Tullow Oil plc Ordinary 10p (TLW)

Company overview

Tullow Oil plc is one of the largest independent oil and gas exploration and production companies in Europe. The Group has interests in some 23 countries, employs around 900 personnel and focuses on four regions: Africa, Europe, South Asia and South America. The Group operates two world-class development projects in Ghana and Uganda where it has discovered new oil provinces. Tullow first listed on the London Stock Exchange in 1987 and in September 2007 entered the FTSE 100 index.

HL Comment (18 January 2012)

In a recent trading statement and operational update, (18 Jan) exploration group Tullow Oil forecast full-year record revenues of $2.3 billion, more than double the $1.1 billion it recorded in 2010. Tullow attributed the jump in revenues to increased production and higher commodity prices. In a separate announcement, Tullow unveiled that new exploration partnering initiatives were being pursued including a frontier exploration partnership with Royal Dutch Shell in the Atlantic basin. The company reported a 74% exploration and appraisal success ratio in 2011 and added that it plans to drill about 40 exploration and appraisal wells in 2012. The statement said capital expenditure for 2011 was $1.4 billion, growing to $2.0 billion in 2012. Production from Tullow's Jubilee field, the group's largest project, is currently more than 70,000 boepd. The Jubilee Phase 1A development plan has now received approved with drilling scheduled to commence in March. The explorer said its production increased to 78,200 barrels of oil equivalent per day (boepd) in 2011. It forecast that production would be between 78,000 and 86,000 boepd this year. The group is scheduled to release full year results on 14 March 2012.

Negative Points:

• Tullow reported further delays in the ramp up of its Jubilee field in Ghana. It has significantly reduced its full year production guidance to 78-86000 boepd due to on-going issues at the oil field. Tullow said it will need to invest about $400 million to fix mechanical issues related to the well design.
• Tullow's earnings and valuation are sensitive to changes in oil and natural gas prices, both of which can fluctuate significantly as a result of economic and geopolitical forces.
• The oil price continues to be highly volatile. The price outlook remains uncertain. Many countries are attempting to adopt alternative/more balanced energy policies.
• Worries over the global economic outlook continue to be expressed, with concerns for China's economic durability remaining in the background.
• Tullow's operating activities could be severely disrupted by the effects of natural disasters or industrial accidents.
• Group net debt at 31 December 2011 was approximately $2.8 billion.

Positive Points:

• The company announced today (18 Jan) a new frontier exploration partnership with Royal Dutch Shell in the Atlantic basin, as the budgets needed to establish new supplies of crude continued to grow. Tullow said the planned partnership would focus on making "transformational" discoveries in "underexplored frontier basins".
• Jubilee oil field production issues aside, Tullow has forecast record full year revenues of $2.3 billion.
• The group is finalising arrangements with the Ugandan Government to complete the $2.9 billion farm down and commence basin development.
• Tullow has an active 2012 drilling exploration programme with 40 wells planned for 2012.
• Tullow has interests in over 85 exploration and production licences across 23 countries in Africa, Europe, South America and south Asia.

Consensus:

On balance, market consensus indicates a buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: US dollar.