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Tullow Oil deep in the red

Another strategic re-set is promised by the year end, but will it be too little too late for shareholders?
September 9, 2020

This year has at times borne witness to some massive examples of equity destruction, though few more spectacular than Tullow Oil (TLW). After booking impairments totalling $2bn (£1.55bn) at its full-year results in March, the oil producer was forced to write-off a further $941m from the value of its exploration assets in its interim figures, alongside $418m in property, plant and equipment.

IC TIP: Sell at 16.6p

The result is a balance sheet in which liabilities exceed assets by $138m. Scrambling for positives, management reassured investors that good well production from Ghana, unchanged capital expenditure plans and hedges to sell 60 per cent of production for at least $57 per barrel until December would mean breaking even on a free cash flow-basis.

That still requires two caveats: that working capital movements stay favourable and oil prices climb by $15 per barrel over two years. Recent history suggests neither assumption can be guaranteed, particularly with the global supply of liquid fuels once again rising into what looks like a wavering economic recovery.

Compounding the uncertainties is the group’s debt pile. Investor attention is once again drawn to the risks involved in securing amendments or waivers to covenants on the reserves-based lending facility. Failure of upcoming leverage tests in December and June is now expected, even after factoring in the $575m Ugandan asset sale.

Consensus forecasts are for adjusted losses of 4.77ȼ per share this year, and 3.76ȼ in 2021.

TULLOW OIL (TLW)   
ORD PRICE:16.6pMARKET VALUE:£234m
TOUCH:16-17.5p12-MONTH HIGH:251pLOW: 7.2p
DIVIDEND YIELD:NILPE RATIO:N/A
NET ASSET VALUE:*NET DEBT: $3bn
Half-year to 30 JunTurnover ($m)Pre-tax profit ($bn)Earnings per share (ȼ)Dividend per share (ȼ)
20198720.277.42.35
2020731-1.44-94.2nil
% change-16---
Ex-div:n/a   
Payment:n/a   
£1=$1.29. *Negative shareholder equity.