Explaining Tullow Oil Rights Issue

On my main Tullow Oil article, I explained the calculation of the Rights Issue affects an individual Tullow’s shareholder.

This post is an expansion, which includes two examples: –

One shareholder bought the shares at £8.32, the other at £1.60 per share.

Then, it goes on to explain what happens if you sold the shares, as well as calculating the new breakeven shareholder for the individual who bought at £8.32.

And finally, it goes on to explain the conditions why, you, as a Tullow’s shareholder should keep the Rights.

N.B.: Some calculations involve in this article uses hypothetical share price of Tullow for illustration and educational purposes. Therefore, shouldn’t be taken as a prediction or forecasts.  

 

(The red colour text for is what been written on the original article.)

The Rights Issue offer for Tullow’s shareholders is 25 for 49 rights issue, at 130p per share (A 35% discount, I believe). The issue aims to raise circa £600m ($750m).

What if you took up your Rights?

 

The “Rights” Example

 

For example, you are a long-term Tullow’s shareholder having bought 10,000 shares at £8.32/share, the total value of £83,200. (Ignoring transaction fees)

With the shares at £2.29, you are sitting on a loss of approx. £60k. Still, you are willing to help Tullow Oil out by participating in the Rights Issue.

How much more do you need to fork out?

 

Doing the maths.

25 FOR 49 Rights issue means you get to subscribe for a further 25 new shares for every 49 shares held.

Take 10,000 shares and divide by 49, then multiply by 25.

(10,000 ÷ 49 = 204, then 204 x 25 = 5,102 shares)

At £1.30/share, you pay £6,632.

 

Round-up

Your original shareholding would have gone from 10,000 shares to 15,102 shares.

 

Selling today

Since these are nil rights, you can sell after purchase. The price depends on the market price of Tullow Oil.

Tullow’s share price was £2.29/share (as of 13/04/2017, and some days after the Rights) and you decide to sell your Rights shares.

You would make a £0.99/share profit. (£2.29/share minus £1.30/share)

Or, £0.99 multiple by 5,102 shares = £5,051 or 76% of profit.

 

Drawback from selling your Rights after purchase

From the above example, the quick £5k profit means the above individual is still nursing £55k in losses.

 

Now, let us reverse the roles.

What if you bought 10,000 Tullow shares at £1.60/share? How have you done so far?

Your original investment is £16,000. The current share price of £2.29/share means you are sitting on a profit of £6,900.

Like the other shareholder, you took up your Rights.

You still need to pay £6,632 for 5,102 shares. And you decide to sell your Rights, which makes you £5,051 profit.

The only difference is, you would keep your 10,000 shares and made 22% profit from your Rights.

 

 

Deciding to Keep Your Rights

Now, going back to the previous shareholder who bought at £8.32/share.

What is the breakeven share price if that individual decides to keep the rights?

Answer

Original Investment: £83,200. Add in £6,632 from the Rights investment means total investment = £89,832. The new shareholding is 15,102 shares.

So, £89,832/15,102 = £5.95/share to break even, instead of £8.32!

That means a further share price gains of 160% would mean he/she will recuperate their investment.

Okay, let us consider another assumption. What if Tullow shares recover to £8.32/share? (The original breakeven price) How much profits would that make?

Answer: £8.32/share multiply by 15,102 shares = £125,649. Minus £89,832 means £35,816.64 profit.

 

 

For the second shareholder who took advantage of the share price collapse and also decided to keep his Rights.

What profit would that individual make, if the shares went to £8.32/share?

(N.B.: After the Rights, the original investment became £22,632.)

It would give a total investment of £125,649. With the profits coming to £103,017!! Or, 455% profit!

 

The above is the best outcome for both shareholders if the business subsequently recovers after the Rights Issue?

For Tullow’s shareholders, it isn’t so simple, as the road can be long, rocky, and bumpy at times, before a smooth recovery ensue. Or, this Rights Issue is just temporary to keep the lights on, before it fell off a cliff.

We simply don’t know the path it will take.

 

Remember: Make sure you took up the rights for the right reason.

 

The REASONS to Keep Your Rights

 

When you decide to keep your rights, you expect a recovery for Tullow in the not too distant future.

You are expecting the oil price will recover.

You are expecting lower capex spending, boosting the company’s chance to generate free cash flow and pay down its debts.

You are expecting lower financial leverage.

You are expecting the company to reinstate its dividend policies.

And, finally, you are expecting the share price to rise.

 

If on the other hand, you feel Tullow won’t recover or requires further Rights Issue, then the right course of action is to sell those Rights.

 

 

Final Thoughts

I hope the Rights Issue surrounding Tullow Oil is explained in a concise manner. I hope the options and examples given are clear and understandable. If not, drop your questions in the comments section below.

 

Call to Actions/Further Questions

Are the above examples clear? Then, please explain below.

Do you think taking up the Tullow’s Rights, is the right thing to do?

Are you in the camp that says the company will experience more problems ahead?

 

Thanks for reading.

P.S. If you know any Tullow’s shareholders or companies that have recently issued a rights issue then please share, subscribe and like this post.  

 

Disclosure

The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.

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