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Tullow - oil prices boost cash

Laura Hoy, Equity Analyst | 21 February 2022 | A A A
Tullow - oil prices boost cash

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Tullow Oil plc Ordinary 10p

Sell: 50.10 | Buy: 50.30 | Change -1.65 (-3.17%)
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On 26 January, Tullow announced that it was expecting full-year revenue to be around $1.3bn with free cashflow of around $250m, thanks to buoyant oil prices and cost cutting. This reflects average production of 59,200 barrels of oil equivalent per day (boepd) with a realised oil price of $63 per barrel.

In 2022, production is expected to be 55,000-61,000 boepd. This could increase by roughly 5,000 boepd following the purchase of Occidental Petroleum's Ghana assets. At a realised price of $75 per barrel, this should bring in around $100m in free cash flow.

The shares are down 14.8% since the announcement. Correct as at 21 February 2022.

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Our View

We're impressed, and relieved, by the progress Tullow's made. At one point, we were concerned about the group's ability to continue operating.

In particular, the successful debt refinancing is a crucial milestone, giving Tullow a chance to regroup. But it's the recovery in the oil price that has been key. It's helped support multiple asset sales and provided 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 75% of the next 14 months' 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.

We're pleased to see the group loosening the purse strings somewhat to support future growth. Debt reduction remains a priority, as it should, but if the group doesn't continue to invest in its oilfields, they'll eventually run dry. The bulk of its spending will be funnelled to Ghana, where growth should be relatively steady. The acquisition of a larger stake in this operation is expected to close later in 2022, which could up average production by almost 10%.

The more important area to watch is Kenya. A total redesign has been done, and the technical work complete. Early signs are positive, but it's too soon to say exactly what this will translate to in the numbers.

Unfortunately, Tullow's biggest long-term threat is outside its control. We suspect demand for oil will still be here for decades, and reduced investment in new projects has the potential to constrain supply, boosting prices. But the pivot towards renewable energy is ramping up and smaller oil companies like Tullow have fewer resources to fund investment in new ventures. That could be problematic longer term.

The operational progress at Tullow is pleasing. Shares are valued well below their long-term average and could re-rate substantially if the group continues to dine out on lofty oil prices. However the longer-term case is murky. It's in a precarious position as we shift toward renewables with very few clean energy options at its disposal at present, caution is advised.

Tullow Oil key facts

  • Price/Earnings ratio: 3.8
  • 10-Year Average Price/Earnings ratio: 13.0
  • Prospective dividend yield (next 12 months): 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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Trading Update

The group has hedged 50-75% of its output through 2024 between $51 and $78 per barrel.

Capital expenditure for the year was around $265m and decommissioning spend was $70m. In 2022 this is expected to rise to $350m and $100m respectively due to increased investment in Jubilee infrastructure.

Net debt at the end of 2021 was $2.1bn, down from $2.4bn last year. Debt reduction remains a priority and the group is on track to bring net debt down to 1.5 times cash profits by 2025.

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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.


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