn’t want to hang about, however, and pressed on. The share price fell by nearly 5% on the day of the launch, which was not encouraging, but by the time the books had closed, the placing had been covered nearly twice over. The shares were finally placed at 1150 pence, a satisfyingly thin discount of 5.4%. The total raised was £925m, which will almost cover the Heritage purchase price.
“That was the sum we had in mind,” Mr Springett confirms. “It means we can be done with equity raising for the foreseeable future.” He disagrees with those who have said that the company is now overcapitalised. “We are appropriately capitalised,” he insists, “with the financial flexibility to pursue an ambitious exploration and appraisal programme. We are now in sound and appropriate financial shape.”
Tullow may not be seen again for a while in the equity capital markets, but it is beginning to contemplate possibilities in bonds. “We have a number of opportunities in the debt capital markets,” says Mr Springett. “But they would be conditional on exploration success and the need to keep the right balance between debt and equity.”
