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Tullow Oil - Rising production sees cash generation rise

Nicholas Hyett | 10 January 2018 | A A A
Tullow Oil - Rising production sees cash generation rise

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Tullow Oil plc Ordinary 10p

Sell: 51.88 | Buy: 51.96 | Change 0.64 (1.25%)
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Increased production and further cost savings saw Tullow generate $0.5bn of free cash flow in 2017. That's ahead of previous expectations, contributing to the significant improvement in the group's net debt position.

The shares rose 3.5% in early trading.

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Our View

It was touch and go for a while in early 2016, but Tullow looks like it's finally back on the road to good health.

Falling debt and new borrowing facilities have given the group extra breathing space, around $1bn to be precise, while the completion of the huge TEN oil field means production is rising. Increasing production into an improved oil price environment is driving better than expected cash returns which is in turn supporting further debt reduction.

Repairing the balance sheet is likely to remain a focus for some time yet - Tullow needs to repay around $580m before it even reaches the upper end of its target debt range - but improved conditions mean the group is able to focus on the future.

Jubilee and TEN will remain the driving force behind the group for some time yet, and new development activity should increase productivity. But Tullow has an excellent track record with the drill bit, and is turning its eye to exploration opportunities once again.

Ugandan and Kenyan assets are in the early stages of development, and signs are promising. The group has added acreage in Cote d'Ivoire and Peru and expects to undertake exploration activities elsewhere in its portfolio in 2018. These early stage assets are speculative but have the potential to generate significant upside.

Tullow deserves credit for its exploration success, as well as its development achievements. A recovering oil price has dramatically increased the value of past achievements, and its expertise are a catalyst for future performance.

However, debt continues to loom large. Until it's back at manageable levels Tullow's future remains largely outside of its control. In combination with an unpredictable oil price, that means investors should maintain a healthy degree of caution.

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Full Year Trading Statement

2017 production averaged 94,700 boepd (barrels of oil equivalent per day) across all Tullow's assets. That compares to 71,700 boepd in 2016, reflecting the increased contribution of the TEN oil field in Ghana. An average realised price of $58.30 a barrel generated revenues of $1.7bn and gross profit of $0.8bn.

Tullow has secured the Maersk Venturer rig for drilling across the two huge Ghanaian fields, TEN and Jubilee, for up to four years as it looks to optimise production. Development work continues in Kenya and Uganda with the group also expanding its exploration activity in Africa and South America.

Year-end net debt is expected to be in the region of $3.5bn, a reduction of $1.3bn over the course of 2017. This reduction is a reflection of the group's strong cash flow as well as the $750m rights issue in April. Tullow's gearing ratio (a measure of debt relative to profits) is expected to be less than 3 times at year end, as the group progresses towards its target of below 2.5 times.

2018 production is expected to be between 86,000 and 95,000 boepd, with the group hedging 60% of production at a minimum price of $52.23 a barrel. Net capital expenditure in 2018 is expected to total around $460m, including $80m of spending in Kenya and $90m of exploration and appraisal spending.

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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.