Departing Tullow founder Heavey leaves key questions for new team

Reinvestment requirements weigh against possibility of dividend payment resumption

Before stepping away from Tullow Oil in two weeks' time, Aidan Heavey will have to preside over a board decision on whether the company he founded 33 years ago should appeal a ruling that has left it with a $140 million (€120 million) bill.

An English commercial court judge found last Tuesday that Tullow was not entitled to cancel a rig contract with drilling equipment company Seadrill in December 2016 for an oil and gas field off the shore of Ghana that was the subject at the time of a territorial dispute with Ivory Coast.

As it happened, investors in Tullow took the ruling in their stride, with the stock dipping by just 0.9 per cent on the day – helped by the fact that the company had already set aside a $128 million provision for the matter in its 2017 annual accounts last year.

It would have been a much more worrying outcome for the company even 15 months ago. At that time, the company was struggling with a $4.8 billion net debt pile, equating to 4.2 times’ earnings, and the task of refinancing more than $3 billion of debt facilities before the year was out.


The company would have to raise $750 million through a deeply-discounted share sale in April 2017 and see an international tribunal resolve the maritime boundary dispute between Ghana and Ivory Coast last September before banks signed up to the refinancing.

A deal to sell almost two-thirds of its 33.3 per cent stake in a Ugandan oil project for a total $900 million also helped its case.

Heavey founded Tullow in the mid-1980s after the one-time Aer Lingus accountant got wind of an opportunity to rework some oil gas fields in Senegal and went about raising money from family and friends for a business he knew little or nothing about.

FTSE 100

The company went on, in late 2000, to snap up gas fields in the North Sea from BP, before doubling in size four years later with the takeover of Energy Africa, giving it assets from Ghana to Namibia along the west coast of Africa. It was catapulted into the FTSE 100 index in 2007 following the $1.1 billion takeover of Australia’s Hardman Resources, which boosted its position in Uganda, a landlocked country in east Africa.

However, Tullow’s huge debt pile and high-risk, high-return model would make it a plaything for hedge funds placing wagers against the stock from 2014 as crude oil prices began to plummet from a high of $115 a barrel to as low as $28 in early 2016 and the group wrote off billions of dollars of prior exploration expenses.

Tullow swung into its first annual operating profit for three years in 2017, on the back of rebounding oil prices, higher-than-expected production and as capital expenditure (capex) dropped by almost three-quarters to $225 million, with the group’s debt ratio falling to 2.6 times earnings before interest, tax, depreciation, depletion and amortisation expenses.

Paul McDade, who became group chief executive last year as Heavey moved on temporarily to the role of chairman, told investors in February that things would be somewhat different under his watch.

“The kind of philosophical approach, I think, under this executive team will be slightly different,” McDade told analysts as he presided over his maiden set of financial results. “We will be more measured about how we invest in exploration. We’ll be more disciplined in capital allocation.”

Dividend payments

Chief financial officer Les Wood raised the prospect three months ago that the company may resume dividend payments, which it froze in 2015. (Less-indebted oil majors such as Royal Dutch Shell and BP were better placed to appease shareholders with attractive dividends as oil prices crashed.)

However, US investment house Sanford C Bernstein, in predicting on Friday that oil prices may experience a “super spike” and double to $150 a barrel, warned that the oil investors “who had egged on management teams to rein in capex and return cash will lament underinvestment in the industry”.

It said oil oversupply in recent years had masked “chronic underinvestment” by the industry in exploration, with proven reserves on the books of the world’s largest oil groups having declined by almost a third on average since 2000.

“If oil demand continues to grow to 2030 and beyond, the strategy of returning cash to shareholders and underinvesting in reserves will only turn out to sow the seeds of the next supercycle,” the Bernstein analysts said. “Companies which have barrels in the ground to produce, or the services to extract them, will be the ones to own and those who do not will be left behind.”

Tullow has already flagged that capex will almost double this year to $460 million.

But with the heavy lifting on reducing the debt burden more or less done and free cash flow estimated by analysts to amount to top $650 million, might this not be the time for the company to put paid to talk of dividends for the time being and accelerate investment?

Or, in managing to scrape through the last few years, will the company have lost some of its entrepreneurial edge when Heavey clocks out for the last time on July 20th?