Tullow Oil faces fragile future

Pressure is on for oil fields in Ghana to increase profits


Things are not looking good for Tullow Oil, whose share price plummeted more than 70 per cent following a spate of bad company news.

Investors were left reeling after a disastrous production update saw dividends suspended and the resignation of both its chief executive and exploration director.

Shares in Tullow fell to 42.5p, as a result, sending stock to its lowest level since 2000 and making the oil group the biggest percentage faller on the FTSE 350 this year.

It rallied slightly on 10 December with the current price at 44.79p, however, this has done little for Tullow’s valuation, which stands at just over £560m, compared with £14.5bn in 2012.

Tullow’s production will be almost a third lower than originally forecast. This will have a big impact on the company’s cash flow, which is expected to dwindle from the predicted $500m to just $150m. This not only affects dividends, but also means there is less money for new exploration.

This latest blow comes just weeks after the company told investors that two projects in Guyana contained low quality, “heavy oil”. This sparked concern that the projects would be more expensive and less lucrative than investors had hoped, causing Tullow’s share price to crash to a two-year low.

Company chair Dorothy Thompson said: “Despite today’s announcement, the board strongly believes that Tullow has good assets and excellent people capable of delivering value for shareholders. We are taking decisive action to restore performance, reduce our cost base, and deliver sustainable free cash flow.”

The energy stock has previously been a favourite with UK investors, thanks to its consistent rise in share price. However this latest news will cause massive paper losses for retail investors, who hold around 15 per cent of Tullow’s stock.

While investors face financial losses, Tullow stands to lose trust in their shareholders, which is far more valuable and harder to replace.

Investment bank Stifel said there were “warning signs” that communication was a concern at Tullow, but said the question now is whether the business needs an “additional injection of equity”.

With $300 million in debt due in 2021 and a further $650 million in 2022, analysts are discussing whether the company will need to turn to its investors with a rights issue to raise capital. Thompson denied the company was looking at a rights issue, but would not rule out a sale of some or part of the business.

Hargreaves Landsdown analyst Nadeem Umar said the debt pile is “higher than we’d like” and warned that Tullow could face further difficulties if oil market prices fall.

Tullow has locked-in oil prices of $56 a barrel for its TEN and Jubilee fields in Ghana, which make up 70 per cent of Tullow’s production next year. If oil market prices are higher than this level the company will enjoy higher profits, but if the market falls it could cause further cash flow problems.

“That means the onus is on these fields to produce enough profit to shift the substantial debts, fund future projects and hopefully reinstate a dividend,” Umar said.

The group has launched a “thorough review” of operations, with an update on progress expected on 15 January 2020.

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