Interactive Investor

Insider: more buying at Vodafone and a bet that Tullow Oil can double

With its shares trading near multi-decade lows, another of Vodafone’s directors has just spent heavily on stock. Graeme Evans has the details and looks at the thinking behind purchases at this popular oil company.

2nd April 2024 08:55

by Graeme Evans from interactive investor

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A surge of interest in Tullow Oil (LSE:TLW) shares after a City bank’s double upgrade has been accompanied by investments worth £63,000 by one of the energy firm’s directors.

Roald Goethe’s moves came after Bank of America praised the Africa-focused oil and gas producer’s debt reduction progress in its switch from “Underperform” to a “Buy” stance.

Shares in the former FTSE 100-listed company responded to last Monday’s note by jumping 11% to above 31p, which is where Goethe made two separate investments of over £31,000 each.

The experienced oil and gas executive is a long-time supporter of Tullow, having owned 22 million shares prior to his appointment to the board in February 2023.

The non-executive director increased his stake to 23.7 million by the end of 2023, a year when Tullow traded between 22.6p and 39p and lost its place in the FTSE 250 index.

However, Bank of America analysts reckon there’s scope for the shares to almost double after raising their price target from 35p to 55p. They said Tullow looked to have “reached an inflection point in its deleveraging journey”.

Net debt has been reduced to $1.6 billion (£1.3 billion) from 2021’s $2.1 billion, having delivered cash flow ahead of expectations during 2023. The company’s ability to access long-term capital has also been enhanced through a recent $400 million (£316.6 million) debt facility agreement with Glencore.

Tullow chair Phuthuma Nhleko recently described the Glencore loan as a “powerful endorsement of our strategy”.

Together with the $800 million (£633.2 million) of free cash flow that Tullow expects to generate between 2023 and 2025, he said the company looked on course to becoming a resilient, low-debt business.

Nhleko added in last month’s annual report: “Tullow is evolving. Three years ago, we were a high-cost exploration and production company with a geographically diverse portfolio.

“Today we have a clear strategy, a disciplined financial approach, a stronger balance sheet and a simplified portfolio focused on Africa. Based on this strengthened position and the material free cash flow, the board looks to the future with confidence.”

Bank of America sees Tullow cutting debt by 75% over the next four years and said recent investments meant a more stable production performance at a lower capital intensity.

It said: “Tullow has made deleveraging progress in recent years, but much of this was aided by disposal proceeds. We see structurally more resilient and higher cash generation on a go-forward basis as a function of a lower cost base.”

Tullow’s operations are now centred on its West Africa producing assets in Ghana, Gabon and Côte d’Ivoire, while it also has a material discovered resource base in Kenya.

Last year’s milestones included the start-up of Jubilee South East, which marked a step change in the Ghana field's production with average daily rates 30% higher in the second half.

The company generated bigger-than-expected free cash flow of $170 million (£134.6 million) last year and is forecasting $200-$300 million (£158.3 million-£237.4 million) for this year based on oil prices at around $80 a barrel.

Tullow, whose turnaround efforts have been overseen by chief executive Rahul Dhir since July 2020, spent eight years in the FTSE 100 index between 2007 and 2015.

It is now worth just over £450 million. In 2022, Tullow’s plans for “very significant” synergies and a material reduction in debt service costs were scuppered when a merger deal with former Cairn Energy business Capricorn Energy fell through.

Vodafone ends dividend uncertainty

A second big purchase of Vodafone Group (LSE:VOD) shares has been made by one of its directors after chair Jean-François van Boxmeer last week disclosed an investment worth £568,000.

Wednesday’s move at a price of 69p came just under a fortnight after the mobile phone group’s finance boss Luka Mucic spent £1.7 million on shares at a similar price.

Their investments follow the sale of Vodafone Italy for €8 billion (£6.8 billion), a deal that marked the final step of the portfolio right-sizing announced by boss Margherita Della Valle last May. The company is now organised into five business divisions of Germany, European markets, Africa, Vodafone Business and Vodafone Investments.

Vodafone also ended dividend uncertainty with a new capital framework that will see its payout rebased from 9 euro cents (7.70p) to 4.5 cents (3.85p) in the 2025 financial year.

The cut will be offset by plans for share buybacks worth €4 billion, part of the €12 billion (£10.3 billion) of proceeds from the sale of operations in Spain and Italy.

It is expected that the total return to shareholders for 2025 will be up to €3.1 billion, made up of €1.1 billion in ordinary dividends and up to €two billion in buybacks. This represents a 23% increase over the expected total returns to shareholders for 2024 of €2.5 billion.

Vodafone said the proposed new dividend had been set at a sustainable level, with appropriate cash flow cover and sufficient flexibility to invest in the business for growth.

The shares, which currently trade with a dividend yield of 11.1%, finished the week near the 70p mark. That’s broadly unchanged for this year but they had been down as far as 63p in February, setting a new two-decade low point for London’s former biggest stock.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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