ii view: Tullow Oil expects a $1.5 billion hit

The share price dived by 64% in 2019. Will the African focused oil explorer fare better in 2020?

Trading and operational update

• Oil production averaged 86,700 barrels of oil per day (bopd) in 2019
• Impairments and exploration write-offs of $1.5 billion (£1.15 billion)
• Revenue for 2019 expected to be $1.7 billion (£1.3 billion)
• Gross profit for 2019 forecast at $0.7 billion (£0.54 billion)
• Average 2020 production guidance remains unchanged at 70,000 to 80,000 (bopd)

Executive Chair Dorothy Thompson said: 

"Tullow has ended 2019 with average production of 86,700 bopd and free cash flow generation of $350 million. Since our December announcement, Tullow's senior team has been working hard on a major review focused on delivering a more efficient and effective organisation. The fundamentals of our business remain intact: recent reserves audits demonstrate that we have a solid underlying reserves and resources base in West and East Africa, our producing assets continue to generate good cash flow and we retain a high-quality exploration portfolio. The Board and senior management are confident of the long-term potential of the portfolio and see meaningful opportunities to improve operational performance, reduce our cost base, deliver sustainable free cash flow and reduce our debt."

ii round-up:

Following a December announcement resetting production guidance lower and suspending the dividend payment, sending its share price crashing, Tullow Oil (LSE:TLW) today reported its latest update ahead of rescheduled 2019 results, now due on 12th March. 

The African focused oil exploration company expects to report impairment charges and exploration write-offs of around $1.5 billion after it lowered its oil price assumptions and reserves estimates. 

Acting management following the departure of Chief Executive Paul McDade cut their long-term oil price assumption by $10 per barrel to $65 per barrel, although reiterated previously lowered production guidance. 

Revenue for 2019 is expected to be $1.7 billion, with gross profit forecast at $0.7 billion. A business review covering all areas of Tullow's operations and cost-base was reported as progressing well. 

The share price, following a 64% decline during 2019, rose by over 1% in late morning UK trading. 

ii view:

Tullow has interests in 80 exploration and production licences across 15 countries. The oil and gas explorer operates across the three divisions of West Africa, East Africa and New Ventures. Ghana in its West African business generated just over three-quarters of 2018 group revenue.  

For investors, oil exploration and production can prove a highly volatile business. As such, typically it is only investors with a medium to high appetite for risk that consider investing in this sector. 

For Tullow, reduced future production expectations, the sudden departure of the Chief Executive and the suspension of a recently introduced dividend payment have hit investor confidence hard. Today’s update has provided some reassurance. The financial 2019 hit has been detailed at $1.5 billion with management’s business review said to be progressing well. The hard truth is that investor confidence is difficult to win and easily lost. Tullow is for now, an investment for high-risk investors only. 

Positives: 

• Operates two offshore developments in Ghana
• Made previous oil discoveries in both Kenya and Uganda

Negatives:

• Extraction difficulties have seen production guidance lowered
• Dividend payment scrapped

The average rating of stock market analysts:

Strong hold