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After nearly three years of losses, are Tullow Oil shares a lost cause?

An oil rig in the ocean

Since 16 September 2019, the Tullow Oil share price has staged a dramatic 82.5% fall, sinking to 42p from 241p at the close on 7 July. Since then, the company has been working hard to up production volumes and clear the debt from its balance sheet, while the recent news of a merger with competitor Capricorn Energy and a deal with Petrofac could help to secure the business.

Tullow Oil is due to provide a trading statement and operational update on 13 July, where investors will be hoping to hear more details on how these recent deals will benefit the company in the near and long-term future.

Headwinds for Tullow Oil

2019 was a dramatic year for Tullow Oil, which saw its share price eventually plunge to a 16-year low off the back of a dismal earnings report. The oil and gas business shed £1bn off its valuation after announcing that its then-CEO Paul McDade would be leaving after only two years in the role. The firm also slashed its production forecast from 87,000 barrels a day in 2019 to between 70,000 and 80,000 for 2020. It also said production would continue to slow in the years ahead.

The company had experienced a run of bad luck in Ghana, Uganda and Kenya, with technical problems and subdued demand bringing the commercial viability of these projects into question.

The problems continued into 2020, when Tullow let go of one-third of its staff after announcing a £1.3bn pre-tax loss. As the pandemic hit, uncertainty around the Africa-focused companies exploration projects only intensified.

2021 was also a tense year, as the company scrabbled to raise funds to meet an April 2022 deadline to repay $650m of debt.

How is the company performing today?

The company does appear to be in better shape these days. In May 2021, Tullow raised a $1.8bn bond offering that the Financial Times credited as “securing its future”.

Rescued from insolvency, the same month the company also reported that it was once again profitable, having made a $213m pre-tax profit in the first half of 2021. This was up from a $1.4bn loss for the same period the year before.

In September, the company announced that it planned to increase production estimates for an oil project in Kenya, saying that it would be possible to extract at a rate of 120,000 barrels per day, compared with previous estimates of 80,000 per day. CEO Rahul Dhir said this made the project "more compelling" and improved it “commercially, technically and environmentally”.

Full-year 2021 results showed continued improvements, with Tullow posting a gross profit of $634m, with the loss after tax reduced to $81m from $1.2bn in 2020. Debt has also been reduced to $2.1bn, down from $2.3bn in 2020 and $3bn in 2019.

Could a merger save the Tullow Oil share price?

More news relating to Tullow’s future has been announced over the past month. First, the London-listed oil firm confirmed a £1.4bn all-share tie-up with rival Capricorn Energy. The deal will see investors receive approximately 3.8 Tullow shares for each Capricorn share they hold, with Tullow shareholders owning 53% equity in the combined company, and Capricorn shareholders owning 47%. The base dividend for the merged company has been set at $60m, and it’s hoped the merger will eventually result in annual savings of $50m.

In a statement released alongside the announcement, the companies said: “The combination represents a unique opportunity to create a leading African energy company, listed in London, with the financial flexibility and human resource capability to access and accelerate near-term organic growth.”

Tullow also announced on 5 July that it had struck a deal with Petrofac, which will provide operations services at a development project in Ghana. Since the news of the merger with Capricorn broke on 1 June, Tullow’s share price is down 21.5% to 7 July, while the share price dropped 6% the day after the 5 July deal announcement.

According to MarketBeat, the average consensus among analysts is that Tullow Oil is a ‘buy’, with four holding this rating. Four other analysts consider the stock a ‘hold’. The average price target on is currently 76.5p, which would represent an 82% increase on 7 July’s closing price.

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