Tullow Oil finds cash flow 'life raft'

Oil companies have had a very strong first half of 2021, thanks to surging demand and continued restraint from the Opec-plus cartel on supply. But the question is whether prices hitting $70 (£50.5) a barrel (bbl) will be enough to rescue balance sheets after a rough 2020. 

For Tullow Oil (TLW), which has also struggled on production, the answer is still up in the air. But a major refinancing and some asset sales have left it looking much healthier. 

Tullow's net debt remained the same between December and June but Tullow has pushed out the maturity of its borrowings to 2026 from 2021 and 2022. The company had previously forecast it would breach gearing covenants on 30 June and 31 December this year, but the refinancing has taken this off the table.

This hasn't come cheap, though. The coupon on the $1.8bn in bonds is 10.25 per cent. Pre-production gas company Energean (ENOG) managed a 5.25 per cent average coupon in a $2.5bn offering earlier this year. 

Tullow's shares were up 3 per cent on the back of Wednesday morning’s trading update, which set guidance for the year at 55,000-61,000 barrels of oil per day (bopd), down from 60,000–66,000bopd. Selling off $133m in projects, which matched guidance, would provide a “life raft to cash flow”, according to Hargreaves Lansdown analyst Sophie Lund-Yates. 

The company expects underlying cash flow for the year of $600m compared to $1.2bn in 2019. This figure excludes $60m in debt refinancing costs, debt service and decommissioning costs. Tullow chief executive Rahul Dhir said the company was now on a “strong financial footing”.

Tullow is also counting on a green light for the Lake Albert project in Uganda, which will see French major Total pay the company $75m. Given Total has committed to building a linked pipeline this looks likely, even with the major's recent push towards more green spending. 

The Uganda sale last year came at the same time management shifted focus from expansion to making sure existing assets were performing on top of holding onto projects that had been up for sale. The question is now where Tullow and its share price goes from here. This is dependent on the oil price. 

Rystad Energy analyst Louise Dickson said the high prices were now creating their own problems. 

"A sustained period of oil prices above $75 per barrel is a real burden for oil-importing countries, which have to divert more spending power on expensive but essential commodities instead of reinjecting the cash into other sectors of the economy," she said, adding a rebellion by Opec-plus members could see a flooded oil market this year and push prices down. 

Tullow is on a positive path and has done well to refinance its heavy debt load this year. For recent investors, it will look like a success as the share price is up 75 per cent in the past year. This still far from 2019's highs of above 200p, however. Our bearish rating remains because of the uncertainty of the oil price. Sell at 53p. 

Last IC View: Sell, 32p, 25 Nov 2020