Tullow has narrowed its full year production guidance, from a previous range of 60k-64k barrels of oil per day (bopd) to 61k-62k bopd. Tullow expressed disappointment with the two strategic 'Ntomme' wells drilled at the TEN Field in Ghana.
The second well didn't encounter as high a quality oil bearing structure as expected. And didn't deliver a commercially viable resource. Tullow and its partners are still assessing the next steps.
Tullow is deferring some of its investment activities and has increased its full year free cash flow guidance to about $250m from $200m. This is based on a $95 per barrel oil price assumption over November and December.
Tullow expects net debt to fall below 1.5 times underlying cash profit by the year end.
The shares fell around 0.7% on the day of the announcement.
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Our View
The collapse of the proposed merger with Capricorn in September means Tullow's stand-alone story is once again the main focus.
Tullow is taking firm steps to ensure improved efficiencies and more uptime across its operations. But 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 has come down from 2.6 to 1.9 and Tullow expects it to dip below 1.5 by the year end.
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 $360m of capital investment expenditure in 2022. The bulk of its spending will be funnelled to Ghana, where growth should be relatively steady. Tullow has deferred some of its investment spend and continues to focus on cutting its operating costs. We have some concerns that a short-term focus on debt reduction, could stifle Tullow's longer term growth potential. We would like to see more details on the Group's investment plans beyond 2022.
At the Jubilee field alone Tullow is targeting the addition of 120 million barrels to the 153 million that are currently booked. We're also pleased to see the group kicking up new opportunities as it seeks to develop its significant gas resources in the region. However, recent disappointments at the TEN Field highlight just how risky exploration and development can be. 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.
The buoyant price environment has helped the group back on its feet. But Tullow is not currently paying a dividend and it's not something we are anticipating in the near term.
Its ability to both pay down debt and fund its expansion is closely linked to the oil price, which could be adversely impacted by a prolonged downturn. Tullow is reducing its reliance on fixing its future sales price, a positive if oil prices remain strong, but risky if prices move the other way.
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's lacks the financial firepower to do this at scale.
With Capricorn out the picture Tullow is once again the master of its own destiny. But its strategic direction lacks some clarity. The market value of £0.7bn is well below internal valuation estimates of its resource base even after stripping out the debt, reflecting investor concern. With the energy transition also looming further ahead, caution is warranted.
Tullow Oil key facts
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