A combination of falling oil prices and the coronavirus has seen Tullow Oil's [TLW] share price tank over 66% so far this year. That said, the Africa-focused oil explorer’s stock hit trouble long before the pandemic began.
Over a two year period, Tullow Oil's share price is down more than 91%, — a fall from grace that has seen the company's market cap drop from £15bn a decade ago to £272.815m. Late last year, things came to a head when Tullow Oil cut its production outlook and saw both its CEO and head of exploration leave the company.
Given just how much Tullow Oil’s share price has fallen, could it be worth the risk?
When is Tullow Oil reporting earnings?
What could move Tullow Oil's share price post-earnings?
Successfully navigating the storm
In March, the company warned that it was facing a 'perfect storm' that put its future as a going concern at risk, along with Tullow Oil’s share price. This storm included falling oil prices and reduced production levels. The extent of the damage saw a $1.7bn pre-tax loss in 2019, a sharp contrast to 2018’s $85m profit. To claw back the losses, Tullow Oil has announced it will cut 35% of its workforce and plans to raise over $1bn through disposals.
As part of Tullow Oil’s disposal programme, the company agreed a sale of its Ugandan assets to Total for $575m. While that's cash coming in, just eight months previously Tullow Oil was eyeing up $900m for its stake, but the deal fell through. Tullow Oil’s share price will likely be affected by how its disposal programme is coming along, so investors will be watching for updates in the half-year results.
Amount of Tullow Oil's workforce being cut
A turnaround in form
Investment website Simply Wall Street argues that, while Tullow Oil hasn't made a profit in the past 12 months, investors might be hanging on for revenue growth. After all, a company with growing revenues is likely to eventually turn a profit.
But, as Simply Wall Street points out, Tullow's revenue has grown a meagre 0.7% in the past 5 years. While investors should keep their eye on future profits rather than historical data, such a long-term slump is bound to give pause for thought. Key to instilling investor confidence in Tullow Oil’s share price will be the firm’s ability to outline a strategy to boost revenues in the earnings update, rather than just reducing costs.
"We realise that Baron Rothschild has said investors should ‘buy when there is blood on the streets’, but we caution that investors should first be sure they are buying a high-quality business," wrote Simply Wall Street in their analysis.
“We realise that Baron Rothschild has said investors should ‘buy when there is blood on the streets’, but we caution that investors should first be sure they are buying a high-quality business” - Simply Wall Street
What should investors expect?
Tullow Oil’s pre-tax loss is expected to come in at $1.5bn, down from a $268m profit in the same period last year. Net debt is expected to come in at around $3bn, along with write downs of between $1.4bn and $1.7bn. All in all, a bleak picture for Tullow Oil’s share price.
Tullow Oil's expected pre-tax loss
So, is Tullow Oil a Buy?
Tullow Oil’s share price has an average 25.06p 12-month target from the analysts tracking the stock on the Financial Times. Hitting this would see a 29% upside on its share price through 8 September’s close. Of the 20 offering recommendations, a majority of 9 rate Tullow Oil a Hold.
While oil prices have recovered from the historic lows seen at the start of the year, there’s still a tough road ahead for Tullow Oil’s share price. For the rest of 2020, Tullow Oil will need to demonstrate that it is able to reduce costs while increasing revenues.
While this is the company’s stated aim, it might prove easier said than done in the current environment.