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Tullow Oil - Debt beginning to fall.

Nicholas Hyett | 28 June 2017 | A A A
Tullow Oil - Debt beginning to fall.

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Tullow Oil plc Ordinary 10p

Sell: 51.95 | Buy: 52.15 | Change 1.70 (3.37%)
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First half production at Tullow's oil fields looks to be in line with guidance, and is expected to hit 87,000 barrels of oil per day (bopd). Pre-tax operating cash flow is expected to be in the region of $0.6bn.

The shares fell 2.8% following the announcement.

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. The huge TEN field is now online, and could eventually produce 80,000 bopd or more, compared to 48,000 bopd in the first half of this 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 this year's significantly lower capital expenditure.

Unfortunately, debt continues to loom large at Tullow. The combination of increased production and falling expenditure means it is now able to use cash from operations to begin paying down the debt mountain. Despite April's $750m rights issues, there is still plenty of debt to clear and if the price it receives for its oil were to fall significantly that could leave the group struggling.

For now that price is being supported by a hedging programme that includes 42,500 bopd of second half production at a price of $60.32/barrel - a price not seen on the open market since mid-2015. That programme is unwinding though, with just 9,732 bopd hedged for 2019, at an average price of $46.33.

Tullow deserves credit for its 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. Until debt is back at manageable levels, Tullow's future remains largely outside of its control.

Pre-close trading update

Guidance for full year working interest oil production remains unchanged at 83,500 to 91,000 bopd. The majority of this (c. 60,000 bopd) will be generated by the group's two large West African fields - Jubilee and TEN - with the group's non-operating West African and European fields making up the difference.

The group's average realised oil price in the first half was $58/bbl, supported by the group's hedging policies. The group has hedges in place for 42,500 bopd in the second half, with an average floor price of $60.32.

Tullow has reduced guidance for full year capital expenditure from $0.5bn to $0.4bn, with potential to fall further to $0.3bn following the sale of interest in its Ugandan assets. Exploration and preliminary development activities continue in Kenya.

Following the group's $750m Rights Issue in April, net debt at the end of the first half is expected to be $3.8bn (2016 year end: $4.75bn), with c. $0.2bn of debt paid down out of organic cash flow. This leaves the group with unused debt facilities and free cash of $1.2bn at the end of June.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.

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