Tullow facing funding risk, UBS slashes target price by 30%

19th Jan 2015 11:44

Tullow Oil has $2.4bn of headroom on its debt facilities, but UBS still reckoned that the oil and gas group faced a "funding risk" as it slashed its target price for the stock from 465p to 335p."A cyclical downturn in E&P asset markets has thwarted Tullow's execution of a key leg of its strategy - the early monetisation of discoveries and recycle of capital. This means until completion of the Tweneboa-Enyenra-Ntomme (TEN) [project in Ghana] in mid-2016 leverage will remain elevated," UBS said.While the $2.4bn of headroom on its loans should be enough to see Tullow through to first oil at TEN even at oil prices at $50 per barrel (bbl), UBS said the "availability of facilities faces by covenant and redetermination risk".The headroom lies within a $3.5bn reserve-based lending (RBL) and $750m corporate debt facility, both of which carry a covenant of 3.5 times net debt-to-operating profits."At our $70/bbl oil price forecast for 2015 this metric reaches 4.1x or, sensitised at $50/bbl, 5.2x. Funding availability will therefore be dependent on how Tullow's banking consortia reacts to lower oil prices," the bank said."Logic suggests getting TEN to production is in all stakeholders' interests (i.e. a credit positive event), but logic, risk tolerance and fear are difficult things to predict."UBS said Tullow is "heavily reliant" on its RBL facility as it is a cheap source of funding. So if the facility reduces due to the recent collapse in oil prices - in turn lowering the value of the portfolio - the company's headroom could also shrink, meaning that it will not have the cash required to develop TEN."There is risk, therefore, in our view, capital may be required at a punitive point in the cycle."UBS kept a 'neutral' recommendation on the stock, which was up 0.8% at 367.6p by 11:42 on Monday.