Things just don’t seem to be going Tullow Oil’s way. The emerging feud between Saudi Arabia and Russia over oil prices, which is likely to have an ongoing depressive effect on Brent crude oil prices, is not going to help.
Tullow Oil [LON:TLW] has disappointed investors with a lack of success in offshore oil exploration in Guyana and other projects in Kenya and Uganda have led to a write off of more than USD 1.25 billion. It is no wonder then that the Irish oil independent is beginning to question its own survival.
“There is a material uncertainty, that may cast significant doubt, that the group will be able to operate as a going concern,” it said in its recent statement to investors.
Tullow Oil shares have been following a progressive decline since mid-November when they were slightly over 200. Since then they have dropped to 10.92 (closing price on Friday 13 March). Latest results have not helped. Tullow Oil is projecting that it can produce about 75,000 barrels of oil per day but is also hedging 60% of the crude oil it sells this year at USD 57/bbl. A further 30% in 2021 is being hedge at USD 52/bbl.
Tullow Oil is in a similar position to many US shale oil producers, smaller companies that are reliant on crude oil to stick to something resembling historic trends. In Tullow’s case, its free cashflow break even is based on a scenario where oil sits at 45 bucks. The company’s management reckons it can survive for 12 months if oil is trading at under 30 (Saudi Arabia is going to try to flood the oil market next month with 25 dollar oil).
Tullow Oil is embarking on serious cost cutting measures
Tullow Oil is embarking on some serious cost cutting measures in a desperate battle to survive, closing all bar its London office and cutting staff by 35%. It has hinted that it can raise further money by selling some of the assets in its portfolio. While management are light on the details here, oil industry commentators reckon this could be fields in East Africa, which are not producing the bulk of its oil. Tullow did confirm that it would like to sell some of its blocks in Kenya.
While oil prices are very low and could go lower still, Tullow Oil says it will still be conducting further exploration, especially in West Africa. It reckons it can add a further 15,000 barrels per day if its gets its Jubilee South East field in Ghana up and running, for example. There is even fighting talk of drilling a well in Suriname and further exploration in Argentina. This could enhance the value of the company’s assets should a buyer emerge. It is certainly looking cheap enough for a bigger acquirer.
A lot of the FTSE 250 oil stocks are seeing some heavy selling at the moment (e.g. Premier Oil), so most recent price action is less to do with Tullow and more with Saudi Arabia’s plan to re-assert control over the oil market. Tullow does not look like it is out of the fight yet and if it digs in, as it seems to be doing, could yet come through this. But it does need to offload some of those East African assets, and fast, if it is still going to be around next year.