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Tullow - Looking slicker all round

Nicholas Hyett | 25 July 2018 | A A A
Tullow - Looking slicker all round

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Tullow Oil plc Ordinary 10p

Sell: 50.55 | Buy: 50.75 | Change -1.25 (-2.40%)
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Tullow reported revenues of $905m in the first half, 15% ahead of last year, driven by an improvement in the oil price and a small increase in production. Profit after tax hit $55m, compared to a loss of $348m in the first half of 2017.

The shares rose 3.6% in early trading.

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Our View

It was touch and go for a while in early 2016, but Tullow is now firmly back on the right track.

Net debt's still a bit higher than we'd like, meaning the company's very exposed to a reversal in oil prices. But the debt pile is falling rapidly and with the huge Ghanaian field producing tens of thousands of barrels of oil a day, there's plenty of cash flow to service it.

The twin tailwinds of increasing production and a rising oil price won't blow this strongly forever though.

The need to replace existing reserves is the monkey on the back of all oil groups. Tullow probably spent less than it would like over the last few years, and so we're not surprised to see the group increase investment in new projects.

Fortunately the company's got an excellent track record with the drill bit. Progress in the East African portfolio looks promising, with Ugandan and Kenyan assets in the early stages of development. The group has also added acreage in Côte d'Ivoire and Peru, with millions invested in exploration work around the world. These early stage assets are speculative but have the potential to generate significant upside.

Nonetheless Ghana will remain the driving force for years to come, with further development of those fields expected to increase output in the near future.

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

Tullow's future remains at the mercy of the oil price, and we think a need to step up investment and deleverage at the same time will restrict returns to shareholders for some time yet.

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Half Year Results

First half production rose 4% to 91,000 boepd (barrels of oil equivalent per day) once insurance payments relating to the Jubilee filed are accounted for. The average realised oil price in the first half rose 18% to $67.50 a barrel.

Strong performances from the TEN field and the non-operated portfolio have led the group to upgrade full year production guidance in West Africa from 82-90,000 bopd to 86-92,000 bopd.

Capital investment increased substantially to $145m in the quarter, with $117m spent of developing known resources and $28 on exploration activities. Tullow expects to spend $460m on capex across the full year.

Development spending is still concentrated on Kenya and Uganda, with two rigs carrying out father drilling on the existing Ghanaian fields. The group continues to invest in exploration activities in Africa and South America, with Guyana, Namibia and Cote d'Ivoire the current areas of focus.

Free cash flow in the half almost doubled to $401m, allowing the group to reduce net debt by $750m to $3.1bn. This represents a gearing ratio of 2, ( net debt divided by adjusted cash profits) compared to 3.3 12 months ago.

Free cash and debt facilities mean Tullow now has financial headroom of $1.2bn.

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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.

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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