Tullow has announced 2018 results in line with the guidance given in January. Revenue was $2bn, after tax profits were $85m and free cash flow of $411m. Net debt continues to fall.
The group also announced a dividend, of $0.048 per share, and confirmed agreements have been reached around the capital gains tax liability for its farm down in Uganda.
The shares rose 2.3% on the news.
Just two years after a rights issue was needed to shore up the balance sheet, things seem to be looking up. Tullow is back in the black and management are confident the group can pay a dividend and shift the debt that's been the monkey on Tullow's back.
With production set to rise, operating costs dropping to just $10 per barrel and an agreement reached over tax obligations in Uganda, it's easy to see where that confidence comes from. But there is such a thing as over-confidence.
The twin tailwinds of increasing production and a rising oil price won't blow this strongly forever, and borrowing's still a little higher than we'd like. That means the company's uncomfortably exposed to a reversal in oil prices (which have been looking rocky recently).
The group also needs to also replace existing reserves. Tullow probably spent less than it would like over the last few years while 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 has 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 Cote 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.
A $100m a year dividend suggests shareholders could be in line for a 2.6% dividend yield going forwards, perhaps more if all goes well. Investors should remember there are no guarantees though, especially with the group's success closely tied to the ups and downs of the oil price.
A 17.5% increase in net realised prices, to $68.50 per barrel, more than offset the impact of a damaged turret in the Jubilee field, which saw production fall 5% to 90,000 boepd. Total revenue, including insurance payments, rose 8.6%.
Operating profit rose sharply to $528.4m, but tax and interest costs limited net profit to $85.4m, against a loss of $175.3m last year.
Tullow's net debt has fallen from $3.5bn to $3.1bn. Together with rising profits, that helped the ratio of net debt to cash profits, net of exploration costs (as measured by EBITDAX), fall from 2.6 to 1.9.
The majority of production came from the TEN and Jubilee sites in West Africa. Recent drilling progress has been good and the remediation work on the damaged turret is due to complete shortly. Tullow expects net production of 39,000 bopd from TEN (up c.30%) and 34,000 bopd from Jubilee (up c.23%). Total production will be between 94,000-102,000 boepd.
In Uganda, Tullow's JV partners expect a Final Investment Decision in 2019. The group anticipates a FID on the Kenyan developments later in the year, with First Oil in 2022.
Net capital expenditure rose from $225m to $423m. Looking ahead, the group expects to spend $570m in 2019, including around $250m in Ghana and $70m in Kenya.
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.
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