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 operates in 15 countries worldwide. The company holds 80 licences to operate on 28 production fields covering an average area of 195,751 SQ KM. The company was incorporated in the year 1985 and has 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 15 licences and covers an average area of 34,244 SQ KM. New Ventures businessoperates in the region of Africa and South America covering frontier exploration and appraisal activity for the company. New Ventures operations hold 30 licenses to operate in 9 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 on June 2017.

Key Statistics



Recent News

On 29th August 2019, Tullow Oil Plc announced the termination of SPAs (Sale and Purchase Agreements) with CNOOC and Total in Uganda. The termination resulted due to disagreement on the tax treatment with Uganda’s Government. Tullow has initiated new sales to reduce its 33.33 per cent stake in project Lake Albert.

On 12th August 2019, Tullow Oil Plc announced results of its exploration well named as Jethro-1. Stena Forth drillship drilled The Jethro-1 to 4,400m metres depth. The logging data confirmed the presence of high-quality oil-bearing sandstonereservoirs.

Top Shareholders

 

Group’s Oil Production Forecast


Source: Company’s Presentation

The company is expecting long-term production growth from East Africa business, which will take the groups production to approximate figure of 150 Kbopd.

Segments Performance

The company’s operations are differentiated into three segments being East Africa, West Africa and New Ventures. In the first half of the FY2019, all the revenue was generated from the operations in West Africa. The total revenue from West Africa segment stood at $872.3 million against $905.10 million in H1 FY2018. The segment profit from West Africa had increased to $474.60 million in H1 FY2019 from $385 million in H1 FY2018. Whereas other reportable segments, East Africa and New Ventures posted negative segment profits. The company’ assets base had been increased for West Africa division whereas the asset value had been declined for East Africa and New Ventures divisions as compared to last year data. The company, in order to expand its operations, has made the majority of capital expenditure in the West African region for the first half of the financial year 2019. In H1 FY2019, the company’s major revenue was derived from the geographic region of Ghana amounting $667.9 million against $655.2 million in H1 FY2018.

Financial Highlights – H1 Financial Year 2019 ($, million)


(Source: Interim Report, Company Website)

In the first half of the financial year ending 2019, though working interest production averaged 86,300 boepd, an increase of 9.10 per cent for the year, total revenue declined to $872.30 millionagainst $905.1 million in H1 FY2018, driven by a decline in company's realised oil price, which was $64.3/bbl for the period. The gross profit grew to $526.5 million in H1 FY2019 from $520.8 million in H1 FY2018. In H1 FY2019, the Adjusted EBITDAX stood at $1,623 million against $1,579 million in H1 FY2018. The operating profit surged to $387.6 million in H1 FY2019 versus $298.9 million in H1 FY2018. The company’s pre-tax profit (continuing operations) stood at $268.4 million in H1 FY2019 versus a PBT (Profit before tax) of $150.5 million in H1 FY2018. The profit after tax for the year grew to $103.2 million in H1 FY2019, from $54.5 million reported in H1 FY2018. Basic EPS also increased to 7.4 cents in H1 FY2019 as compared to a basic EPS of 3.9 cents per share in H1 FY2018. The company’s diluted EPS stood at 7.1 cents in H1 FY2019 as compared to a diluted EPS of 3.7 cents per share in H1 FY2018. Net debtalso fell to $2,948 million in H1 FY2019 from $3,082 million reported at the end of H1 FY2018. While free cash flow of $181 million was reported in H1 FY2019 against $390 million in H1 FY2018. The Underlying cash operating costs/boe was down to $9/boe in H1 FY2019 (H1 FY2018: $10.9/boe). An interim dividend of 2.35¢/share was also approved for the period.

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 generate 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 in 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
 


The reported gross margin in H1 FY2019 increased by 8.1 per cent to 58.4 per cent against 50.3 per cent reported last year for the same period. The reported EBITDA margin of 86.1 per cent for the H1 FY2019 stood higher than the industry median of 59.8 per cent. Net margin reported was 11.4 per cent for the first half of the financial year 2019, reflecting an increase of 6.1 per cent when comparedwith last year data for the same period. Return on equity for the H1 financial year 2019 stood at 3.6 per cent, which was higher than the industry median of 3.3 per cent. On the liquidity front, Tullow Oil Plc’s current ratio was slightly lower than the industry median of 1.71, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the TLW Plc’s was 1.70x, which was higher as compared to the industry median of 0.35x, reflecting that the company is more leveraged as compared to its peers.  
 
Share Price Performance

Daily Chart as at September-04-19, before the market close (Source: Thomson Reuters)

On September 04, 2019, at the time of writing (before the market close, at 10:35 AM GMT), Tullow Oil Plc shares were trading at GBX 207.40, up by 2.83 per cent against the 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 24.28 per cent lower than its 52w High and 27.00 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 5,945,869.60; 30 days – 6,643,130.03 and 90 days – 5,528,782.58. The average traded volume for 5 days was down by 10.50 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.75, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £2.83 billion, with a dividend yield of 1.93 per cent.

Method 1: Price to Earnings Approach (NTM)


To compare Tullow Oil Plc with its peers, Price/Earnings multiple has been used. The peers are Energean Oil & Gas Plc(NTM Price/Earnings was 20.09), SOCO International Plc(NTM Price/Earnings was 18.95), Wentworth Resources Plc(NTM Price/Earnings was 4.99), Eland Oil & Gas Plc(NTM Price/Earnings was 3.25) and Cairn Energy Plc(NTM Price/Earnings was 20.21). The Average of Price/Earnings (NTM) of the company’s peers was 13.50x (approx.)

Method 2: Price to Cash Flow Approach (NTM)
 

To compare Tullow Oil Plc with its peers, Price/Cash Flow multiple has been used. The peers are Hunting Plc (NTM Price/Cash Flow was 6.70), Petrofac Ltd (NTM Price/Cash Flow was 4.54), Premier Oil Plc (NTM Price/Cash Flow was 1.33), BP Plc (NTM Price/Cash Flow was 4.24) and Wentworth Resources Plc (NTM Price/Cash Flow was 2.22). The Average of Price/Cash Flow (NTM) of the company’s peers was 3.80x (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 increase 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

Although the company had shown a decline in its Top-line performance,the bottom-line performance in the current financial year has improved significantly.The company’s EBITDA margin is well above the industry median. The company has 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 has reduced its production guidance for 2019 due to issue with the 10 wells, but overall, the company had been able to reduce its costs, which can be witnessed by decent operating profit. The company’s solid financial base is provided by increased production from its West African business.

The company has made decent progress in its Kenya business and is expecting the first lifting of crude from East Africa in a few months. In Guyana, the exploration campaign of three-wells is going on. The company further acquired 3 new licences in Malvinas West Basin in Argentina. With the ongoing trade tensions between the US and China, the profitability of the company is expected to witness some impact.

Over the course of 3 years (FY15 - FY18), the company’s revenue surged from $1,606.60million in FY15 to $2,047.60 million in FY18. Compound annual growth rate (CAGR) stood at 8.42 per cent.

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 201.70 (as on 3rd September 2019) with lower double-digit upside potential based on 13.50x NTM Price to Earnings (approx.) on FY19E earnings per share (approx.) and 3.80x 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 4th September 2019).
*All forecasted figures and Peers information has been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.82324 GBP.

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