Financial Roller-Coaster Ride Independents to Force Consolidation Increase
While British independent Premier Oil and Norwegian stock competitor Chrysaor agree to merge and wipe billions in shareholder debt, Ireland-listed independent Tullow shocks the market with a double warning of lower cash receipts and a tough deleveraging plan. The Irish independent, primarily focused on the African oil and gas games, announced that it will announce plans in November to cut its $ 3 billion (EUR 2.55 billion) net debt pile amid depressed oil prices .
Tullow issued a profit warning last month indicating that there is a potential liquidity squeeze if no action is taken. Further details are expected on November 25th, when Tullow holds a so-called Capital Markets Day (CMD). On September 9, the company announced that it had posted a loss of $ 1.3 billion for the first half of 2020, primarily due to asset impairment. The new statements now cast doubts about the company's future, support more assets for sale and possible new refinancing talks.
With its new CEO Rahul Dhir, the company is apparently facing a perfect storm as current financial markets are no longer in love with hydrocarbon-based companies. A little light remains as the company also announced that it has passed a semi-annual test of its liquidity projections by its group of lenders behind a $ 1.8 billion reserve based lending facility (RBL) and had $ 500 million liquidity head start as of October.
However, internal and external developments are not very promising in the coming months. In April 2022, the company will be able to repay senior notes valued at approximately $ 650 million, which could create a "liquidity squeeze" given current financial data.
The situation described above is also made worse by the fact that Tullow Oil shares have lost more than 90% of their value in the past 12 months. A combination of new management, asset write-downs, lower oil prices and less than positive exploration adventures has caused the stock price to crash. Analysts fear the future may be in doubt. Even if the market continues to believe that Tullow Oil could receive around $ 500 million from the agreed sale of Ugandan assets by the end of 2020, there are still major hurdles on the road. Not only is the sale of part of Tullow's Kenyan onshore fields being examined, the current market situation could even lead to a process of renegotiating the sale.
Tullow's news is overshadowed by another surprise surge, this time focusing on the North Sea Arena. British non-oil company Premier Oil has agreed to team up with private equity rival Chrysaor. Not only will the deal create the North Sea's largest oil and gas producer, but it will all but wipe out current shareholders. The so-called merger is actually a takeover by Chrysaor that will wipe out the £ 2.3 billion mountain of debt and bring new bosses to power. The deal will be listed by Premier Oil in London, but Chrysaor will own 77% of the shares in the new company.
The deal will hurt Premier Oil investors badly as creditors will receive £ 950 million in cash and 10.6 percent of new business. Existing Premier Oil shareholders will only have 5 percent left. The market reacts positively and shows that stocks are rising extremely. With a total production volume of 250,000 bpd oil and gas, the company will be the largest producer on the North Sea.
Linda Cook, Chrysaor Backer Harbor Energy's chief executive and former Shell executive, will become the first female director of a major UK publicly traded energy company. Premier Oil also holds assets in Asia and Latin America. The main reason for the so-called merger was Premier Oil's high level of debt, which has since been eliminated. Still, there are doubts about the future of the new company.
Even that Chrysaor, which is backed by private equity firms Harbor and EIG, is a major North Sea producer due to the acquisition of British fields from Shell and Conoco Phillips to integrate both will not be easy. At the same time, the focus on assets is not easy and financially challenging. Current oil and gas prices do not have enough upside potential to be extremely bullish. North Sea production is a high cost area, as oil companies like Equinor show.
More mergers, bankruptcies and hostile takeovers are expected in the coming months. However, the current high profile role of US and EU-based investors may be short-lived. It will be more rational and attractive to see when Asian and Arab institutions and sovereign wealth funds will come fully into the market.
Financial activism is a western phenomenon, realism is the strength of Asia-MENA. Stock prices are historically low, oil and gas prices are weak, the financial markets for hydrocarbons are closed. It's going to be high noon, but with some other cowboys this time. With some developments undermining the value of existing shareholders, another reason for conventional investors to leave the market is emerging!
In our economic calendar you will find all economic events of today.
This article was originally published on FX Empire
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