Overview

Tullow Oil PLC (TLW) is a London, United Kingdom-headquartered Africa’s leading independent oil and gas company which works across all stages of the oil life cycle from exploration to production. The group is an Africa-focused oil group having interests in more than 80 exploration sites and operate in 17 countries worldwide. The company holds 87 licences to operate on 28 production fields covering an average area of 267,649 SQ KM. The company was incorporated in the year 1985 and have an employee base of 990 professionals.

The group’s operations are differentiated in three operating segments: East Africa, West Africa and New Ventures. The company’s West Africa operations focus on production and development projects in the West African region. West Africa operations hold 49 Licenses to operate in 5 countries in the western region of Africa. West Africa Business manages UK operations as well. The company’s East Africa operations focus on oil discoveries in the region of Kenya and Uganda. East Africa Business holds 16 licences and covers an average area of 49,634 SQ KM. The company’s New Ventures businessoperates in the region of Africa and South America covering frontier exploration and appraisal activity for the company. TheNew Ventures operations hold 22 licenses to operate in 10 countries. Paul McDade was appointed as the Group Chief Executive Officer in 2017. Les Wood holds the responsibilities of the Chief Financial Officer and appointed to the Board in June 2017.

Key Statistics



Top Shareholders


Segments Performance

The company’s operations are differentiated into three segments being East Africa, West Africa and New Ventures. In FY2018, all the revenue was generated from the operations in West Africa. The total revenue from West Africa segment stood at $1,859.2 million against $1,722.5 million in FY2017. The segment profit from West Africa had increased to $528 million from $89.6 million in FY2017. Whereas other reportable segments East Africa and New Ventures posted negative segment profits. The company’ assets base had been increased for East Africa division whereas the asset value had been declined for West Africa and New Ventures divisions as compared to last year data. The company in order to expand its operations had made the majority of capital expenditure in the West African region for the financial Year 2018. In FY2018, the company’s major revenue was derived from the geographic region of Ghana amounting $1,404.1 million against $1,196.1 million in FY2017.

Trading Update (1 January to 25 April 2019)

In the Q1 of FY2019, the company’s average oil production was 84,600 bopd, below management’s expectations due to technical issues in Ghana. The problem had been resolute, and the company changed its oil production direction between 90,000 - 98,000 bopd.The company will commence its operations in Guyana in June 2019 under its Three-well exploration programme. The company net debt stood at $3 billion with a liquidity of $1 billion by the end of Q1 FY2019. The company’s Project Oil Kenya development is showing the predictable growth. The company procured 3 new licenses in the Argentina bid to operate in the Malvinas West Basin and the work will commence in 2020.

Financial Highlights – Financial Year 2018 ($, million)


(Source: Annual Report, Company Website)
 
In the financial year ending 31^st December 2018, though working interest production averaged 81,400 boepd, a decrease of 7 per cent for the year, total revenue increased by around 8 per cent to $1,859.2 million against $1,722.5 million in FY2017, driven by a rise in company's realised oil price, which was $68.5/bbl after hedging and $71.8/bbl before hedging. The gross profit grew to $1,081.6 million in FY2018 from $815.3 million in FY2017. In FY2018, the Adjusted EBITDAX stood at $1,600 million against $1,346 million in FY2017. The operating profit surged to $528.4 million in FY2018 versus $22.4 million in FY2017. The company’s pre-tax profit stood at $260.5 million in FY2018 from a loss before tax of $285.9 million in FY2017.

The profit after tax for the year grew to $85.4 million, from a loss of $175.3 million reported in 2017. Basic EPS also increased to 6.1 cents as compared to a loss of 13.7 cents per share in 2017. The company’s diluted EPS stood at 5.9 cents as compared to a loss of 13.7 cents per share in 2017. Net debt also fell to $3,060 million from $3,471 million reported at the end of 2017. While free cash flow of $411 million was reported in 2018 against $543 million in FY2017. The operating cost was down to $10.0/boe in FY2018 (2017: $11.1/boe). A final dividend of 4.8¢/share was also proposed.

Key Performance Indicators

FACILITY HEADROOM AND FREE CASH AT YEAR END
The company needs to maintain adequate liquidity to run operations as planned. Reducing the debt level helps the company to identify the financial health of the business. The company was able to reduce its net debt to $3.1 billion from $3.5 billion. The company’s gearing (net debt to adjusted EBITDAX) is also reduced to 1.9x from 2.6x. The company was able to free cash of $1 billion as with the issue of $800 million senior notes and cancellation of the RCF lead to an extension of debt maturity.


WORKING INTEREST PRODUCTION

The company’s main source of revenue is the production activities at Ghana and other non-operated assets. The company’s targeted net production was between 72,000 to 83,000 boepd in the year 2018. In the FY2018 the company achieved a Production of 81,400 boepd which was well above the base target of 77,500 boepd.



CASH OPERATING COST

The company measures the cost associated with its assets and measures the efficiency and profitability of the asset. The company’s targeted opex per barrel was between $10.3–$11.9 in 2018. The company achieved an Opex/boe for 2018 of $10.0/boe.



NET GENERAL & ADMINISTRATIVE COSTS

The company measures the administrative costs related to staff salary and rental costs etc. The company’s net G&A was targeted between $95–$109 million in 2018. The company posted a Net G&A of $90 million in FY2018.


CAPITAL INVESTMENT
The company aims to maintain and grow its business, and this requires capital expenditure. The company’s estimated capex to a range between $426–$490 million in 2018. The company achieved its stretched target and reported $423 million capex in 2018 excluding Uganda costs covered by deferred considerations.

Financial Ratios


(Source: TR)
 
The reported gross margin in FY2018 increased by 9.5 per cent to 52.8 per cent against 43.3 per cent reported last year for the same period. The reported EBITDA margin of 54.3 per cent for the FY2018 stood higher than the industry median of 32.6 per cent. Net margin reported was 4.2 per cent for the financial year 2018, reflecting an increase of 13.5 per cent when comparedwith last year data. Return on equity for the current financial year stood at 3.00 per cent which was lower than the industry median of 12.4 per cent. On the liquidity front, Tullow Oil Plc’s current ratio was higher than the industry median of 1.42, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the TLW Plc’s was 1.60x which was higher as compared to the industry median of 0.42x, reflecting that the company is more leveraged as compared to its peers.  
 
Share Price Performance

Daily Chart as at June-12-19, before the market close (Source: Thomson Reuters)

On June 12, 2019, at the time of writing (before the market close, at 1:38 PM GMT), Tullow OilPlc shares were trading at GBX 194.85, down by 5.45 per cent against its previous day closing price. Stock's 52 weeks High and Low are GBX 273.90/GBX 163.30. At the time of writing, the share was trading 28.86 per cent lower than its 52w High and 19.32 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 4,113,552.20; 30 days – 4,700,243.10 and 90 days – 5,313,049.03. The average traded volume for 5 days was down by 12.48 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.97, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £2.88 billion with a dividend yield of 1.81 per cent.

Valuation Methodology
Method 1: Price to Book Value flow Approach (NTM)
 

To compare Tullow OilPlc with its peers, Price/Book Value multiple has been used. The peers are Equinor ASA (NTM Price/Book Value was 1.47), BP Plc (NTM Price/Book Value was 1.42), DNO ASA (NTM Price/Book Value was 1.47), Aker Solutions ASA (NTM Price/Book Value was 1.31) and Jadestone Energy Inc (NTM Price/Book Value was 1.53). The Average of Price/Book Value (NTM) of the company’s peers was 1.44x (approx.)
Method 2: Price to Cashflow Approach (NTM)
 
 


To compare Tullow OilPlc with its peers, Price/Cash Flow multiple has been used. The peers are Eni SpA (NTM Price/Cash Flow was 3.84), Total SA (NTM Price/Cash Flow was 4.84), Saras SpA (NTM Price/Cash Flow was 3.18), I3 Energy Plc (NTM Price/Cash Flow was 3.24) and Lundin Petroleum AB (NTM Price/Cash Flow was 5.29). The Average of Price/Cash Flow (NTM) of the company’s peers was 4x (approx.)

Growth and Risk Assessment

The company has a high-grade exploration portfolio which will help the company to generate good output in terms of production and will help the company to increase its revenue. The company is not relying on one geographic area. It is expanding its operations to South America with its New Ventures business segment. The strong financial performance will ease any political tension and increased the growth of the company. With the ongoing trade tensions between the US and China will affect the oil prices in the international markets.

Conclusion
The company had shown improvement in its top-line and bottom-line performance in the current financial year. The company’s EBITDA margin is well above the industry median. The company had reduced its debt and remained highly cash generative. The company’s balance sheet remained strong and increased its budget to invest in growth opportunities. The company is planning to invest in Uganda and is expected to obtain approval from the Government of Uganda in the second half of FY2019. The company further acquired 3 new licences in Malvinas West Basin in Argentina. With the ongoing trade tensions between the US and China, profitability of the company is expected to witness some impact.

Based on the decent  fundamental prospects and supported by the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 206.10 (as on 11th June 2019) with lower double-digit upside potential based on 1.44x NTM Price to Book Value (approx.) on FY19E book value per share (approx.) and 4.00x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on 12th June 2019).
*All forecasted figures and Peers information has been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.78496 GBP.

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