The tumbling of Anglo-Irish oil prospector Tullow Oil’s share price on the London Stock Exchange on December 9, may have caught western markets by surprise but was not a completely unexpected development to the company’s watchers in East Africa.
Since the sudden collapse of oil prices from their peak starting in 2015, Tullow has been walking the high wire as the value of its acquisitions diminished relative to its costs.
Last week, the company that rode a crest by overselling the prospective returns on its investments to shareholders came to haunt it, forcing the double resignations of chief executive Paul McDade and Angus McCoss. The share price went south, shedding half of the stock’s value in a single day.
With assets in 45 countries, 20 of them in Africa at its peak, Tullow enjoyed its golden noon in 2012 when it announced finding a well in French Guyana that it claimed was so deep one could sink Mount Kilimanjaro into it. Then followed the conclusion of its protracted acquisition of Heritage Oil’s assets in Uganda for $1.45 billion. Earlier, it had found oil in Turkana while its Jubilee field in Ghana had also started production.
Behind the glitter, however, the company was in a fix. Tullow was overleveraged in Uganda where its acquisition and exploration costs peaked at $4.85 billion. It recovered only $2.9 billion from the farm down of two-thirds of its interest to Total EP and the China National Offshore Oil Corporation.
Even then, the bulk of proceeds from this transaction were retained by the partners to fund Tullows’s share of subsequent field development activities.
When the bill for final investment in Uganda was finally tallied, Tullow did not have the resources to back its share and was forced to surrender yet more of its stake to its partners in lieu of cash.
A similar scenario has played out in Kenya where Tullow’s interest in the Turkana fields has been diminishing over time.
Tullow is now in that position where it can neither turn back nor move forward without incurring a huge penalty. Under the current energy price environment, its assets are not generating enough revenue to fund expansion and neither is it a good candidate for additional credit.
It might be premature to tell if the current events will ultimately turn into Tullow’s swansong. But whatever the final course, there will be valuable lessons on how not to manage investor relations.
Markets operate on trust and sentiment is everything. Timely and full disclosure of any material developments at the company is not an option, but an obligation. Trust is generated when the people given the responsibility to run the affairs of a public company are open to the shareholders, communicating both the good and bad news in unembellished terms. Because Tullow failed in that duty, the market is not willing to give it a chance when it needed that support most.
Despite its diminished stature, Tullow is a company that still carries the hopes and aspirations of millions in East Africa. It should not be surprising that many want clarity on what the future portends for their combined fortunes.