Friday, December 13, 2019

Tullow Oil Stock Stages a Recovery. But for How Long?

Tullow Oil: What does boardroom blitz mean for small cap partners?

Shares in Africa-focused Tullow Oil rose nearly 6% on Wednesday just two days after the oil producer slashed its production outlook for the fourth time this year and said it had ousted its chief executive and head of exploration, after weak performance of its main producing assets in Ghana.

The back story. The London-listed company (ticker: TLW.UK), which was founded in 1985 by Irish businessman Aidan Heavey, has suffered a series of setbacks in Ghana, Uganda, and Kenya. Demand for Jubilee field gas from the Ghana National Gas Company has been much lower than expected, and Tullow has experienced technical problems on two new wells at one of its other fields. The company also failed to sell a $900 million stake in a Ugandan project to Total and Cnooc in August. 

Tullow now expects production for 2020 will be a third lower than previously forecast, averaging between 70,000 and 80,000 barrels of oil a day, down from around 87,000 barrels in 2019.

What's new. Shares in Tullow have recovered for a second day in a row—a welcome reprieve for shareholders after the stock experienced a 70% crash and hit a 16-year low Monday, valuing the company at just £560 million. On Wednesday, shares had recovered slightly and were trading almost 6% higher in London at 48.32 pence, valuing the company at around £676 million. Still, that’s a long way from the £13 share price in 2012.

Looking Ahead. Tullow has started a strategic review of the business, with the aim of cutting the cost base to match the production profile and boost execution on existing operations. Dorothy Thompson, Tullow’s interim executive director, will give investors a full financial and operational update at Tullow’s full-year results on Feb. 12, 2020. 

However, the company’s lower output will have a knock-on effect on the company’s free cash flow, which it now anticipates will be $150 million next year. To pay down its debt load of around £2.3 billion, management may have to sell some parts of the business—or indeed put the whole company on the block.

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