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Tullow Oil - 2022 production in line as investment ramps up

For the full year, total production was in line with guidance at 61k barrels of oil equivalent per day (kboepd).

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For the full year, total production was in line with guidance at 61k barrels of oil equivalent per day (kboepd). This drove revenue of about $1.7bn with an average realised oil price of $87 per barrel.

Underlying free cash flow of about $267m came in ahead of Tullow's expectations with net debt down $0.2bn to approximately $1.9bn. That's a ratio 1.3x cash profits, improved from 1.9 times as 30 June 2022.

For 2023, Tullow has guided that production guidance stands at a range of 58-64 kboepd. Capital expenditure is expected to be around $400m, dominated by investment in its Ghanaian fields.

Assuming an average oil price of $80 per barrel, free cash flow of about $100m is estimated, with that set to double at an oil price of $100 per barrel.

The shares were up 4.5% in early trading.

Our view

The collapse of the proposed merger with Capricorn in September means Tullow's stand-alone story is once again the main focus.

It's the recovery in the oil price that has been key in improving financial performance, allowing the company's ratio of net debt to underlying cash profit, a key measure of financial health, to move in the right direction. Since June 2021 it's come down from 2.6 all the way to 1.3 times. Its ability to continue this progress and fund its expansion is closely linked to the oil price. That's outside the group's control, and a prolonged downturn can never be ruled out.

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 and Tullow expects about $400m of capital investment expenditure in 2023. The bulk of its spending will be funnelled to Ghana. We would like to see more details on the Group's investment plans beyond 2023.

But if its proposed investment in Ghana pays off, the significant uplift in cashflow expected in 2024 and 2025 will provide a strong platform for any future plans. In Ghana's Jubilee field alone, Tullow is targeting the addition of 120 million barrels to the 153 million that are currently in reserves. However, exploration and development is inherently risky and there's no guarantee that these objectives will be achieved. Kenya has the opportunity to join the production roster, but this remains dependent on the ongoing search for a strategic development partner.

Despite its improved fortunes, Tullow is not currently paying a dividend and it's not something we're anticipating in the near term.

We're also concerned about the group's position as we transition toward renewables. Many of Tullow's peers are using the windfall of cash from higher prices to accelerate their transition to sustainable energy. Tullow lacks the financial firepower to do this at scale.

With Capricorn out the picture, Tullow is once again the master of its own destiny. Production is likely to remain fairly stable this year. The biggest driver of market sentiment in the short term is likely to be progress in Ghana, which could drive a step change in financial performance further down the line. But its strategic direction lacks some clarity. With the energy transition also looming further ahead, caution is warranted. That's reflected in serious downward pressure on the group's valuation.

The Share Research team is ceasing covering of Tullow Oil. This is the last update and house view HL will produce on this stock. You can still find out more about our thoughts on the Financials industry by signing up to our Share Insight email.

Tullow Oil key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 25th January 2023