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Tullow Oil - Still a long way to go

Equity research team | 8 February 2017 | A A A
Tullow Oil - Still a long way to go

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Tullow Oil plc Ordinary 10p

Sell: 44.91 | Buy: 45.08 | Change -0.46 (-1.01%)
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Full year revenue fell 21% to $1.3bn, with gross profit down 8% at $547m. Operating cash flow of $0.8bn, although 20% lower than 2015, is slightly ahead of the group's previous guidance.

Net debt at year end was $4.8bn, around $800m above 2015 but $0.1bn lower than had been expected in November. Total financial headroom, including both cash and existing loan facilities, sits at $1bn.

The shares fell 1.6% in early trading.

Our View

Tullow has been desperately unlucky. Having found vast quantities of oil, it then saw the rug pulled from under its feet when the price of crude plunged, just as the company was fully committed to taking on huge debts in order to develop the new fields.

However, Tullow's lenders have kept the faith, renewing and extending debt facilities through thick and thin, allowing the group to focus on developing its discoveries.

With the bulk of the capital expenditure behind it, Tullow is finally starting to see production rise - with the huge TEN oil field online, production is expected to ramp up further next year. In the longer term the group will be hoping to see returns from its East African operations, with other exploration activities accounting for 25% of next year's significantly lower capital expenditure.

Unfortunately, debt continues to loom large at Tullow. The combination of increased production and falling expenditure should mean it can use cash from operations to pay down the debt mountain. However, the group may still seek to raise additional funds through a rights issue to speed up the process.

Tullow deserves credit for its ongoing exploration success, as well as its development achievements. Nonetheless, as its hedging programme unwinds, the group's future cash flows will be dependent on the oil price. This means that until debt is back at manageable levels, Tullow's future remains largely outside of its control.

Full year results:

Oil production in Tullow's West African fields averaged 65,500 barrels of oil per day (bopd). The region primarily constitutes the Ghanaian Jubilee and TEN fields, with the completion of TEN meaning that field contributed to production for the first time this year. European gas assets contributed 6,200 barrels of oil equivalent per day (boepd).

Production in 2017 is expected to average between 78,000 and 85,000 bopd in West Africa, with European production of between 6,000 and 7,000 boepd.

Exploration activities have continued, with progress made in Kenya and a farm-down deal agreed with Total in Uganda for a total consideration of $900m. The deal will see Tullow receive $200m in cash, of which $100m is payable on completion of the transaction, $50m payable on the final investment decision and $50m payable at first oil. The remaining $700m represents reimbursement of a proportion of Tullow's past exploration and development costs.

Operating capital expenditure in 2016 was $0.9bn, and is expected to fall further in 2017 to $0.5bn, of which $125m should be offset by the Uganda farm down deal.

CEO Aidan Heavey will be stepping up to become Chairman following the group's AGM on the 26th April, with current COO Paul McDade taking up the position of CEO.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.