Tullow Oil’s new boss faces difficult pitch to win over investors next week

As a high-flying Merrill Lynch investment banker, Rahul Dhir did such a good job selling Scottish oil group Cairn Energy the idea of floating its Indian business on the stock market in 2006 that he was asked to take charge of the unit and manage the deal.

Almost a decade and a half later, the petroleum engineer by background faces a more daunting pitch next week: trying to convince lenders and investors at Tullow Oil, where he took over as chief executive in July, he can turn around the Irish-founded exploration group that has lost its way in recent years.

The Africa-focused oil group has been loss-making for most of the past nine years, having written off over $7 billion (€5.9 billion) of exploration costs and stomaching in excess of $3 billion of impairment charges, mainly as it lowered its long-term oil price forecasts, according to Irish Times calculations based on annual and interim reports.

However, the real problem facing the company for some time has been less to do with Tullow Oil’s profit and loss account and more to do with its debt – at a time of low oil prices. While Brent crude oil prices have rallied 17 per cent to about $44.50 a barrel since late October, helped by positive Covid-19 vaccine news, they remain well off their January highs of almost $69.

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Tullow Oil, saddled with $3 billion of net borrowings and having burned through more than $200 million more cash than it took in during the first six months of the year, warned in September that its scheduled repayment of $650 million of senior debt in April 2022 could lead to a “liquidity shortfall” as its financial projections are tested next January and March for 18-month periods under the terms of its main lending facility.

Earlier this month, Moody’s, one of the world’s leading credit ratings agencies, downgraded its view of Tullow Oil’s creditworthiness to ‘Caa1’, seven levels deep into “junk” debt territory. It said that with oil prices likely to remain subdued over the next 12-18 months, it is doubtful that the company will have the funds to actually repay the money due in April 2022 without action being taken.

News last week that Tullow Oil has received an initial $500 million – with $75 million to follow – from the completion of the sale of its Ugandan assets to French oil major Total is welcome, especially since a previous deal fell through last year. It has bought the group, whose shares are down more than 90 per cent in the past year and a half, some breathing space as a $300 million convertible bond falls due next July.

But Dhir is going to have to come up with a serious restructuring plan at a so-called capital markets day next Wednesday to cut debt and allow the market to even begin to appreciate the value of its prize producing oil fields in Ghana.

An update on a potential cashing in of the group’s Kenyan assets may be key. Tullow Oil had been looking to sell down its pipeline projects there, but suspended the process over the summer as its joint venture partners assessed whether they continue to be a strong development prospect in the face of low oil prices.

While Tullow Oil itself remains the subject of perennial takeover speculation, the fact that Dhir is holding an investors’ day signals he is confident that the company can forge an independent future.

It may involve an attempt to raise additional equity, according to Moody’s.

But with the company currently valued by the market at €395 million – less than 60 per cent of what it raised from investors in a supposed turnaround share sale in 2017 – Dhir would have trouble tapping that well again any time soon.

Fexco must forget €150m Chinese dangled for Goodbody

It may be difficult for Goodbody Stockbrokers’ top managers and Kerry-based financial services group Fexco, which owns 51 per cent of the brokerage, to forget about €150 million two Chinese suitors offered for the business in recent years before each deal collapsed.

But they'll need to, if it's going to be a case of third time's a charm getting a sale over the line. AIB entered exclusive talks this week to buy back Goodbody which it was forced to sell a decade ago under a restructuring plan tied to its taxpayer bailout.

AIB received €24 million for the firm at the time. Though this ignores the fact that the bank extracted about €100 million of surplus cash from Goodbody beforehand, according to sources.

Goodbody, which is 49 per cent owned by staff and management led by Roy Barrett, is currently sitting on about €60 million of surplus cash, mainly as a result of the sale of its stake in the Irish Stock Exchange in 2018. This means that the Chinese deals valued the underlying business, including its €20 million of regulatory capital, at €90 million.

Few in Dublin’s gossipy stockbroking circles believe it will trade for anything near that.