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Tullow Oil - cash in black thanks to asset sales

Nicholas Hyett, Equity Analyst | 10 March 2021 | A A A
Tullow Oil - cash in black thanks to asset sales

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Tullow Oil plc Ordinary 10p

Sell: 42.42 | Buy: 42.61 | Change 1.02 (2.44%)
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Tullow reported full year revenues of $1.4bn, down 17.1% from a year earlier. The decline reflects a modest rise in sales volume during the year, to 74,600 barrels of oil equivalent per day (boepd), offset by a 18.4% decline in average realised oil prices to $50.90 a barrel.

The group reported an after-tax loss of $1.2bn, an improvement on a $1.7bn loss reported in 2019. That was driven by significant asset impairments given the lower oil price, with free cash remaining in positive territory thanks to asset disposals.

The shares rose 4.2% in early trading.

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Our View

The 2020 profit numbers may be ugly, but asset sales meant Tullow managed to deliver positive free cash flow. In the current environment that's the most important thing.

An almighty oil price crash and a series of disappointing exploratory wells meant the group's shares fell 95% between November 2019 and March 2020. At one point there were serious questions about whether the group would be able to service its debt.

However, the successful sale of Ugandan assets marked a major turning point. Together with a useful hedging programme that secured an 18.6% higher average price for the group's oil, and aggressive cost cutting programme that's helped the meaningfully reduce net debt year-on-year.

However, the drive for greater efficiency has come at a price. Capital expenditure was 41.2% lower in 2020 than a year earlier. Under-investing for a sustained period risks damaging the business's long-term prospects, since oil that's pumped today must ultimately be replaced with new reserves if the group is to have a future. So far that's not been a problem, with increased reserves in the group's huge Ghanaian oil fields offsetting 2020 production - but it's one to watch closely going forwards.

Tullow does have a few points in its favour. Production forecasts appear to have stabilised, and over 60% of next year's production is hedged - which helps put a floor under the price it receives for its oil. In fact the group now reckons it can be comfortably cash flow positive with oil prices of $50 a barrel, well below today's $67.72 a barrel.

Unfortunately Tullow is still facing some difficult conversations with its creditors. Negotiations are running up to the wire, and the group needs lenders to be understanding.

Even assuming the short term financial hurdles are cleared, Tullow faces a difficult future. The oil & gas industry looks set for massive disruption in the years ahead - as the rise of renewables hits market demand and investors give environmentally unfriendly companies the cold shoulder. That will likely leave smaller, debt laden producers, like Tullow, at the mercy of an uncertain market

Tullow Oil key facts

  • Price/Book ratio: 1.04
  • Ten year average Price/Book ratio: 2.96
  • Prospective dividend yield (next 12 months): 0.0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full Year Results

Full year production across the group averages 74,900 boepd in 2020, down 13.7% year-on-year. Lower production reflects field decline, partially offset by higher uptime on the Jubilee field.

The average oil price achieved during the year of $50.90 a barrel, reflects the benefit of oil hedges. Without these hedges the group would have achieved an average price of $42.90.

Underlying operating cash costs came in at $332m, or $12.10 a barrel. That represents a 9% per barrel increase year-on-year, and reflects lower production and increased operating costs related to the coronavirus. Depreciation, depletion and amortisation costs came in at $16.30 a barrel (2019: $22.00), as asset impairments related to lower oil price expectations reduced book value and associated depreciation.

Tullow reported impairments for the full year of $251m, with a further $987m in exploration write-offs, both driven by lower oil price expectations.

Capital Expenditure for the full year came in at $288m (2019: $490m) with $206m invested in development activities and $82m in exploration and appraisal.

Free cash flow for the full year came in at $432m, up 21.6% year-on-year. That includes $513.4m of proceeds from the disposal of assets in Uganda. Net debt at the year end stood at $2.4bn, down from $2.8bn a year ago, although gearing (net debt as a proportion of cash profits before exploration costs) rose from 2.0 to 3.0. The group has access to around $1.1bn in free cash and undrawn debt facilities.

2021 production is expected to come in between 60,000 and 66,000 boped, with 40,000 barrels hedged at $48.17 a barrel. Underlying operating cash flow is expected to be around $0.5bn at a $50 average oil price.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.