Tullow Oil plc (TLW) Ordinary 10p
HL comment (27 January 2021)
Full year revenue is expected to be $1.4bn, with gross profit of $0.4bn. That reflects average production of 74,900 barrels of oil per day (bopd) and an average realised price of $50.8 a barrel.
Management and the group's banks have agreed on a one-month extension to the group's Reserve Based Lending facility - originally scheduled for renegotiation in January. This is to allow extra time for the banks to review the new business plan and operating strategy.
The shares fell 5.9% in early trading.
The sale of the group's Ugandan assets last year was a rare glimmer of good news for Tullow after a run of pretty awful luck.
The group has generally done a pretty good job of discovering and developing new assets, and after a pretty hairy time back in 2015/16 felt secure enough to start paying a dividend.
Enter a series of disappointing exploratory wells and an almighty oil price crash. Instead of a steady flow of dividends Tullow is back to cutting costs left, right and centre to preserve cash and keep debt under control.
The drive for greater efficiency has come at a price, with some pretty brutal cuts to capital expenditure. Under-investing for a sustained period risks damaging the business's long-term prospects, since oil that's pumped today much be replaced with new reserves if the group is to have a future.
Tullow does have a few points in its favour. Production forecasts appear to have stabilised, and a fair portion of near-term production is hedged - which should help it secure an above market price for its oil. The cash inflow from the sale of the Ugandan assets is also a positive. The project has been problematic for some time, and the proceeds will provide a useful boost to the balance sheet at a crucial moment.
Unfortunately the group is still facing some difficult conversations with its creditors, and risks going insolvent if these don't pan out. Management has suggested lenders would be understanding, but a month long extension on one facility suggests negotiations are running up to the wire. There's no guarantee the group will clear all the upcoming hurdles, and failure to do so could push it into insolvency.
While the oil price is moving in the right direction, it started from a very low base and that means life will continue to be a challenge for Tullow. The high fixed cost base and significant debt pile has always made the group a bit of a play on the oil price. If things pan out in its favour the share price could recover nicely, but with the stock trading on just 0.6 times book value, the market's clearly pessimistic and we suspect it has good reason to be.
Tullow Oil key facts
- Price/Book ratio: 0.62
- 10 year average Price/Book ratio: 2.29
- Prospective dividend yield (next 12 months): 0.0%
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.
Full Year Trading Update
Capital and decommissioning expenses came in at $290m and $50m respectively for 2020. However, $500m from the disposal of Ugandan assets meant year-end net debt fell from $2.8bn in 2019 to $2.4bn. Impairments and write-offs for the year are expected to come in at $1.4bn.
Tullow now expects 2021 production to be between 60,000 and 66,000 bopd, negatively affected by the planned shutdown of the Jubilee field in September and delays to drilling elsewhere.
The group expects capital expenditure and decommissioning costs for the coming year to come in at $365m, while operational costs are expected to fall $125m.
Underlying operational cash flow is expected to be $0.5bn, assuming oil prices of $50 a barrel, with a target of $7bn over the next ten years.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.
Previous Tullow Oil plc updates
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