Tullow Oil plc (LON:TLW) (LSE:TLW.L) shares have dropped 14% so far today after it announced a rights issue. Tullow Oil’s proposal is for a 25 for 49 rights issue of 466,925,724 New Ordinary Shares at an issue price of 130p per share. It is fully underwritten and will raise gross proceeds of £607 million (approximately £586 million net of expenses).
The issue price of 130p per share represents a discount of 45.2% to Tullow Oil shares closing price of 237.3p on 16 March. It also represents a discount of 35.3% to the theoretical ex-rights price of 201.1p per New Ordinary Share calculated by reference to the closing price on the same day.
The proceeds from the rights issue will be used to reduce Tullow Oil’s debt levels. It began a restructuring and reorganisation in 2014 as the oil price fell. Tullow Oil is now producing positive free cash flow and has begun the process of reducing its debt, thanks in part to the increasing production from new projects such as TEN. The rights issue will accelerate the process of reducing gearing levels, which in my view is a positive step for the Tullow Oil share price and for its shareholders.
Even before today’s announcement, Tullow Oil shares had fallen 20% since the start of the year. That’s behind the performance of other oil stocks such as BP plc (LON:BP) (LSE:BP.L), Premier Oil PLC (LON:PMO) (LSE:PMO.L), BHP Billiton plc (LON:BLT) (LSE:BLT.L) and Royal Dutch Shell Plc (LON:RDSB) (LSE:RDSB.L). Premier Oil’s share price is 12% lower, Shell is 5% down, BP shares are 10% down and BHP Billiton has gained 1% since the start of the year.
As someone who is optimistic about the long term prospects for oil, Tullow Oil has investment appeal in my opinion. I think accelerated efforts to reduce its debt are likely to be positive for its overall performance in the long run. I think BP, Premier Oil, Shell and BHP Billiton also have investment appeal. But I believe Tullow Oil shares could perform relatively well in the long run, aided by a potentially stronger balance sheet.