Tullow sticks to its guns on Capricorn

Merger details still dominate proceedings, but Tullow Oil (TLW) delivered an encouraging set of figures at the half-year mark, even though working interest production dipped marginally on the 2021 comparator. It means that full year production guidance for 2022 has narrowed from 59,000-65,000 barrels of oil equivalent a day (boepd) to 60,000-64,000boepd.

Financial performance was clearly boosted by underlying energy prices, allied to a sizeable uplift in the gross margin. But the driller’s operational progress shouldn't be ignored. This is best exemplified in Ghana, where Tullow has delivered eight new wells since the commencement of a multi-well drilling programme in April 2021. They were not only delivered ahead of schedule but were brought in at an average cost of around $50mn (£42.7mn) per well, a 10 per cent reduction on the expected cost. Gross production from the Jubilee field was 15 per cent in advance of the 2021 half-year, achieved in conjunction with the completion of the planned, biennial maintenance shutdown of the Jubilee floating production storage and offloading vessel in May.

Free cash flow moved into negative territory due to arbitration and Ghana pre-emption payments, although the consequent $205mn outflow does not include the impact of $200mn in revenues linked to two Ghana liftings, which took place in early June but were paid for shortly after the period-end. Tullow reiterated guidance for operating cashflow of c.$950mn for 2022, assuming an average oil price of $95 a barrel.

Tullow confirmed that it would stick to the details of its planned all-share merger plan with Capricorn Energy (CNE), even though some high-profile Capricorn investors, including Madison Avenue, Legal & General, and Schroders, maintain the deal undervalues the company. We concur and it seems likely that the deal will falter in its present form given that it weighs heavily in favour of Tullow shareholders. Hold.

Last IC view: Sell, 53p, 15 Jul 2021