ii view: Tullow Oil shares dive despite profits boost

This African oil explorer fell by a fifth in value during 2022 and is down again this year. We assess prospects.

Full-year results to 31 December

• Revenue up 40% to $1.78 billion (£1.51 billion)
• Gross profit up 68% to $1.09 billion (£0.93 billion)
• Profit after tax of $49 million (£42 million), up from a loss in 2021 of $81 million
• Net debt down 13% to $1.86 billion (£1.58 billion)

Chief executive Rahul Dhir said: 

"Looking ahead, we have multiple catalysts to deliver further profitable growth. There is strong momentum across the portfolio with the commissioning of Jubilee South East on track for the second half of 2023, bringing undeveloped reserves online and Jubilee gross production to more than 100 kbopd [thousands of barrels per day] before the end of the year. Engagements to secure a strategic partner for the Kenya development project continue and we are preparing a plan of development to monetise the remaining resources at TEN.

"We have created a unique platform of assets and capability, including industry leading safety performance, which positions us strongly to create significant value for all our stakeholders."

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ii round-up:

African focused energy company Tullow Oil (LSE:TLW) today detailed a near doubling in profit given higher oil and gas prices following the war in Ukraine. 

Revenue climbed 40% to $1.78 billion (£1.51 billion) pushing gross profit up to $1.09 billion (£0.93 billion) from 2021’s $647 million. A profit after tax of $49 million (£42 million) contrasted with the prior year’s loss of $81 million. 

Shares in the FTSE 250 company fell 8% in UK trading having been down by a fifth in 2022. That came as a mid-year agreement to a merger with fellow FTSE 250 company Capricorn Energy (LSE:CNE) later collapsed. 

Tullow has interests in over 30 exploration and production licences across eight countries, including Ghana where it operates the Jubilee and TEN fields along with operations in South America. 

Aided by higher energy prices, free cash flow during the year rose to $267 million form 2021’s $245 million, despite an increase in capital expenditure to $354 million from a previous $263 million. That aided a 13% retreat in net debt to $1.86 billion. Its ratio of net debt-to-adjusted profit (EBITDAX) is expected fall to 1 times come the year end and at an estimated $100/bbl from a ratio of 1.3 times as of the end of 2022. 

However, there are concerns about both production and cash flow. Tullow admits the Jubilee South East development will be the “main driver of production growth in 2023”, but it won’t be onstream until the second half of the year. That’s also why full-year free cash flow will be weighted to the final six months. Tullow guides to what at current prices of around $80 a barrel would be $100 million of free cash flow this year. At $100 a barrel, it's $200 million.

ii view:

Founded in and named after the town of Tullow in the Republic of Ireland in the mid-1980s, Tullow today sits alongside the players such as Diversified Energy Co (LSE:DEC) and Harbour Energy (LSE:HBR) and is listed on the London, Irish and Ghanaian stock exchanges. Its South American operations are situated in Guyana and Argentina. 

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For investors, Tullow has over recent years been a company in retreat. In early 2019, it had interests in over 85 exploration and production licences compared to over 30 today. Concerns about an economic slowdown in the West now overshadow the oil price as interest rates rise, while fossil fuel usage remains under the spotlight given long term climate change concerns and initiatives. Net debt of $1.86 billion (£1.58 billion) also compares to a stock market value of around £460 million.  

On the upside, a reopening of the China economy following pandemic lockdowns may help counter any Western weakness and help support demand for energy. Net debt did fall over this latest financial year, while underlying cash operating costs fell to $267 million from 2021’s $269 million. 

For now, and while a return to a pre-tax profit is positive, the shares remain high risk, with investors perhaps preferring to wait for further reductions in net debt and a clearer picture of the likelihood of achieving both production and cash flow targets.

Positives: 

• Average daily production rose year-over-year
• New exploration licence secured in Côte d'Ivoire

Negatives:

• Uncertain economic and oil price outlook
• Fossil fuels negatively linked to climate change

The average rating of stock market analysts:

Buy