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Tullow Oil remains a recovery play

A heavy debt load means this oil and gas producer is lowly rated, but its assets are producing consistently
March 8, 2023
  • Earnings constrained by impairment and hedging
  • Borrowings down just 4 per cent on 2021

Tullow Oil (TLW) had a wild ride in 2022, finding a solution to its debt load through a merger with Capricorn Energy (CNE) that fell through after investor protest. Despite that drama, Tullow is back where it started, in debt terms, with borrowings down just 4 per cent from the end of 2021 to $2.37bn (£2bn). 

Sales reflected the 40 per cent uptick in oil prices off the back of consistent production performance in the year, although a significant hedging programme has limited the exposure to prices above $75 a barrel. This year, over half of sales are hedged between $75 and $55 a barrel. This will drop to around a fifth of production in 2024. 

Earnings remained subdued due to a higher tax bill and non-cash impairments of $391mn, although these were balanced out by a $197mn gain on the deal to take a greater stake in the Jubilee oil field. Free cash flow only saw a 9 per cent uptick on 2021, at $267mn. The company has forecast 2023 free cash of $100mn, with an average oil price of $80 a barrel. 

Chief executive Rahul Dhir said 2023 would be the “year people stop worrying about the debt at Tullow”. Higher production will help this, although consensus forecasts see the company only making a dent in borrowings in 2024, as the bulk of it matures. The earnings outlook is flat as well, with Ebitda dropping from 2022 levels to $1.3bn in 2023 and 2024, as per the forecasts. 

The heavy borrowings aside, Tullow is cheap for its production profile and assets. For investors keen on oil exposure and higher risk, this could be a good entry point. We are more circumspect given the sector’s volatility, however. Hold. 

Last IC View: Hold, 48p, 14 Sep 2022

TULLOW OIL (TLW)   
ORD PRICE:34pMARKET VALUE:£493mn
TOUCH:33.6-34.2p12-MONTH HIGH:64pLOW: 32p
DIVIDEND YIELD:NILPE RATIO:12
NET ASSET VALUE:*NET DEBT:$2.8bn
Year to 31 DecTurnover ($bn)Pre-tax profit ($mn)Earnings per share (ȼ)Dividend per share (ȼ)
20181.8606.14.8
20191.68-2-121.02.4
20201.40-1273-87nil
2021**1.29215-5.7nil
20221.784423.4nil
% change+39+106
Ex-div:NA   
Payment:NA   
£1=$1.20 *Negative equity **Restated