Shares in Tullow Oil plunged more 16 per cent in London on Wednesday as investors digested news of the group's plans to sell $300 million of bonds convertible into shares in the future.
The bonds is set to carry a coupon, or interest rate, of 6.625 per cent, the top end of the range Tullow had given earlier today. Holders of the bonds will be able to convert their investment into ordinary shares at an initial conversion premium of 30 per cent above the volume weighted average price of shares in London today.
Unless previously converted or redeemed, or repurchased and cancelled, the bonds will be redeemed at par on July 12, 2021.
Some analysts said that buyers of the bonds may be also have been short-selling, or making a financial bet that the stock will decline, as a way of “hedging” their investment. The lower the price falls, the less they would have to pay to convert the bonds into shares in the future.
Royal Bank of Canada’s capital markets unit said the share dilution of to existing investors from the transaction “should be limited and this is a useful diversification of funding for Tullow”.
“Given that we believe the company is turning a corner, any weakness today should be seen as an opportunity to buy [THE STOCK],” it said, adding that it sees a material increase in production and free cash flow at Tullow in the second half of the year.
Negative
However, US brokerage Stifle said the convertible bond is sightly negative from a few different perspectives, noting that the fact that the company needs to raise the money after recently re-examining its credit facilities is “a bit of a surprise.”
However, it said that this concern wouldn’t be an issue if the proceeds are used to repay existing debt.Tullow said it will use the proceeds for general corporate purposes and capital investment.
“We are very pleased with teh result of this bond offer, which reflects the confidence that themarket has shown in the group’s business and strategy,” said Ian Springett, chief financial officer at Tullow.
Tullow Oil lenders renewed $3.5 billion of credit lines in April linked to oil reserves earlier this year and agreed to amend financial leverage covenants on the facility, which the company said last week demonstrates their support “during this period of low oil prices”. The company plans to refinance the facility by the end of the year.
Tullow last week lowered its oil production estimates for this year due to issues with its Jubilee field in Ghana, which resulted in an extended shut-down period in April. Production restarted in May and has ramped up since then. It also said its “transformational” TEN project in Ghana was expected to deliver its first oil by the middle of August.
The company’s shares fell as much at 16.4 per cent in London. They were trading down 15.2 per cent at £2.04 at 2.22 pm.
