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Tullow Oil - first half production in-line with expectations

First half production was in-line with expectations, and drilling performance across the portfolio was said to be strong.

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First half production was in-line with expectations, and drilling performance across the portfolio was said to be strong.

Tullow's on track to meet full year production guidance of 59-65 thousand barrels of oil equivalent per day (kboepd).

A shareholder prospectus for the planned merger with Capricorn Energy is expected to be published in the fourth quarter, with a vote on the deal around the end of the year.

The shares were broadly flat following the announcement.

View the latest Tullow oil share price and how to deal

Our View

The proposed merger with Capricorn energy makes a great deal of sense in our view. However, we can't rule out a capital restructuring of Tullow or the new combined group, in order for the ambitious dividend policy to happen. And before we know any of this for sure, the deal still needs the approval of Tullow's shareholders. For now, that means Tullow's stand-alone story should remain the focus.

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.

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 has gone through, which should mean a bump up in average production. We're also pleased to see the group kicking up new opportunities, with gas contract negotiations with the Government of Ghana potentially offering an additional 14% bump to production.

The more important area to watch is Kenya. A total redesign has been done, and the technical work complete. Early signs are positive and the group looks close to achieving its next big milestone as long as it can bring another strategic partner on board.

The buoyant environment has helped the group back on its feet. Unfortunately, that's not what investors want to see from oil and gas producers during such an accommodative price environment. Tullow's strained finances mean it hasn't been able to capitalise on the higher price environment in the same way many of its peers have. It remains to be seen whether the group would be prepared to forge ahead if prices head in the other direction.

On top of the fact that Tullow's fortunes right now are heavily dependent on oil prices remaining elevated, we're 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 not able to put the same firepower behind its own transition, which could become a problem down the road.

We can't knock Tullow's progress, but it's hard to turn overly positive on an oil company that's struggling to turn a profit in the most accommodative environment we've seen in some time. The group's valued well below the long-term average, reflecting this concern. With the energy transition also looming further ahead, caution is warranted.

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.

Trading update

Tullow has hedged 42,500 barrels per day (bpd) this year, and 33,100 bpd in 2023 and 11,300 bpd in 2024.

The group still expects to generate $200m in free cashflow this year, assuming an average oil price of $95 a barrel. This will be weighted towards the second half of the year because of an arbitration payment and acquisition.

In Ghana, seven new wells have been delivered, with average costs per-well 10% below the average expected well. Net production of around 31,000 barrels of oil equivalent per day (bpd), was in line with expectations at the Jubilee field, while the TEN fields saw net production of around 12,500 bpd.

In Gabon the Simba expansion project has resulted in increased production from the Simba field of c.6,000 bpd (net) in the first half of the year.

A two-month shutdown which had been planned for March has been postponed to August in Côte d'Ivoire.

Tullow is still searching for an investor for its Kenyan development plans, and is ''confident'' there will be progress in the short-term.

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 13th July 2022