Tullow Oil plc (TLW) Ordinary 10p
HL comment (30 July 2020)
First half production averaged 77,700 barrels a day (2019: 86,300), in line with expectations and with coronavirus having no impact to operations. This together with a realised oil price of $52 a barrel, means revenue is expected to be $0.7bn for the half, coming in below last year's $0.9bn.
Tullow has revised its long term oil price value down from $65 a barrel to $60. As a result Tullow expects to record $1.4-1.7bn in impairment charges and exploration write-offs at the half year.
Tullow shares are down 8.6% since the announcement.
Fate seems to have it in for Tullow.
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, the collapse of a farm-down deal in Uganda and finally 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 most important numbers at the moment, in our opinion, are the cash flow forecasts for next year. Cash is the money the bank the group actually has to pay salaries, service debt and invest in growth. Tullow reckons it can break even on a cash basis with oil at $35 a barrel, and with oil now around $40 a barrel things are looking up.
However, that efficiency has come at a price, with some pretty brutal cuts to capital expenditure. Under investing for a sustained period risks damaging the businesses long term prospects.
Fortunately Tullow has a few points in its favour. Production is well hedged over the next year or so - which should help it secure an above market price for its oil. Despite a sizeable debt pile the group also expects to have $500m of financial headroom in its borrowing facilities. Both of those will help it keep its head above water if the currently depressed oil prices remain short-lived.
The recent sale of the group's Ugandan assets is also a positive. The project has been problematic for some time, and the proceeds of the sale will provide a useful boost to the balance sheet at a crucial moment. The sale means newly appointed CEO Rahul Dhir will be taking over a company in better shape than the he might have expected.
While the oil price is moving in the right direction, it started from a very low base. Which 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.
Tullow Oil key facts
- Price/Book ratio: 0.6
- Ten year average Price/Book ratio: 2.5
- Prospective yield: Tullow have currently suspended its dividend
We've introduced this section in response to recent survey feedback.
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.
Management said Ghana had a strong operating performance in the first half, producing on average 54,000 barrels a day. Full year forecasts are for an average of 51,600 barrels a day.
Equatorial Guinea and Gabon produced 5,000 and 16,800 barrels a day respectively - full year production is expected to drop slightly in both regions. Cote d'Ivoire's produced 1,900 barrels a day but this is expected to rise to average 2,000 over the full year.
At the end of June, the group's net debt is expected to be $3bn. Free cash and liquidity is expected to be around $0.5bn. As things stand the group expects free cash flow to break even over the full year.
Thanks to good performance across the portfolio, full year production guidance has been narrowed to 71,000 -78,000 barrels a day. On 28 July, 60% of 2020 sales revenue was hedged with a floor of $57 a barrel and 44% of 2021 sales revenue hedged with a floor of $51 a barrel.
The $575m sale of the Ugandan assets is expected to complete before the end of year-end. Despite having been approved by shareholders, the transaction remains subject to the Government of Uganda and the Uganda Revenue Authority finding a tax agreement.
Completion operations on the Ntomme-9 production well at TEN are ongoing and the well is due onstream in August. However, coronavirus is disrupting progress on the Kenyan work programme and the group are in discussions with the government to agree next steps. In Suriname, drilling of a prospect (Goliathberg-Voltzberg North) is planned for the first quarter of 2021.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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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