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Tullow Oil - battening down for oil meltdown

Nicholas Hyett, Equity Analyst | 12 March 2020 | A A A
Tullow Oil - battening down for oil meltdown

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Tullow Oil plc Ordinary 10p

Sell: 50.10 | Buy: 50.30 | Change -1.65 (-3.17%)
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Total production during the year averaged 86,800 barrels per day (boepd), down 3.6% on last year. Together with lower oil prices that meant revenue fell 9.5% to $1.7bn. Profit after tax fell to a $1.7bn loss from a $85m profit last year, following significant writedowns in the value of some assets. Free cash flow remained positive.

The dividend has been suspended and at current oil prices free cash flow is expected to be significantly lower next year.

The shares fell 17.2% following the announcement.

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Our View

Fate seems to have it in for Tullow.

The group has generally done a pretty good job of discovering and developing new assets, and after a pretty hairy time back in 2015/16 the group felt secure enough to start paying a dividend at the end of last year.

Enter a series of disappointing exploratory wells, the collapse of a farm-down deal in Uganda and finally an almighty oil price crash. Instead of a steady flow of dividends Tullow is back to cutting costs left right and centre to preserve cash and keep debt under control.

The most important numbers from the full year results announcement, in our opinion, are the cash flow forecasts for next year. Cash is the money the bank the group actually has to pay salaries, interest on debt and invest in growth. Tullow reckons it can break even on a cash basis with oil at $45 a barrel, but with oil currently at around $34 that looks a long way off.

If oil prices remain at this level for a sustained period Tullow could end up reliant on asset sales for its survival, but the current environment is hardly ideal for securing the best price.

In the short term however, Tullow has a few factors in its favour. Production is well hedged over the next year or so - which should help it secure an above average price for its oil. Despite a sizeable debt pile the group also expects to have $700m of financial headroom in its borrowing facilities. Both of those will help it keep its head above water if the currently depressed oil prices remain short-lived.

There's no getting away from the fact that the next few months will be tough for Tullow. The high fixed cost base and significant debt pile has always made the group a bit of a play on the oil price. In the current conditions we don't think there's much the company can do but batten down the hatches and try to weather the storm. If it's successful the share price could recover, but with the stock trading on just 0.1 times book value the market is clearly pessimistic.

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Full Year Results

Lower production during the year reflects challenges in the group's offshore Ghanaian fields as well as decommissioning of UK assets. After accounting for hedges the group reported a realised oil price during the year of $62.40 a barrel (2018: $68.50).

Lower production meant underlying cash costs per barrel rose 11% year-on-year to $11.1.

The group reported significant non-cash write-offs and impairments following unsuccessful exploration wells in Guyana and the collapse of the Uganda farm-down deal. There were also reductions in long term oil price assumptions. Together these issues totalled $2bn and are the main reason for the group reporting a loss this year.

Free cash flow for the year fell 13.6% to $355m. Net debt during the year fell slightly to $2.8bn (2018: $3.1bn), although this still represents a small increase in total gearing.

Production guidance for 2020 has been set at 70-80,000 boepd with capex falling 30% to $350m, around 40% of this will be spent on assets in Ghana. Free cash flow is expected to be $50-$75m at $50 oil and break even at $45 oil. 60% of 2020 sales are hedged at $57 a barrel.

The group expects to have $700m of financial headroom at the end of March.

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