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Tullow Oil - pre-tax profit back in positive territory

Sophie Lund-Yates, Equity Analyst | 15 September 2021 | A A A
Tullow Oil - pre-tax profit back in positive territory

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Tullow Oil plc Ordinary 10p

Sell: 44.91 | Buy: 45.08 | Change -0.46 (-1.01%)
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Half year revenue fell $4m to $727m, as sales volumes fell 14.7% to 65,800 barrels of oil equivalent per day (boepd), offset by a 17.4% rise in the realised oil price to $60.8 a barrel.

A large reduction in exploration costs written off and impairment charges meant the group reported a pre-tax profit of $213m, up from a $1.4bn loss last year.

The group now expects full year production volumes to be at the upper end of the guidance range, at 58,000 - 61,000 boepd.

The shares rose 3.0% following the announcement.

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Our View

We're impressed, and relieved, by the progress Tullow's made. It wasn't too long ago we were concerned about the group's ability to continue operating.

In particular, the successful debt refinancing is a crucial milestone gives Tullow a chance to regroup. A recovery in the oil price is a welcome tailwind too. It's given multiple asset sales a much-needed boost to cashflows, and together with cost cutting means the balance sheet's in much better condition.

Production forecasts appear to have stabilised, and over 50% of the next half's production is hedged - which helps put a floor under the price it receives for its oil. All-in-all, Tullow is on a more stable footing and the question now turns to one of delivery.

That could be hindered by the fact that the drive for greater efficiency has come at a price. Capital expenditure was over 47% lower at the half year compared a year earlier. While it plans to spend up to $1.5bn over the years to 2025, Tullow said it's "focused on limiting its capital exposure". 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. This hasn't caused any glaring issues so far, but it's something to keep an eye on.

Growth in the mature Ghanaian oil fields should be relatively steady, although there are no guarantees. The more important area to watch is Kenya. A total redesign has been done, and the technical work complete, but so far we've little indication about what these assets could mean for the group's fortunes. Early signs are positive, but it's too soon to say exactly what this will translate to in the numbers.

However, Tullow's biggest long-term threat is outside its control. The pivot towards renewable energy is ramping up. Smaller oil companies like Tullow have fewer resources to fund investment in new ventures, which could be problematic as the ESG lobby gathers pace.

The operational progress at Tullow is pleasing. But we continue to think its fortunes are largely in the hands of others. If the shift to renewable energy is slower, or social pressure less fierce, than expected, the shares could re-rate substantially. Overall, Tullow is at the mercy of an uncertain market.

Tullow Oil key facts

  • Price/earnings ratio: 7.7
  • Ten year average Price/earnings ratio: 13.8
  • 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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Half year results

Working interest production fell 21.2% to 61,230 boepd, reflecting reduced production at the Jubilee and TEN fields, plus disposals. New wells in Ghana did not produce any oil in the period, so were unable to offset the production decline.

Higher global oil prices meant Tullow's hedges were less effective, and without these, the realised oil price per barrel would have been $65.2. As of the end of June 2021, Tullow has hedges in place for downside protection on 51% of its forecast production to May 2023.

Underlying cash costs per barrel were $12.9, up from $11.0. This reflects the lower production, and higher operating costs associated with Covid-19. Administrative expenses halved to $23m following the previously announced reduction in headcount.

Impairment charges were over $400m lower than last year, at $8m.

Capital expenditure fell from $192m, to $101m. Over half of this spending went on production and development. Tullow outlined plans to spend $1.3-$1.5bn on capital expenditure between 2021 - 2025. This will be self-funded.

Free cash flow was $86, versus a $213m outflow last year, reflecting the lower capital expenditure and higher profits. Net debt stood at $2.3bn, down from $3.0bn at the same time last year. Together with the higher profits, that meant net debt as a proportion of cash profits fell to 2.6 times, down from 3.0.

Tullow forecasts full year free cash flow of about $0.1bn. This would increase by around $50m if the oil price averages $70 a barrel in the second half.

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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.