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Tullow bringing the debt burden down

After a painful 2017, surging production is enabling the Africa-focused driller to pay down its debt pile
February 7, 2018

It's hard to fault Tullow Oil (TLW) in terms of ambition. Undaunted by last April's major rights issue and refinancing, and with free cash flow surging, the frontier driller is already looking to build on its established production base through farm-downs on assets in Uganda and Mauritania, new licence awards in Côte d'Ivoire, and a near-term drilling campaign in Namibia. Management has also confirmed the potential of the South Lokichar basin in Kenya following an appraisal campaign, with the best estimate of contingent resources given at 560m barrels. A final investment decision on that front is expected next year.

IC TIP: Hold at 188p

The outlook on Tullow has improved markedly since its offshore TEN project in Ghana first started adding barrels in 2016. The project placed a heavy draw on capital expenditure and cash flows (and shareholder goodwill), but the resulting 27 per cent year-on-year decline in net debt, and a reduction in its multiple to cash profits (plus exploration expenses) from 5.1 to 2.6 through 2017, shows that the company has moved well beyond its most capital-intensive phase. A rationalisation of the exploration portfolio through disposals and farm-downs has also taken pressure off the balance sheet.

Prior to these figures, JPMorgan Cazenove expected adjusted EPS of 22¢ for the December 2018 year-end, against a loss of 49¢ in 2017.

TULLOW OIL (TLW)   
ORD PRICE:188pMARKET VALUE:£2.61bn
TOUCH:187.6-187.9p12-MONTH HIGH:261pLOW: 142p
DIVIDEND YIELD:NILPE RATIO:NA
NET ASSET VALUE:195¢*NET DEBT:128%
Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)**Dividend per share (p)**
20132.650.3116.010.2
20142.21-2.05-1463.4
20151.61-1.30-97nil
20161.27-0.91-55.8nil
20171.72-0.30-14.7nil
% change+36---
Ex-div:-   
Payment:-   
£1 = $1.40. *Includes intangible assets of $1.93bn, or 139¢ a share. **Adjusted for Apr 2017's 25-for-49 rights issue.