Tullow banking on free cash flow surge

In its July trading update, Tullow Oil (TLW) pointed to a succession of insider share acquisitions as proof positive that management remains confident in the driller’s strategy. That may be so, but judging by the trajectory of the share price on results day the market is clearly more circumspect.

We can say that any investor anxieties have less to do with Tullow’s operational nous than they do with the persistent debt overhang. A year ago, the proposed merger with fellow explorer Capricorn Energy (CNE) hit the buffers after the latter company decided to pursue an alternative arrangement with Israeli pure fuel group NewMed Energy. That ended any hopes of alleviating the debt burden through a merger, at least in the short term, as any potential partners need to take on board the extent of refinancing costs in a higher interest rate environment.

In March, we pointed out that “a significant hedging programme has limited the exposure to prices above $75 (£58.4) a barrel”. Those hedging arrangements are expected to tail off to a degree in 2024, but expectations on crude prices have become more tenuous given the geopolitical wranglings of the Opec+ producer nations. At any rate, Tullow delivered 53.5 thousand barrels of oil equivalent per day (boepd) at an average price of $73.3 a barrel. Unfortunately, gross profits were held in check by an overlift expense (the difference between the production entitlement and amounts lifted).

The top end of the oil production range has been narrowed for the full year, but the focus remains on debt reduction. Tullow’s chief executive, Rahul Dhir, is pinning his hopes on the estimated $800mn in free cash flow that will be generated through to 2025. Given that $415mn was allocated towards net financing through the period, it’s not difficult to appreciate his excitement at the prospect. Hold.

Last IC View: Hold, 34p, 08 Mar 2023