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Atlantic View – Sell Tullow Oil #TLW, group still facing an existential crisis

by John Woolfitt, Atlantic Capital Markets

Fundamentals & Statement Summary

Oil and gas exploration and production company Tullow Oil (TLW.L) has interests in over 70 exploration and production licences across 14 countries. The group today announced half year results for the six months ended 30 June 2020, and reported a working interest production average of 77,700 bopd, in line with expectations, generating revenues of $731m ($872m); gross profit of $164m and a loss after tax of $1.3bn (profit of $103m). A $418m impairment charge on property, plant and equipment and recorded exploration write-off costs of $941m were mainly driven by a write-down of the value of its Ugandan assets.

As of June 30, Tullow reported net debt of $3.0bn; gearing of 3.0x net debt / EBITDAX and liquidity headroom and free cash of $0.5bn.

Production guidance improved to between 73,000 and 77,000 barrels of oil equivalent per day from between 71,000 and 78,000 to reflect recent strong performance in Ghana, although offset to some extent by production curtailments in Gabon.

Group organisational restructuring is well advanced and forecast to deliver cash savings of over $350m over three years, significantly in excess of the previous target of $200m. This will deliver annual sustainable cash savings of over $125m from 2021. Evaluation of various refinancing alternatives with respect to the Group’s capital structure is also ongoing.

Alongside a newly restructured board, including non-Executive Chair Dorothy Thompson and senior oil and gas executive Mitchell Ingram in as a non-executive director, newly appointed CEO Rahul Dhir commented:

“Despite the very tough conditions in the first half of this year, we have successfully delivered reliable production and major, sustainable reductions to our cost base. We are also close to completing the important sale of our interests in Uganda. The quality of Tullow’s assets remains robust.

Since my arrival as CEO, we have been developing new plans for our business, with the support of our Joint Venture Partners and expert advisors. These plans will deliver enhanced value from our assets to benefit all our stakeholders including our host countries and investors. We will host a Capital Markets Day towards the end of 2020 at which we will update the market on these plans to deliver on Tullow’s true potential.”

Chart and Technicals

Source: FactSet and Hargreaves Lansdown

Tullow’s well documented problems are clearly reflected in the charting price action, and while a precipitous pre-COVID fall in Q4 2019 occurred well before the crisis kicked in, an all time low just over 7p serves as a reminder that the oil industry can turn industry bellwethers into penny stocks at the drop of a hat. Since that time, Tullow shares have recovered and from mid April onwards have held or deviated either side of the 50-day MA line, dropping below the MA envelope in late July. If shares can recover the 50-day MA at 24p by mid October, then the falling 200-day MA currently at 39p is a distant prospect, however current divergence indicates a retest of 7p all time lows.

Summary and Atlantic View

The former oil industry bellwether has today put a brave face on what is otherwise an existential crisis. Earlier this year Tullow had highlighted the risk to its own survival, citing a material uncertainty that it would be able to operate as a going concern. The solid production and forward guidance from Ghana are a standout amidst horrendous debt levels, ($3bn) and write-downs from the sale of Ugandan assets. Despite forward guidance on cost savings, there is little sign at present that Tullow can realistically get on top of the debt pile – something the newly appointed management team will need to get to grips with as an absolute priority. Until / when the board can demonstrate clear progress in this regard, Atlantic rates Tullow shares as a sell into any strength, down to the all time lows of 7p. Sell.

To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here

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