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Tullow Oil - Guyana oil strike less than hoped

Nicholas Hyett | 2 January 2020 | A A A
Tullow Oil - Guyana oil strike less than hoped

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Tullow Oil plc Ordinary 10p

Sell: 34.18 | Buy: 34.23 | Change 2.56 (8.11%)
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Tullow has announced that the Carpa-1 well in Guyana has discovered high quality oil. However, the amount of oil and general reservoir development is below previous estimates.

Tullow will now assess results from across its Guyana and Suriname assets before deciding what to do next.

The shares fell 10.6% in early trading.

View the latest Tullow oil share price and how to deal

Our View

Tullow's Ghanaian oilfields, TEN and Jubilee, account for vast majority of the group's oil & gas production. These fields carry the burden of shifting still substantial debts, as well as funding future projects and any return to shareholders. That makes recent production problems in the region extremely damaging.

A high fixed cost base means reduced production increases average costs per barrel, as well as impacting revenue, and free cash flow expectations have been slashed as a result. That's seen the dividend introduced last January scrapped, and the debacle has claimed the scalps of the CEO and Exploration Director.

Given the overreliance on just two fields the string of disappointing results from exploration activities in Guyana is less than welcome. It takes time for new wells to come online, so we were always a long way from Guyana being a profit driver. But a secure source of future cash flows would have been welcome.

The one ray of hope is that Tullow is no longer living hand to mouth.

Leverage is considerably lower than back in 2016, although still higher than we'd like, and the management still expect to generate free cash this year. A few years ago Tullow might have been compelled to sell some assets to shift its debts. That's still a possibility, but it feels less like a fire sale scenario.

Prices of over $56 a barrel are locked in for a significant portion of its anticipated production in the next two years. But the group's still very exposed to a fall in oil prices, and reduced production and low quality finds in South America only exacerbates that problem.

Tullow does have other exploration projects in Argentina, Cote d'Ivoire and Peru, and more developed operations in Kenya and Uganda. But with Ghana still the focus for years to come the new CEO will have their work cut out.

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Trading Update - 09/12/19

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 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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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 disclosure for more information.