Tullow shares slide on worries over $750m cash call
Another record high for FTSE 100 with support from a weaker pound
Tullow Oil hit a seven-month low on Monday amid fears that its $750m cash call signals a reversion to its high-spending past.
The decision last week by Paul McDade, Tullow’s incoming chief executive, to launch a rights issue has undermined its investment thesis of organic debt reduction and production growth, said Merrill Lynch.
Shareholders will be paying a heavy price with the share count increasing 50 per cent, just to hit a year-end debt reduction target that would have been reached anyway by mid-2018, it forecast.
“With ‘growth’ mentioned numerous times on Friday’s conference call, we believe new management may be tempted to prioritise growth [and] exploration at a time when investors are looking for free cash flow,” said Merrill.
“We are concerned about a potential loosening of capital expenditure discipline established over the last three years.”
Tullow closed 2.4 per cent lower at 197.5p in a mixed wider market that found support from a weaker pound. The FTSE 100 edged 4.85 points higher at 7,429.81, another record high.
AB Foods climbed 1.6 per cent to £26.59 after Goldman Sachs added the Primark owner to its “buy” list with a £30 target.
With group earnings growing at 10 per cent per annum, AB could be sitting on £2bn of net cash by the end of 2021, it forecast.
Primark’s return to like-for-like growth since September shows its discount pricing and short lead-time supply chain remains differentiated from the wider retail sector, said Goldman. And unlike peers, Primark’s guidance assumes its will absorb cost inflation this year rather than try to pass it on to consumers and suppliers, said the broker.
Diageo hit a record high, up 0.4 per cent to £23.28. Kathryn Mikells, Diageo’s chief finance officer, told a London conference that cost savings are on track and second-half prospects look stronger, with price cuts for Smirnoff and Captain Morgan in the US helping to slow declining volumes.
Nostrum Oil & Gas dropped 5.8 per cent to 442.6p after a Kazakhstan court froze the 13.5 per cent stake in the explorer belonging to Frank Monstrey, the company founder and chairman.
The court order was in connection with ongoing proceedings commenced by BTA Bank against Mukhtar Ablyazov, the Kazakh tycoon and dissident.
Security outsourcer G4S faded 1.8 per cent to 295.6p after a downgrade to “sell” from HSBC.
While G4S qualifies as a turnround story, the biggest challenge for investors is to identify the continuing business given a stream of disposals and an opaque divisional reporting structure, HSBC said. It also cited intensifying wage-cost pressures for the group’s guarding division.