Tullow Oil may have the last laugh in 2016

Short sellers and hedge funds feel the pain as Irish company’s market cap soars 160%

Aidan Heavey of Tullow Oil says a project in Ghana  will help the group start to generate free cash flow.  Photograph: Nick Bradshaw

Aidan Heavey of Tullow Oil says a project in Ghana will help the group start to generate free cash flow. Photograph: Nick Bradshaw

 

Aidan Heavey, whose Tullow Oil has been a plaything of hedge funds placing wagers against the stock this year, appears set to end 2016 with the last laugh.

Almost 15 per cent of Tullow Oil’s shares are out on loan to investors who have been betting that they will fall in value – what’s known as “short selling” a stock – according to Shorttracker.co.uk, which monitors UK regulatory disclosures of short positions in the market.

The trouble is, the company’s market cap has soared 160 per cent from its January lows to £2.8 billion (€3.4 billion), making it the best performer in the European energy industry. Even before Opec agreed to cut output last month – let alone its deal last weekend to bring non-Opec members into the tent – one of the most aggressive “shorters”, Yorkshire-born billionaire Crispin Odey’s flagship hedge fund Odey European, was feeling the pain.

It emerged in early November that clients had pulled tens of millions of euro from the fund as its biggest short by value, Tullow Oil, rose dramatically, while other negative bets also backfired.

Shorting banks

The billionaire, who made a killing from shorting banks before the financial crisis, moved his focus a year ago to oil and gas explorers at a time when Brent crude prices were in freefall. He was not alone.

Other hedge funds, including Lansdowne Partners and Marshall Wace in London as well as Bahamas-based Key Group Holdings, have also placed costly wagers against Tullow.

Tullow, which expects to end this year with about $4.9 billion (€4.7 billion) of net debt, is preparing to refinance more than $3 billion of bank facilities next year.

The company said in a trading update in early November that the first flow of oil from the so-called TEN project off the coast of Ghana in August will help the group start to generate free cash flow in the current quarter and begin the process of “deleveraging” its balance sheet.

Still, some analysts believe Tullow’s shares have gotten ahead of themselves, with Goldman Sachs and Numis moving in the past week or so to cut their recommendations to outright “sell”, while Citigroup has lowered its stance to “neutral”.

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