ii view: Tullow crashes after significant loss

Business sales and cost savings now battle debt and a falling oil price at this African oil explorer.

Full-year results to 31 December 2019

• Revenue down 9.5% to $1.68 billion (£1.31 billion)
• Loss after tax of $1.7 billion (£1.33 billion)
• Free cash flow down 14% to $355 million (£277 million)
• Dividend payment suspended
• Net debt down 8.5% to $2.8 billion (£2.2 billion)

Executive chair Dorothy Thompson said: 

"This has been an intense period for Tullow as we have worked hard on a thorough review of the business which has led to clear conclusions and decisive actions. We are focused on delivering reliable production, lowering our cost base and managing our portfolio to reduce our debt and strengthen our balance sheet. Even with recent events in oil markets, Tullow's assets remain robust: we are a low-cost African oil producer, with a strong hedging position, substantial reserves that underpin our business and a high potential exploration portfolio."

ii round-up:

African focused oil explorer Tullow Oil (LSE:TLW) today reported results broadly in line with its previously lowered estimates.

The Ireland-headquartered company reported a pre-tax loss of $1.7 billion (£1.33 billion), driven by exploration write-offs and impairments of $2 billion, including a revised write-off for its Ugandan operation. 

Tullow previously announced the departure of its chief executive Paul McDade and the suspension of its dividend payment as it battled reduced reserves estimates, a falling oil price and debts close to $3 billion (£2.34 billion).

The share price, having fallen by over 60% in 2019, is down a further 75% year to date. Tripped up by a dispute between the Saudi’s and the Russian’s, the oil price is down by over 40% in 2020 to less than $40 per barrel. Fellow indebted explorer Premier Oil (LSE:PMO) has also seen its price plummet – down 80% year-to-date. 

In December 2019, Standard & Poor's downgraded Tullow's corporate credit rating to B from B+, and assigned a negative outlook.

Current acting Tullow head Dorothy Thompson is through portfolio management including potential business disposals planning to raise in excess of $1 billion (£780 million) to reduce group debt. Around 35% of Tullow staff will lose their jobs under a cost saving restructuring plan. 

ii view:

Tullow has interests in 80 exploration and production licences across 15 countries. The oil and gas explorer operates across the three divisions of West Africa, East Africa and New Ventures. Ghana in its West African business generated just over three-quarters of 2018 group revenue.  

For investors, oil exploration and production can prove a highly volatile business. As such, typically it is only investors with a medium to high appetite for risk that consider investing in this sector. 

For Tullow, reassuring comments from its temporary head and plans to reduce debt via potential business disposals and cost savings initiatives offer positives. But a falling oil price, huge debt and a recently downgraded credit rating provide for a tough investor backdrop. Tullow remains an investment for consideration by high-risk investors only. 

Positives: 

• Possible business disposals are being targeted to reduced debt
• A new chief executive may give the company renewed vigour 

Negatives:

• Extraction difficulties have previously seen production guidance lowered
• Dividend payment scrapped

The average rating of stock market analysts:

Strong hold