Tullow Oil’s [TLW.L] share price has sprung another leak in 2020, battered by the slump in demand for oil from both industry and individual consumers during the coronavirus pandemic. This has driven down demand for the stock and, as of 8 December, Tullow Oil’s share price is 49.7% below where it started the year.
Tullow Oil’s share price began the year by closing at 59.66p on 2 January, compared with 190.56p on 4 January 2019, before plunging to just 7.55p on 18 March as coronavirus fears hit markets. A drop in demand for oil as people stayed at home and planes were grounded sent oil prices tumbling.
This added to the company’s 2019 troubles, which saw Tullow Oil’s share price slump because of reduced oil production targets, a dividend suspension and the departure of Paul McDade, then-CEO of Tullow.
However, as global lockdowns eased over the spring and summer, and management said it was cutting staff costs and raising over $1bn in disposals, Tullow Oil’s share price recovered to 27.44p on 7 April and 38.17p by 8 June.
Tullow Oil’s share price dropped significantly once again to 14.30p on 2 October, following its half-year results in early September. The report revealed a loss of $1.3bn compared with a $103m profit in the same period last year, as it took a $1.4bn write down on a lowered oil price outlook.
Tullow Oil's half-year loss compared with $103m profit a year ago
It added that it was looking at refinancing options because of its huge $3bn debt mountain and that the process carried uncertainties that could risk its going concern status.
However, approval from the Government of Uganda in October for Tullow to sell off a $575m stake in the Lake Albert Development oil project to rival Total [TOT] eased concerns, and helped Tullow Oil’s share price climb to 33.82p on 24 November.
Upping cash flow
The next day, Tullow unveiled a new strategy committing 90% of its investments to its West African oilfields and reducing focus on exploration.
It said that it expects to generate $7bn of operating cash flow over the next 10 years and to reinvest $2.7bn of that, mainly in a multi-well drilling program in Ghana. The remaining $4bn will go on cutting debt and allowing for shareholder returns on oil prices of $45 per barrel in 2021 and $55 per barrel from 2022 onwards.
Tullow Oil's expected operating cash flow over next 10 years
Tullow is confident that there is plenty of potential in its Ghanaian oil fields, given that it has produced only 14% of the 2.9 billion barrels in place to date.
Its shares rose to 37.49p on the day of the announcement, before closing at 32.15p. Tullow Oil’s share price dropped to 27.87p on 30 November, but has since recovered to sit at 33.10p on 10 December.
“The plan focuses our capital on a deep portfolio of short-cycle, high-return opportunities within our current producing asset base and will ensure that Tullow can meet its financial obligations,” said Rahul Dhir, CEO of Tullow.
“The plan focuses our capital on a deep portfolio of short-cycle, high-return opportunities within our current producing asset base and will ensure that Tullow can meet its financial obligations" - Rahul Dhir, CEO of Tullow
The market view
The consensus rating among 10 analysts polled on Market Screener is Hold, and the average target price is 45p. Berenberg has a Hold rating and a 35p target price, while RBC has an Underperform rating and a 35p price target.
David Round, analyst with BMO Capital Markets, is confident that Tullow’s proposed cash flow creation will “go a long way towards addressing the market’s funding concerns”.
However, Mark Wilson, analyst at Jefferies, is cautious. He believes that Tullow’s focus on costs “combined with mature oil-producing assets with an established track record of gradual decline cannot be turned around to medium-term production growth”.
Dhir may be forced to sell more assets or even seek a buyer for the whole business, Roland Head suggested in The Motley Fool.
“There’s also a risk the firm will struggle on for years, servicing its debts, but doing little more,” he wrote. “In a situation like this, shareholders face a lot of risks. I don’t see any good reason to buy Tullow shares.”
“There’s also a risk the firm will struggle on for years, servicing its debts, but doing little more. In a situation like this, shareholders face a lot of risks. I don’t see any good reason to buy Tullow shares" - Roland Head
What Tullow needs, along with all oil and energy stocks, is an acceleration in prices in 2021. It is likely that the price will keep rising gradually as economies slowly recover from the pandemic, but it will remain constrained.
If Tullow Oil can strike it lucky in West Africa and boost its cash flow, then its shares may respond. However, it’s unlikely that they will return to the heights seen in 2019 any time soon.