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Tullow Oil - Production on course, with cash flow rising

Nicholas Hyett | 15 November 2018 | A A A
Tullow Oil - Production on course, with cash flow rising

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Tullow Oil plc Ordinary 10p

Sell: 49.86 | Buy: 50.05 | Change -0.10 (-0.20%)
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Tullow's on course to meet full year production guidance of 87-91,000 barrels of oil per day (bopd). The group also expects to generate free cash flow of $700m (benefitting from the $200m sale of Ugandan assets).

The shares rose 1.7% 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 uncomfortably exposed to a reversal in oil prices (which have been looking rocky recently). 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 as it fought to keep its head above water, so we're not surprised to see the group increasing 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 significantly next year.

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.

But the group'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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Trading update

Ghanaian oil fields Jubilee and TEN field are both performing in line with expectations. The repair of the turret in Jubilee is going well, and the FPSO vessel is expected to be back to full capacity by the end of the year. Tullow expects to complete four new wells in Ghana by early 2019, taking total production to 180,000 bopd.

Full year gas production across TEN and the UK assets are is expected to be 2,300 barrels of oil equivalent per day (boepd).

Tullow expects to take final investment decisions for its Kenyan and Ugandan assets next year and will begin drilling in Guyana in mid-2019.

Year-end net debt is expected to be $2.8bn (2017: $3.5bn) with gearing at 1.8 times (2017: 2.6 times).

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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.