Last time we took a close look at Tullow Oil (LON:TLW), we were in the first week of full lockdown in the UK in March and oil prices were in the basement. Tullow Oil was embarking on a serious cost cutting program, closing all but its London office and slashing staff by 35%. The market was idly speculating that Tullow Oil would also put its East African oil claims up for sale in order to save its hide.
That was then. Since March many other sectors have suffered the ferocity of the pandemic, and FTSE 250 oil companies like Tullow have at least still found a ready market for their end product, although a global economic slump has hammered the oil price.
Analysts reckon Tullow needs oil sold at 45 bucks for free cashflow break even. Tullow Oil had not been reassuring the market in March by remarking at the time that it might not end up being a going concern.
Fast forward to November 2020, and the UK is going back into a lockdown, but Tullow Oil is still with us. If you were a Tullow Oil shareholder in 2019, there may be no going back to those valuations, but most of the damage to the stock price was done before the pandemic hit. Since we first looked at the company, there has been some life returning to the beast, with shares trading up 80% from March lows (at time of writing). Volume in Tullow Oil stock over the summer months was intense, with plenty of buyers coming back into the company between March and the middle of June.
Since then shares have been gradually declining, off a peak of 34. Tullow Oil was a rewarding trade back in April, the question is whether we will see some more near term price action?
Tullow Oil renegotiated debt: confirmation from syndicate
Tullow Oil has managed to renegotiate its debt package: its lending syndicate confirmed debt capacity of $1.8bn in its bi-annual review. Going into the fourth quarter, the company confirmed that it had $500m of liquidity headroom and free cash. This reassured the analysts at least, who said the deal would let Tullow Oil refocus on how it can adapt to the new low oil price environment, which looks like it will persist well into 2021.
The stock came off a recent low of 16 when it announced it had received approval from the government of Uganda for the sale of a $575m stake in an oil project to Total SE. Tullow had been waiting since 2017 to close its divestment in the Lake Albert development project, but had been hampered by tax disagreements.
This is a big monkey off Tullow’s back and should go a long way to help restore confidence in its fortunes, which were looking particularly bleak in the dog days of March.
Low oil price, debt, COVID…what next?
Tullow saw first half revenue fall to $731m from $872m in 2019. It reported production of 77,000 barrels a day, also down against over 86,000/day in 2019, and it realised an average oil price of $51.8/barrel (2019: $64.3/barrel). It registered a loss of $1.3bn versus a profit of $103m last year. Tullow’s net debt at the end of 1H 2020 was marginally up.
Tullow Oil looks like a better prospect now than it did in March, but it is not out of the woods yet, and if we wanted to invest money in the oil sector, and that’s a big ‘if’, we would not invest in Tullow Oil. There are still too many lurking risk factors in its immediate future, before you factor in the COVID pandemic. Tullow will still need to ensure it continues to meet is covenants, the Uganda sale could still fall through, and any withdrawal of funding could leave the company in a very precipitous state.