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Tullow Oil - On the long road back to financial health

Nicholas Hyett | 26 July 2017 | A A A
Tullow Oil - On the long road back to financial health

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Tullow Oil plc Ordinary 10p

Sell: 59.80 | Buy: 59.94 | Change -1.88 (-3.05%)
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First half revenue hit $0.8bn at Tullow, with free cash flow of $205m. However, non-cash impairments, as a result of the low oil price, meant the group reported an overall loss for the half of $309m.

The shares rose 5.4% 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 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 issue, 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.

First half results

Tullow's net working interest in production from its West African oilfields rose to 81,400 barrels of oil per day (bopd), while European production averaged 6,000 barrels of oil equivalent per day (boepd). Increased production supported a 46% rise in revenues despite realised oil prices falling 6% versus the same period last year.

The combination of free cash from production and a $750m rights issue in April means net debt fell by around $1bn since the end of December. Facility headroom and free cash now stands at $1.2bn.

Capital expenditure guidance for 2017 has already been reduced from $0.5bn to $0.4bn, and is expected to fall further to $0.3bn once the Uganda farm-down is complete. Tullow's three-year cash cost savings target has also been revised up from $500 million to $650 million. The group is targeting an operating cost of $8 a barrel in Ghana.

The submission of plans for further development of the Jubilee field is on track, while preparations are underway to resume drilling at the TEN field later in the year. The Kenyan exploration programme continues, with a further three wells planned for the second half of 2017.

Full year guidance for West African production of 78,000-85,000 bopd remains unchanged, with Europe expected to produce between 5,500 and 6,000 boepd.

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.