Tullow Oil (LSE: TLW) shares have been making a tentative comeback, gaining nearly 60% since the beginning of 2016 as crude oil has been strengthening.
But after the price of a barrel has fallen back from $70 to around $63, the shares have retrenched. Is that a buying opportunity?
Last week, Tullow reported its first operating profit in three years. It was only a modest one at $22m, and hefty finance costs helped push that down to a bottom-line loss. But, crucially, we learned of free cash flow of $543m, and that will hopefully leave Tullow’s lenders feeling a little less twitchy over the oil firm’s big debts.
After refinancing in November, that debt level still stood at $3.47bn (£2.5bn) at year-end, which is a bit above the company’s current market capitalisation of £2.45bn.
Debt falling
But gearing was “significantly reduced” and is actually not far above the company’s targeted level. And there’s still headroom (including cash) of $1.1bn. I see the chances of a collapse very much receding now, and I don’t think the short sellers are going to win this one.
The prospects for Tullow’s drilling programme are looking good for boosting production over the next few years — Kenya is expected to produce first oil in the early 2020s. Although oil is down a bit, I can see it regaining $70 or higher before too long — and I reckon Tullow Oil shares should do well in 2018, on a forward P/E of 12.
A big crash
Looking at its share price, you could be forgiven for thinking Amur Minerals Corporation (LSE: AMC) is on the ropes. At one stage on Tuesday the price dipped by more than 15%, though as I write it’s come back a little and is 10.4% down at 5.8p.
The price has actually fallen by 55% over the past 12 months, but what lies behind the latest drop?
The company, which delves for nickel-copper sulphide in Russia’s eastern regions, revealed it has taken on a new convertible loan facility to the tune of up to $10m, with an initial $4m to be drawn straight away. Two other drawdowns will be taken, one at 121 days and one at 240 days.
Amur sounds happy with the deal, but the terms of the repayment will surely be behind the market’s weak sentiment in response. Each cash advance is to be repaid in 12 monthly instalments, but if Amur elects not to pay any individual instalment, the lenders can convert that amount into new ordinary shares at any time.
Dilution?
With Amur currently lossmaking, how many of those repayments it will elect to make is an open question. And though the deal is flexible for it, we now have the uncertainty of how much dilution of shareholders’ interests we’ll see. Amur’s market capitalisation is currently around £40m, and the total $10m loan could represent up to around 20% of that.
The share price momentum is not in Amur’s its right now, but what should you do? Buy for a potential recovery or sell and use the cash to buy some Tullow shares?
Well, I wouldn’t buy a tiny ‘jam tomorrow’ stock like Amur anyway, and I already own some Premier Oil shares as my risky hydrocarbon pick — so it’s a choice I can happily ignore.
But Amur Minerals could go either way, and I reckon 2018 could be a crucial year.