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Can Tullow Oil’s share price recover amid faltering oil prices?

FTSE 250 oil and gas exploration company Tullow Oil’s [TLW] share price fell by close to 16% this week after saying it expects to report pre-tax impairments and exploration write-downs totalling $1.5bn. This was “primarily due to a $10 a barrel reduction in the group’s long-term accounting oil price assumption to $65 a barrel”, Tullow said in a trading statement on 15 January.

Tullow’s share price closed at 49.88p on 15 January, down by over 15% from the previous close, taking its market capitalisation to £702.2m. This was well below the 0.3% decrease so far this year for the iShares Global Energy ETF [IXC] and the Invesco Dynamic Energy & Exploration Production ETF [PXE], which has dropped 5.7% this year.

 

 

 

 

With Tullow’s outlook for the year ahead muted, there are other headwinds. These include perceived threats of oversupply, which recently led the Organization of the Petroleum Exporting Countries (OPEC) to cut oil production in Q1. Will Tullow Oil’s share price continue to languish in 2020?

 

Plumbing the depths

Tullow Oil had a torrid 2019. The company’s share price fell 63.39% through the year, hastened by production difficulties. The most dramatic drop was during November, when the company was forced to revise its anticipated output because of ongoing problems at its Ghana oilfields.  

In November, the company released a trading update stating that it had dropped its full-year oil production guidance again to 87,000 barrels of oil per day (bopd) from the previously revised estimate of between 89,000 and 93,000 bopd in its half-year results. While the company ended up reporting average oil production for the year of 86,700 bopd in 2019, it now expects production for 2020 to be between 70,000 and 80,000 bopd.

The company noted that “production performance has been significantly below expectations”. Between the start of November and the end of December, Tullow Oil’s share price dropped 22.56%. During that period, the company also announced that its then CEO Paul McDade and exploration director Angus McCoss would be resigning by mutual agreement.

 

A fresh start?

Aside from the write-down, Tullow Oil said in its update that it expects full-year total revenue to be $1.7bn and gross profit to reach $700m, with capital expenditure to be around $490m for 2019.

It also expects to generate underlying cash flow of “at least $150m from 75,000 bopd at $60 per barrel”.

Meanwhile, the company has “hedged 45,000 barrels per day of its 2020 output with an average floor price of $57.28” and has hedged 22,000 barrels per day at $52.80 each for next year, CityAM reported.

“The fundamentals of our business remain intact: recent reserves audits demonstrate that we have a solid underlying reserves and resources base in West and East Africa, our producing asset continue to generate good cash flow and we retain a high-quality exploration portfolio,” Dorothy Thompson, executive chair at Tullow Oil, told the publication.

 

Market Cap£769.558m
PE ratio (TTM)5.88
EPS (TTM)9.30
Quarterly Revenue Growth (YoY)-3.60%

Tullow Oil share price vitals, Yahoo Finance, 16 January 2020

 

Steering a new path

However, some are not so positive. Following Tullow Oil’s trading update in December the Motley Fool said that its “forward P/E of 8.5 times [currently at 3.82] might make it cheap on paper, but its trading at bargain basement levels for a reason”.

Hargreaves Lansdown questioned the issue of oil prices in a January. It highlighted that the financial health of the company is dependent on these prices “playing ball” even if Tullow has “locked in a price of over $56 a barrel for a significant portion of the next year’s production”. Equity analyst Nicholas Hyett pointed to “low quality finds in South America” as only adding to the issues.

“Tullow does have other exploration projects in Argentina, Cote d'Ivoire and Peru, and more developed operations in Kenya and Uganda. But commercial production is years away. The new CEO will have their work cut out steering Tullow smoothly through the immediate future,” Hyett wrote.

“Tullow does have other exploration projects in Argentina, Cote d'Ivoire and Peru, and more developed operations in Kenya and Uganda. But commercial production is years away. The new CEO will have their work cut out steering Tullow smoothly through the immediate future” - equity analyst Nicholas Hyett

 

Out of the 21 analysts polled by MarketScreener, only three analysts hold an outperform position on the stock, with 12 analysts rating it a hold and five a buy.

The average 12-month price target among 15 analysts on MarketBeat is 93.71p, representing an 87.87% increase on its share price, as of 15 January’s close of 49.88p.

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