Edison Investment Research

Tullow - convertible bond issue

Tullow has announced it plans to raise $300m of convertible debt (maturing 12 July 2021, with an annual coupon of 5.875-6.625% paid semi-annually and convertible at 30-35% premium to VWAP on 6 July 2016). Given this proposed debt raise, it is worth re-examining the London-listed bonds for E&Ps and see how they have performed in recent months.

Oil and Gas Macro Outlook - Tightening market buffered by abundant inventories

Summary

Oil price volatility remains high with Brent crude having risen 17$/bbl or 51% since our latest published macro outlook in January 2016. Since then we have seen supply impacted by a 1.2mmbpd reduction in Canadian output due to wildfires, combined with underinvestment and instability- driven supply interruptions across OPEC members:  Venezuela, Libya and Nigeria. Some of these temporary supply impacts will reverse over the coming months; nonetheless, we expect the oil market to tighten over the course of 2016. Although record levels of inventory and uncertainty over the sustainability of emerging market demand growth may limit near term price gains,  longer term, we expect prices to rise to c.70$/bbl in-line with levels required to incentivise non-OPEC supply expansion. Our short term oil price assumptions remain aligned to EIA STEO forecasts at 43$/bbl Brent in 2016 and 52$/bbl in 2017.

BP Stat review - quick thoughts and highlights

The annual BP Statistical Review is the industry standard source for tracking energy trends, usage and sources.  Full details of the Statistical Review can be found here. This year’s edition was presented yesterday, with interesting commentary made on the statistics.

Exploration Watch - Porcupine Basin

The underexplored Porcupine Basin offshore Ireland attracted 80% of the applications in the recent 2015 Atlantic Margin Irish licensing round, and for the first time saw a significant number of awards going to major companies including ExxonMobil, Statoil, Nexen and BP. The area has become a focus of attention most recently as a result of Statoil’s 300-600mmbbl Bay du Nord discovery in the analogous Flemish Pass Basin offshore Canada, but is also the result of earlier work by a number of independent companies that kicked off a round of 3D seismic surveys in 2013. As a result companies such as Antrim Energy, Europa Oil & Gas, Petrel Resources and Providence Resources hold assets surrounded by major-held licences and are well positioned in the ongoing farm -out processes.

Bonds vs Equity vs Oil

Despite the low oil prices and Genel’s recent significant reserve downgrade, today’s announcement by Genel that it will be buying back a portion of its outstanding debt is a testament of the management’s confidence in the business and the benefit of the company’s strong balance sheet. The 7.5% coupon bonds were trading at 55% of the issue price yesterday and implied a yield to maturity of around 30%, a material discount.

Genel’s Taq Taq highlights complexity of fractured reservoirs

Genel Energy surprised the market this week by downgrading the reserves in its Taq Taq field in Kurdistan. 2P recoverable reserves dropped from 683mmbbls to 356 mmbbls, with the bulk of the reduction attributed to a lower than originally estimated fracture porosity in the Cretaceous Sharanish reservoir. Yet it has taken six years and 184mmbbls of production to get to this point - so how can this be and what does it tell us about the development of fractured reservoirs?