Shares inTullow Oil (LSE: TLW) are surging today after the company announced that its lenders have agreed to maintain the companys credit facility in its current form.
The groups lenders have completed the routine six-monthly Reserve Based Lend redeterminationprocess and have decided to leave Tullows debt capacity unchanged at $3.7bn.
This news is, in no uncertain terms, a huge relief for Tullow and its shareholders. Indeed, over the past few months there have been mounting concerns that the companys lenders were considering pulling the plug, as oil and gas prices plummeted.
Tullows debt is secured against the value of its oil reserves. As the value of these reserves has been marked down, it was believed that Tullows lenders were looking to reduce the financing available to the company by a similar amount. Tullows debt has been provided by a syndicate of more than 20 banks, two of which are looking to reduce exposure to the oil and gas sector.
And if lenders had pulled the plug on Tullows finance facilities, City analysts were convinced that that the company would have been forced to conduct an emergency rights issueor asset fire sale.
Nevertheless, it seems as if Tullow still has the backing of its lenders for the time being. As of yesterday, the company hasundrawn credit facilities amounting to $2.1bnwith no near-term debt repayment obligations. The group secured a $450m extension to its credit facilities earlier in the year.
Bright outlook
The decision by Tullows banks to continue to support the company despite the oil price environmentis meaningful. Across the oil sector, banks are pulling the plug on weaker companies, which are struggling to maintain their debt piles as oil prices remain depressed.
But with a guaranteed $2.1bn of headroom on its credit facilities, Tullow has a robust capital structure, and it looks as if the companys banks are willing to support it through this turbulent time. It helps that Tullow has hedged 55 % its production for 2015, giving management some clarity over cash flows.
Whats more, the group is sufficiently funded to meet all of its capital spending commitmentsincluding the ongoing investment in the Tweneboa-Enyenra-Ntomme (TEN) development.
TEN is on budget and on schedule to start generating cash flow for Tullow in mid-2016. Group oil production is set to grow to around 100,000 barrels of oil per day netduring 2017, up from full-year 2015 net guidance of 63,00068,000bopd. In addition to this production increase, Tullow is slashing costs and hopes to achieve$500m in cost savings over the next three years.
Time to buy?
Now Tullows lenders have given their full support to the company, is it time to buy?
It could be. Management is focused on cutting costs to bring the groups cost base down as the price of oil remains depressed.
Further, when the TEN field starts production next year, Tullows production will increase by around 50%, cash flow will improve, and profit margins should widen. That said, Tullow does trade at a relatively expensive2015 P/E of 57 and 2016 P/E of 15.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.