ii view: Tullow Oil progress pleases

A CEO nearly a year into the job and a new strategy for this African energy company. Buy, sell or hold?

AGM trading update

• Production to the end of May 2021 averaged 62,000 bopd
• 2021 drilling campaign commenced

ii round-up:

Africa-focused oil explorer Tullow Oil (LSE:TLW) today announced that production to the end of May had averaged 62,000 barrels of oil per day (bopd), in line with management’s own expectations. 

It also raised the volume of oil it protects with hedging to 75% of the company’s output for the next two years, with plans for a further 50% increase for a year after that. That’s up from a previous 60% hedge for the first year and 30% for the second year. 

Tullow shares rose by around 2% in UK trading and are up by more than 85% over the last year. Shares for rival Cairn Energy (LSE:CNE) are up by just under a fifth over the same time, while the Brent crude oil price is up over 75%. 

The Tullow news follows the arrival of new chief executive Rahul Dhir just under a year ago and the outlining of a new group strategy back in November last year. 

Tullow has shifted its focus away from exploration and development towards a production focused company with an emphasis on cash generation. Strategic areas of focus now include lowering the cost base, improving operational performance, and reducing debt. 

Developments over recent months have included the sale of its interests in Uganda, Equatorial Guinea and the Dussafu Marin permit in Gabon to raise over $700 million (£497 million) in proceeds and a comprehensive debt refinancing. These asset sales have left it on track to realising $1 billion over two years through disposals and cost reductions. 

Operationally, its key operations in Ghana, where it operates the Jubilee and TEN fields, are now delivering more reliable and consistent performances with 98% average uptime year-to-date. 

In 2021, Tullow plans to drill four wells in total, consisting of two Jubilee production wells, one Jubilee water injector well and one TEN gas injector well. It has successfully drilled the first Jubilee production well and the Jubilee water injector well, and the reservoirs encountered were in line with expectations. 

Its next trading update is scheduled for 14 July.

ii view:

Tullow Oil has interests in over 50 exploration and production licences across 11 countries. Listed on the London, Irish and Ghanaian stock exchanges, its operations include the Jubilee and TEN fields in Ghana. Full-year results to the end of December 2020 saw it reporting production of just under 75,000 bopd and a loss after tax of $1.22 billion, including exploration write-offs and impairments of over $1 billion.

Under its new November 2020 strategy and 10-year business plan it aims to generate $7 billion in underlying operating cash flow and $4 billion of pre-financing cash flow at an average oil price of $55 per barrel. Over 90% of its capital is to be focused on its West African producing assets. 

For investors, a relatively new CEO and a 10-year business plan offer a new and lower-risk business model. Asset disposals, cost cuts and a successful debt refinancing plan all add to the positives, not to mention a significant recovery in the oil price since the depths of the pandemic in March 2020. But net debt of $2.4 billion as of its December 2020 financial year end compares with a current stock market value of under £1 billion, while fossil fuel usage is now under attack from long term climate change initiatives. For now, and with Tullow shares up by more than 500% since pandemic lows back in March 2020, the stock for now looks to be up with events. 

Positives: 

• A new 10-year business plan being pursued
• Reducing debt via asset sales and costs cuts

Negatives:

• Still elevated debt
• Fossil fuels negatively linked to climate change

The average rating of stock market analysts:

Weak hold