You say 'tomato', I say...

On 6 July 2016, Tullow Oil plc announced it was launching a US$300 million convertible bond offering – reopening a capital market which has been effectively closed to London-listed E&Ps for a number of years.

One of the most fascinating aspects of the deal was not the metrics – it was in Tullow’s comments stating that its focus would continue to be on “strengthening the balance sheet and deleveraging the business”. This begs the question; is a convertible bond equity or is it debt?!

With +US$2.7 billion of convertible bonds issued by London-listed E&P companies since 2006, we look at just how many have actually converted to equity – and the implications that can have on anyone considering one in the future.

You Say Tomato

The Ruler's ruler

In its most recent annual report, Ophir Energy plc (LSE: OPHR) made a simple but bold statement: “We are making NAV per share growth the strategic driver for the business.” And that should be a good thing – as generally, the most widely used valuation metric for European-listed oil exploration and production (E&P) companies is net asset value (NAV).

So why should stating the obvious be so bold?

Because, as it turns out, Ophir is to use that metric, and that metric alone, as the performance measure for a newly designed long term incentive scheme for employees.

But to completely ignore the market valuation of a company is to imply the market is (almost always) wrong in terms of value – something that is rarely the case in the fullness of time. It also creates the potential for unintended outcomes which could ultimately result in the misalignment of management and shareholders.

We delve deeper into Ophir’s new LTIS to understand how well it fits with Ophir’s exploration-focused story and look at the wider implications of a remuneration package at a public company which will drive strategic decision but that is largely immune to share price performance.

The Ruler's ruler

Awwww, Do I have to...?

The value of doing your homework is a hard lesson to learn. Homework is hard. Homework is boring. And anyways, that question will NEVER come up on the test…

Even in an era where most of the legwork is done with the click of a few buttons it wouldn’t appear that the ease (and speed) of being able to do homework has made it any more palatable. But it can be surprising what you find if you take the time to look for it. OK Google...

An example of this situation was recently highlighted when Genel Energy plc (LSE: GENL) announced a large reserve downgrade on its Taq Taq field in the Kurdish Region of Iraq. The Taq Taq field has had a surprisingly long history in the public eye having been owned (or almost owned) by a number of public oil companies. While reserve estimation is an inexact science (just ask Shell…) – the data that does exist suggests that investors should have done a little bit more homework.

The Value of Homework

The Name is Bond, NOK Bond....

The recent dramatic fall in share prices of independent E&P companies on the back of plummeting oil prices has been well documented - but what has gone under reported is the sharp fall in bond prices as well.

Unique to this cycle, many of the bonds that have been issued by independent E&P companies over the past few years have been on markets where retail investors can invest directly in securities which have traditionally be the preserve of institutional investors.

With bonds in well-known E&P names trading at yields more resembling equity returns (15-35%!) we attempt to ask “has the market got it right?” with regard to the pricing of these bonds and point out situations where potential pricing ‘anomalies’ may exist in the current cyclical downturn.

NOK Bond