Tullow Oil’s share price [TLW.L] has slumped over the past month. Perhaps this isn’t surprising considering that the price of oil has had a similar decline. Yet with a trading statement out this week, Tullow Oil could give investors something to be cheerful about if it shows progress on reducing losses and raising margins.
The African focussed oil producer made something of a comeback last year. Cash strapped and debt laden, it managed to secure refinancing through a bond issue and has been focusing on developing opportunities in West Africa.
Of course, as an oil producer, Tullow Oil’s share price is subject to oil price volatility. Since 8 June, the price of Brent crude has dropped 13%, going from $123.58 a barrel to $107.15 a barrel. Over the same timeframe, Tullow Oil’s stock has fallen 18.25%.
Tullow Oil’s share price drop mirrors the 20.53% downturn in oil producers as an investment theme over the past month, according to our thematic screener, with seven out of the eight ETFs covered suffering drops of between 20% and 30%.
What to watch out for in Tullow Oil’s earnings
Since joining in 2020, Tullow Oil chief executive Rahul Dhir has focused efforts in Western Africa, either through exploration or mergers and acquisitions. The company has said that its Jubilee and TEN fields in Ghana are ‘highly profitable investment opportunities. This makes any news on the oil producer’s growth strategy in the region near the top of the agenda when the trading statement is published.
Debt will be another key area to watch out for in the update. At Tullow Oil's 2022 AGM in May, Dhir said that asset sales, cost savings and the price of oil had helped the company reshape its capital structure by securing a $1.8bn bond issue. Before the bond issue the oil producer had warned that it faced a ‘significant risk of insolvency proceedings’.
According to Dhir, this provided the liquidity and financial stability for Tullow Oil to make good progress on the delivery of its business plan.
Tullow Oil’s debt pile stood at $2.1bn at the end of 2021. However, in a sign that the company is moving in the right direction, losses after tax were $82m in 2021, down from the $1.2bn loss in 2020.
Tullow Oil merger with Capricorn Energy under scrutiny
A big reason for people joining the earnings call will be the merger with Capricorn Energy. Announced at the start of June, the tie-up would create an African focussed energy group that was London listed, with the two companies eyeing savings of up to $50m by the second year of completion.
Not everyone’s convinced the deal is such a good thing. LGIM - the UK’s biggest asset manager and top 10 investor in Capricorn Energy - said that it could see ‘no clear strategic rationale for the combination’ and that the merger would ‘worsen’ Capricorn Energy’s commitment to transitioning away from fossil fuels.
Institutional investors have also said that the deal would give heavily indebted Tullow Oil access to Capricorn Energy’s cash. When the deal was announced, analysts at Investec said that it provided Tullow Oil with a ‘significant deleveraging event’ due to ‘Capricorn’s significant cash balance’. There have also been grumblings that the terms of the deal favoured Tullow Oil shareholders.
Conversely, analysts at Stifel recently upped their rating on Capricorn Energy to ‘Buy’ from ‘Hold’, saying that the deal undervalued the oil producer and that a higher offer would be needed for the deal to go through, which would mean Tullow Oil forking out more cash.
As it stands, of the eight analysts covering Tullow Oil’s stock on the Financial Times have a median price target of 74.59p, suggesting a 66.6% upside on Friday’s close.