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Tullow - tough 2020 confirmed, focus on efficiency

Nicholas Hyett | 15 January 2020 | A A A
Tullow - tough 2020 confirmed, focus on efficiency

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Tullow Oil plc Ordinary 10p

Sell: 24.59 | Buy: 24.73 | Change 0.94 (3.96%)
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Tullow's share of production last year averaged 86,700 barrels of oil per day (bopd). That's slightly below guidance provided in November, but lower than expected capital expenditure means free cash flow and net debt is in line with guidance.

Tullow continues to expect production and free cash flow to decline next year.

The shares fell 2.8% in early trading.

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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 and there have inevitably been write-downs as a result.

While leverage is considerably lower than back in 2016, it's still higher than we'd like. There's a lot of focus on both operating and capital efficiency to help conserve cash, and all being well management expect to generate free cash next year. That means Tullow's less likely to be compelled to sell assets to shift its debts. While a portfolio revamp might well be part of the new CEOs playbook - as the company's yet to appoint a new woman/man to the helm - it feels less like a fire sale scenario.

Still, financial health depends on the oil price playing ball, despite having locked in a price of over $56 a barrel for a significant portion of next year's production. Reduced production and low quality finds in South America only exacerbates the problem.

Tullow does have other exploration projects in Argentina, Cote d'Ivoire and Peru, and more developed operations in Kenya and Uganda. But commercial production is years away. The new CEO will have their work cut out steering Tullow smoothly through the immediate future.

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Results

Full year results are expected to show revenues of $1.7bn, gross profit of $700m, and capital expenditure of $490m. Free cash flow is expected to come in at $350m, with net debt falling to $2.8bn, a gearing ratio of around 2 times (gearing measures net debt as a multiple of cash profits before exploration expenses).

Management now expect total production in 2020 of around 75,000 bopd, with the decline driven by the Ghanaian fields. Capital expenditure is expected to fall 28.6%, partly offset by an increase in decommissioning expense, with free cash set to reach $150m assuming $60/barrel oil.

Tullow is undertaking a review of the group's structure, to reduce general and administrative costs, and improve efficiency of investment plans. The search for a new CEO continues.

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