Financial Roller-Coaster Ride Independents to Force Consolidation Increase

At the same time that British independent Premier Oil and Norwegian equity rival Chrysaor are agreeing to a merger, wiping out billions of shareholder debts, Irish listed independent Tullow shocks the market with a dual warning about lower cash earnings and a harsh debt-cutting plan. The Irish independent, mainly focusing on African oil and gas plays, stated that it will announce plans in November to lower its $3billion (€2.55 billion) net debt pile amid depressed oil prices.

Last month Tullow already gave a profit warning, indicating that it faces a potential cash shortfall if no action is taken. More details are to be expected on November 25, when Tullow is holding a so-called capital markets day (CMD). On September 9, the company stated that it has made an $1.3 billion loss for H12020, mainly driven by asset write-downs. The new statements are now fuelling doubts about the future of the company, supporting more assets to be sold and well as possible new refinancing discussions.

With its new CEO Rahul Dhir the company is heading for a perfect storm it seems, as current financial markets are not anymore in love with hydrocarbon based companies. Some light is still there, as the company also revealed that it has passed a biannual test of its liquidity projections by its group of lenders behind a $1.8 billion reserve-based lending (RBL) facility and maintained $500 million of liquidity headroom as of the start of October.

The coming months however the internal and external developments are not very promising. On April 2022 the company will have be able to repay around $650 million of senior bonds, which looking at present financials could lead to a “liquidity shortfall”.

The above painted situation is also being worsened by the fact that Tullow Oil shares have lost more than 90% of their value in the last 12 months. A combination of new management, asset write downs, lower oil prices and less than positive exploration adventures, have been causing a share price crash. Analysts are worried that the future could be in doubt. Even that the market still expects that Tullow Oil could receive around $500 million by the end of 2020 from the agreed sale of Ugandan assets, there are still major hurdles on the road. Not only is the sale of part of Tullow’s onshore Kenyan fields under review, the current market situation could even lead to a renegotiation process of the sales.

Tullow’s news stands in the shadow of another surprise move, this time with a focus on the North Sea arena. British oil independent Premier Oil has agreed to merge with a private equity rival Chrysaor. The deal will not only create the North Sea’s biggest oil and gas producer but almost wiping out current shareholders. The so-called merger is in reality a take-over by Chrysaor, wiping out £2.3billion debt mountain and puts new bosses in charge. The deal will keep Premier Oil listed in London, but with Chrysaor holding 77% of the stakes in the new company.

The deal is going to hurt the investors of Premier Oil hard, as creditors stand to get £950million in cash and 10.6 per cent of the new business, existing Premier Oil shareholders will be left with just 5 per cent. The market is reacting positively, showing shares to climb extremely. With a total production volume of 250,000 bpd of oil and gas, the company is going to be the largest producer on the North Sea.

Linda Cook, the boss of Chrysaor backer Harbour Energy and a former Shell executive, will be the first woman chief executive of a major listed UK energy company. Premier Oil also holds assets in Asia and Latin America. The main reason for the so-called merger has been the high debt levels of Premier Oil, which have now been removed. Still, doubts exist about the future of the new entity.

Even that Chrysaor, which is backed by private equity firms Harbour and EIG, is a major North Sea producer, due to acquiring British fields from Shell and Conoco Phillips, to integrate both will be not easy. At the same time, the focus assets area is not an easy one and financially challenging. Current oil and gas prices are not showing enough upward potential to be utterly optimistic. North Sea production is a high-cost area, as also is being shown by oil majors such as Equinor.

The coming months more mergers, bankruptcies and hostile take-overs are to be expected. The current high-profile role of US-EU based investors could however be a short-lived phenomenon. It will be more rational and attractive to see when Asian and Arab institutionals and sovereign wealth funds will enter the market in full force.

Financial activism is a Western phenomenon, realism is Asia-MENA’s forte. Share-prices are historically low, oil and gas prices weak, financial markets closed for hydrocarbons. It will be High Noon but this time with some other Cowboys. With some developments wiping out the value of existing shareholders, another reason for conventional investors to leave the market is emerging!