ii view: Tullow Oil lowers production outlook

Tullow Oil has struggled with mechanical issues, but low-cost West African oil remains exciting.

Half-year results to 30 June 2019

• Revenue down 3.6% to $872 million
• Gross profit up 1.1% to $527 million
• Full-year production guidance revised down to 89-93,000 barrels of oil per day (bopd)
• Net debt down 4.3% to $2.94 billion 
• Interim dividend of 2.35 US cents

Chief executive PAUL McDADE said:

"Today's results demonstrate strong financial delivery in the first half of 2019 with robust profits and free cash flow. We are disappointed that a mechanical issue at our latest TEN well has caused us to reduce our 2019 production outlook; however, our overall portfolio of low-cost West African production continues to provide a solid financial base for the business, allowing the Group to invest for future growth, continue to reduce debt and pay dividends to shareholders."

ii round-up:

Tullow (LSE:TLW) was set up in 1986 and named after the Irish town. The company now has interests in over 85 exploration and production licences across 17 countries split into three divisions: West Africa, East Africa and New Ventures.

Quoted on the London, Irish and Ghanaian stock exchanges, it employs around 1,000 staff. 

Alongside half-year results, full-year 2019 oil production guidance was revised lower to 89-93,000 bopd from 90,000 to 98,000 barrels previously flagged. This was due to a mechanical issue at its TEN well, offshore West Africa. 

Away from the downgrade, Tullow is optimistic about its three-well Guyana exploration campaign which is now underway. There's also been good progress in Kenya, with the first lifting of East Africa crude expected in the coming months.

The share price declined by over 2% in midday UK stock market trading. 

ii view:

Oil exploration and production is a volatile business. As such, generally only investors with a medium to high appetite for risk should consider investing in the sector. 

As for Tullow, recent commencement of a dividend payment underlines management confidence in the outlook, and a prospective dividend yield of nearly 3% does add appeal for investors. But a cut to production guidance is a disappointment and again serves to underline the risks. 

Positives: 

• Three high-potential, high-risk wildcat wells being drilled in Guyana this year
• Capital returns policy has begun

Negatives:

• Annual oil production guidance revised lower
• Final Investment Decision (FID) in Kenya delayed to 2020 from second half of 2019

The average rating of stock market analysts:

Buy