ii view: Tullow Oil shares surge as much as 75%

Finally, some good news for this embattled African oil explorer, but is it enough?

Sale of Ugandan stake and trading update

• Selling it entire Ugandan interest for $575 million
• Proceeds being used to reduce debt
• Appointment of new chief executive
• First quarter production is in line with expectations

Executive chair Dorothy Thompson said: 

"I am very pleased with the material progress Tullow has made in the first quarter of this year given the challenges facing the Group after our performance in 2019, the Covid-19 pandemic and recent very low oil prices. This week, we have announced two significant milestones with the agreement to sell our Uganda interests to Total for $575 million in cash and the appointment of our new CEO, Rahul Dhir. 

"Operationally, we are delivering well against our production targets following improvements put in place by our asset team in Ghana and we have made significant changes to the structure and cost base of our organisation. Finally, the recent successful redetermination of our Reserves Based Lending facility has underpinned Tullow's liquidity and the strength of our assets.

ii round-up:

Africa-focused oil explorer Tullow Oil (LSE:TLW) today announced the proposed sale of its entire onshore Ugandan oilfield stake for $575 million (£460 million) to French oil major Total (EURONEXT:FP). 

Sale proceeds will contribute towards Tullow’s target of raising over $1 billion in order to reduce group debt and strengthen the balance sheet. 

Tullow debt amounts to $2.8 billion (£2.24 billion) compared to a stock market value of under $400 million earlier this week. 

Its shares rose by as much as 75% in early opening UK trade from a closing price of around 20p yesterday, although later retreated to a gain of 25%. But Tullow shares are still down by nearly 90% over the last year. In January, it reported a 2019 loss after tax of $1.7 billion (£1.33 billion).

Shares of fellow oil explorers Premier Oil (LSE:PMO) and Cairn Energy (LSE:CNE) are down by around 74% and 39% respectively over the last year. The price for Brent crude oil has collapsed year-to-date, down by more than 70%.

Tullow will receive $500 million in cash from Total and $75 million once a final investment decision (FID) is reached on the project. The deal is dependent on both shareholder approval and a final tax decision from the Ugandan government. The sale is expected to complete in the second half of the year.

ii view:

The last year has been a year to forget for Tullow investors. The departure of its chief executive Paul McDade and the halting of its dividend payment both followed a reduction in its reserves estimates. Its woes were compounded by a falling oil price and significant group debts.

Good news has today come in the form of a proposed stake sale, reducing group debt, and the arrival of a new chief executive. Rahul Dhir will join Tullow from sub-Saharan oil & gas company Delonex in July.

Oil exploration and production companies can and regularly do prove highly volatile businesses to invest in. For Tullow, today’s news announcements are clearly positive. But an oil price under pressure from Covid-19 and still elevated debt offer a continuing tough backdrop. This Africa-focused oil explorer remains an investment for high-risk investors only. 

Positives: 

• The Ugandan share sale will reduce debt
• A new chief executive may give the company renewed vigour 

Negatives:

• Oil price remains under pressure
• Group debt is still elevated

The average rating of stock market analysts:

Weak hold