Citi warns Tullow Oil’s debt build-up could delay production

London Stock Exchange-listed Tullow which has discovered oil in Turkana County should sell part of its stake to raise money for production, analysts at Citigroup Global Markets say in their latest report.

The analysts caution that delays in injecting cash would hold back production in Kenya, Uganda and Ghana.

“A failure to farm-out its current high equity stakes in its future developments could see a delay in the development timetable for some of these projects,” said Citi in its latest report titled Detailed Review of Tullow’s Exploration and Production Portfolio.

The investment bankers, who say they held discussions with the Tullow Oil management prior to producing the report, see export of oil likely to start from 2019. However, it warns that further build-up in debt could delay commercial development. Tullow has already discovered some 600 million barrels of oil in Kenya.

Tullow Oil holds a 50 per cent stake at Block 10BB in the Lokichar basin where several wells have yielded oil, with Canadian-owned Africa Oil holding the other half.

The report forecasts that if there is no share sale, the company’s gearing, the ratio of net debt to equity, would reach 80 per cent by 2017.

Such a debt would consume 2.4 years of the company’s earnings before tax, interest, taxes, depreciation and amortisation (EBITDA).

“Assuming no farm-outs, we see net debt/EBITDA peaking at 2.4-times in 2016 on our oil price deck (of $90 per barrel) and gearing (or net debt to equity ratio) peaking at 80 per cent in 2017,” said the investment bankers.

The analysts also see the company’s LSE price-to-earnings (P/E) ratioimproving to 29 by 2015 and to 22 in 2016, meaning investors can recover their money in a shorter period. This implies the company’s share price will surge at a faster pace.

The investment bankers estimate that the net dividend yield will rise marginally from 1.3 per cent last year to 1.4 per cent this and next year before rising further slightly to 1.5 in 2016.

Production in Kenya, the analysts said, will focus on the planned development of the discoveries at the Lokichar Basin, where most of the wells have been found to have oil.

“Despite two recent disappointing well results at Emong and Ekunyuk, we believe there is a sufficient resource base to underpin a commercial development. …We assume about 750-800 million barrels,” said Citigroup. Already, 600 million barrels have been confirmed.

The investment bankers said drilling of the Etom prospect —the largest undrilled structure in the Lokichar area —later this year could see the resource base increase to about one billion barrels.