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Tullow - problems in Ghana hit production

George Salmon | 25 April 2019 | A A A
Tullow - problems in Ghana hit production

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Tullow Oil plc Ordinary 10p

Sell: 32.57 | Buy: 32.67 | Change -1.40 (-4.13%)
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Technical problems in Ghana meant Tullow's first quarter production was below expectations, averaging 84,600 barrels of oil a day (bopd) including insurance payments.

While the underlying issues have been resolved, the group has lowered full year oil production guidance by around 3% to 90,000 - 98,000 bopd.

The shares fell 3.5% on the news.

The final recommended dividend is $0.048 per share.

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Our View

Just two years after a rights issue was needed to shore up the balance sheet, things seem to be looking up. Management are confident the group can pay a dividend and shift the debt that's been the monkey on Tullow's back.

It's easy to see where that confidence comes from. The group's locked in prices of over $56 a barrel for approaching half its anticipated volumes in the next two years, and the rest should fetch even more given the market price is well above that at the moment. On top of that production is ramping up, and operating costs have dropped to just $10 per barrel.

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.

It also needs to replace existing reserves. Tullow probably spent less on exploration and development 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, Tullow 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's also added acreage in Argentina, 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.

The stated aim is to pay at least $100m a year in dividends, which suggests shareholders could be in line for a 3% 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.

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First quarter trading details

Despite the smaller non-operated portfolio performing well, production in West Africa was below expectations due to gas compression constraints on Jubilee during February and a delay in completing a well in the TEN field. Together, TEN and Jubilee are responsible for 69% of total group production.

In East Africa, Tullow remains hopeful of reaching a final investment decision in Kenya by year end, however this is dependent on agreements with the government. While the principles have been agreed, discussions are also ongoing with the Ugandan authorities regarding the tax treatment of its farm-down agreement with Total.

Tullow has secured new blocks around the Falklands, and plans are in place to drill exploratory wells off the coast of Guyana in June. The group will continue to seek to access new acreage in both Africa and South America.

At 31 March 2019, net debt was $3bn with $1bn of financial headroom and no near-term debt maturities. 2019 capital expenditure guidance of $570m remains unchanged.

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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.