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Tullow Oil - guidance lowered again

Nadeem Umar, Research Editor | 9 December 2019 | A A A
Tullow Oil - guidance lowered again

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Tullow Oil plc Ordinary 10p

Sell: 22.80 | Buy: 23.01 | Change -1.64 (-6.84%)
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Production at Tullow's core sites in Ghana has been significantly below expectations, and the group has lowered its expectations for the year. As a result, the board has decided to suspend the dividend.

CEO Paul McDade and Exploration Director Angus McCoss have resigned with immediate effect.

Tullow shares fell 51.9% following the announcement.

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Our View

The recent news of production problems in Ghana is difficult to stomach.

That's because these are Tullow's strongest assets, with the TEN and Jubilee fields accounting for around 70% of production. That means the onus is on these fields to produce enough profit to shift the substantial debts, fund future projects and hopefully reinstate a dividend.

The group has prices of over $56 a barrel locked in for a significant portion of its anticipated production in the next two years, but reduced production volumes will make it difficult to achieve the low operating costs per barrel investors hoped for. Consequently, free cash flow expectations have been slashed.

The update is coming off the back of news that recent discoveries in Guyana are of low quality. It takes time for new wells to come online, so we were always a long way from Guyana being a profit driver, and the group remains optimistic about the larger basin. But a secure source of future cash flows would have been welcome.

While significantly lower than back in 2015/16, leverage is still higher than we'd like. The group could suffer more than it would otherwise if we see a reversal in oil prices. A few years ago Tullow might have been compelled to sell its interest in the assets to shift some of its debts. Given recent updates, we don't think some monetisation should be off the table today.

Tullow does have early stage projects in Argentina, Cote d'Ivoire and Peru, and is still generating free cash flow, but the group was hoping to sustainably return $100m a year to shareholders. News the group has decided to suspend the dividend changes the investment story.

The money saved should give a new CEO some headroom, but they'll have to work hard to get Tullow back on track.

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Trading update - 9 December 2019

Tullow now expects to produce between 70,000 and 80,000 barrels of oil per day (bopd) in 2020, compared to an expected 87,000 this year. It's also forecasting an average of 70,000 bopd for the following three years.

As a result, after capital investments of around $350m, the group expects to generate just $150m of underlying free cash flow.

The group has launched a "thorough review" of operations, with an update on progress expected on 15 January 2020.

Third quarter results - 13 November 2019

In East Africa the group completed its first oil shipment from Mombasa, as the Lokichar pilot scheme continues to produce 2,000 bopd. In Uganda the previous farm-down agreement has now lapsed, although conversations with the government are ongoing.

Oil samples from the Jethro-1 and Joe-1 wells in Guyana have proven to be heavy crudes with a high Sulpher content. However, the group "remain confident in the broader light oil potential of the Orinduik and Kanuku blocks located in this prolific oil basin".

Net debt is expected to finish the year at $2.8bn, compared to $3.1bn last year.

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