Production in the first half was broadly flat at 60.9k barrels of oil equivalent per day (boepd) and in line with expectations. Full year production guidance for 2022 has been narrowed from 59-65k boepd to 60-64k.
Despite a fall in actual volumes sold from 65.8k boepd to 53.5k, a 43% increase in average sales price to $86.5 per barrel contributed to a 16% increase in revenues to $846m.
Meanwhile the average underlying cost to extract each barrel was barely moved at $13, helping the company to nearly treble post-tax profits to $264m.
Tullow is continuing to seek new sources of production in its largest territory Ghana, having drilled a total of 5 wells in the first half. Of the 6 planned wells remaining, a further two are expected by the year end.
''The Board of Tullow remains fully committed to the merger with Capricorn which continues to be recommended by both the Tullow and Capricorn Boards on the current terms.''
The shares finished the day up 2.2%.
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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, and more importantly Capricorn's, where some material investor concerns have been made public. For now, that means Tullow's stand-alone story should remain the focus for now.
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 improve to 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 $380m of capital investment expenditure in 2022. The bulk of its spending will be funnelled to Ghana, where growth should be relatively steady.
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.
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.
We can't knock Tullow's progress, but the Capricorn deal is likely to be the key driver of shareholder value and that's something over which it has limited control. 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
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.
Half Year Results
Ghana accounts for over two thirds of overall production. It is the only region in which Tullow is the operator. The flagship asset in Ghana is the offshore Jubilee field in which Tullow holds a 39% economic interest. Production at Jubilee was up 15% reflecting efficiency improvements which included the planned shut down and maintenance of its storage ship (FPSO) which is typically used in the absence of a pipeline connection. Tullow has taken over responsibility for running the FPSO with a view to driving further efficiencies.
Nearly a third of Tullow's production is attributed to its non-operated portfolio also in West Africa. Gabon contributed the majority of the daily 18k barrel output and it is hoped a new well will come on stream in September. Further drilling to confirm the scale of the resource in Gabon is ongoing.
Ivory Coast which averaged 2.1k barrels per day is planning a 45 day shut down of its production facilities from October. Tullow is working closely with its partner to determine a longer-term plan for its FPSO.
Tullow added more to its resource base in the period than it took out the ground, with reserves increasing from 231.4m barrels to 242.2m.
Free cash flow was negative at $205m. This includes a number of exceptional items (equating to negative outflows of $127m) and also reflects an increase in cash tax payments. This excludes payments made after the half worth $200m for oil sales from Ghana that occurred in the period. For the full year Tullow expects positive free cash flow of about $200m.
Net debt was broadly flat at $2.3bn.
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.
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