Tullow Oil plc (TLW) Ordinary 10p
HL comment (12 August 2019)
Tullow Oil has announced an oil discovery in the Jethro-1 well, part of the Orinduik block off the coast of Guyana . Tullow said the recoverable resources look to be greater than previous forecasts, and the find de-risks the remaining projects on the site.
The shares rose 17.3% on the news.
Tullow has great assets in Ghana, but the TEN and Jubilee fields account for around 70% of production. As a result, the onus has been on these fields to produce enough profit to shift the still substantial debts, fund future projects and pay the new dividend.
It takes time for new wells to come online, so we're still a long way from Guyana being a profit driver. But the better than expected early results will help alleviate that pressure. Tullow has a 60% share of the field that's delivered the positive news, and previous guidance had been for it to have over 150mmboe of recoverable resources.
A few years ago, Tullow would likely have been compelled to sell its interest in the assets to shift some of its debts. It may still opt to monetise some of the field now, but recent progress on deleveraging means it's under less pressure to do so.
Prices of over $56 a barrel are locked in for a significant portion of its anticipated production in the next two years. On top of that, production in the core Ghanaian wells is set to rise, and operating costs have dropped to just $10 per barrel.
That underpins the group's confidence in the policy of paying $100m per year in dividends, plus special distributions where appropriate. As things stand, that implies a prospective yield of around 2.8%. If Tullow keeps the assets and can successfully bring production online, it can look forward to improved cash flows in the future. That could translate to higher dividends.
Of course, there are still potential trip wires ahead.
While significantly lower than back in 2015/16, leverage is still a little higher than we think is entirely comfortable so the group remains exposed to a reversal in oil prices.
There's also been a few operational hiccups. The pace of production increases has been tempered by technical problems at key sites and an agreement with the Ugandan government on a farm-down deal with French and Chinese partners has stalled.
However, we think Tullow looks in much better health than it has for some time. Further results from other wells in Guyana are expected later in the year, and the group also has early stage projects in Argentina, Cote d'Ivoire and Peru.
Half year results (24 July 2019)
Half year revenues of $872m were 3.6% below the same period last year and a touch under previous guidance, reflecting a lower average oil price. However, Tullow also reduced underlying cash operating costs per barrel by 17.4%, with operating profits up 29.3% as a result - to $388m.
First half production averaged 89,000 barrels of oil equivalent per day (boepd), including production-equivalent insurance payments. Full year production is now expected to average 89,000-93,000 boepd, down from 90,000-98,000 boepd expected in June after the group encountered technical problems while drilling on the TEN Ghanaian oil field.
Capital expenditure during the half hit $248m (from $145m last year), with free cash flow of $181m.
The group finished the half with net debt of $2.9bn, down 4.3% on last year. However, the improvement in profitability means gearing fell from 2 times cash profits to 1.8.
The development of the group's Kenyan oil assets is said to be progressing well, with terms signed with the Kenyan government and a final investment decision targeted for the second half of 2020. The Uganda farm down continues to make limited progress.
The group has acquired new licenses in Argentina, Peru and Namibia during the half, with additional drilling opportunities in Peru and Suriname.
The board announced an interim dividend of 2.35 cents per share.
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