Overview
Tullow Oil PLC (TLW) is a London, United Kingdom-headquartered leading independent oil exploration and production company which works across all stages of the oil life cycle from exploration to production. The group seeks to draw upon multiple resources and relationships to create value. It is focused on finding and monetising oil in Africa and South America, with interests in 80 exploration and production licences across 15 countries. The group was established in 1985 by Aidan Heavy, while production and sales commenced in 1987 following the signing of a licence agreement in Senegal in 1986. In 1989, Tullow was awarded its first onshore UK licence after the group expanded its operations into the UK in 1988 by acquiring exploration acreage and proven gas fields, and it laid the foundation for the South Asia assets in 1990 after it signed its first licence agreement in Pakistan. The group is listed on the London Stock Exchange and is a constituent of the FTSE 100 index.


(Source: Company Website)

By 2018, the country had operations in 17 countries and produced 90,000 boepd, and firmly established itself as a self-funding oil company, which is balanced across exploration, development and production activities, with 28 producing fields and 195,751 square km of acreage.  With the aim to build the best inventory of prospects for drilling and managing risk exposures, the group undertakes targeted exploration in Africa and South America to find oil, which is developed for future production, and used to sell in the ground or to build reserves and resources. The group invests in high-return, near-field wells, drilled adjacent to its producing assets as it is focused on appraisal and development with clear plans for monetisation. To increase and extend production plateau across it producing assets in West Africa, the group is investing in-field drilling programmes and has focused production plans with clear routes to revenue-generating objectives.

Key Statistics
 
 
Management

Dorothy Thompson is the Chairman of the Board of the group since July 2018. Paul McDade is the Chief Executive Officer. The CEO is assisted by Angus McCoss, who is the Exploration Director, and Les Wood, who is the Chief Financial Officer of the group.

Segments

The operations of the group are differentiated in three operating segments, namely East Africa, West Africa and New Ventures. The West Africa operations are focused on production and development projects in the West African region, and also manages the UK operations. West Africa working interest production for the first half of 2019 is expected to average around 88,700 bopd, and includes the Jubilee and TEN fields in Ghana, which are the flagship operated assets of the group, and a portfolio of non-operated production assets across the region. The East Africa operations are focused on continued exploration activity across the extensive acreage position in Kenya and are responsible for realising value from the significant oil discoveries made in Uganda and Kenya to date, with 15 licences and covers an average area of 34,244 square km. New Ventures is tasked with finding high-value oil at low-costs and managing and replenishing exploration portfolio with high-potential prospects and is responsible for frontier exploration and appraisal activity across Africa and South America.

Recent Development

The company on 16 September 2019 announced that the Joe-1 exploration well had successfully opened a new Upper Tertiary oil play in the Guyana basin and the company would await the outcome of the Carapa well to determine the optimal follow-on exploration and appraisal programme.

Top Shareholders

 
(Source: Thomson Reuters)

Financial Highlights (H1 2019, in $m)

 
(Source: Company Filings)

Realised oil price after hedging for the period was $64.3/bbl(1H 2018: $67.5/bbl) and working interest production volume for the period averaged at 86,300 boepd (1H 2018: 79,100 boepd). Sales volume were 75,200 boepd and total revenue for the period was $872 million against $905 million in the prior year.  The gross profit grew to $526.5 million in H1 2019 from $520.8 million in H1 2018, as cost of sales declined significantly. As a result of the phasing of non-routine activity in the second half of 2019, underlying cash operating costs amounted to $145 million or $9.0/boe (1H 2018: $181 million; $10.9/boe), while the adjusted EBITDAX stood at $1,623 million against $1,579 million in H1 2018 and operating profit surged to $387.6 million in versus $298.9 million in H1 2018. Due to a reduction in the average level of net debt in the first half of 2019 as compared to 2018 and foreign exchange gains, net financing costs for the period declined to $120 million (1H 2018: $145 million), contributing to the rise in pre-tax profit (continuing operations) of $268.4 million versus $150.5 million in H1 2018. The profit after tax for the year grew to $103.2 million in H1 2019, from $54.5 million reported in H1 2018 and basic earnings per share also increased to 7.4 cents as compared to a basic earnings per share of 3.9 cents per share in H1 2018. The diluted earnings per share stood at 7.1 cents in H1 2019 as compared to a diluted earnings per share of 3.7 cents per share in H1 2018. With $36 million invested in exploration and appraisal activities and $212 million in development activities, capital expenditure amounted to $248 million (1H 2018: $145 million), while net debt fell to $2,948 million in H1 2019 from $3,082 million reported at the end of H1 2018. Free cash flow of $181 million was reported in H1 2019 against $390 million in H1 2018. An interim dividend of 2.35¢/share was also approved for the period.

Segmental Analysis

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 has 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 has been increased for West Africa division whereas the asset value decreased for East Africa and New Ventures divisions as compared to last year data. The company, in order to expand its operations, has made most of the 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 and amounted to $667.9 million against $655.2 million recorded in H1 FY2018.

Financial Ratios


 (Source: Thomson Reuters)

The company has reported impressive growth in profitability margins, which have improved significantly over the years and are better than the industry median. Liquidity ratios have shown improvement as well and are in line with the industry median now. However, the group is more leveraged than its peers but has shown improvements over the years. While the group’s asset turnover ratio has improved, it is less than the industry median, suggesting more room for improvement.

Method 1:Price/Cash Flow Multiple Approach (NTM)



To compare TLW with its peers, Price/Cash Flow multiple has been used. The peers are Premier Oil PLC(NTM Price/Cash Flow was 1.63), Aker BP ASA(NTM Price/Cash Flow was 4.37), Pharos Energy PLC(NTM Price/Cash Flow was 4.68), Lundin Petroleum AB(NTM Price/Cash Flow was 4.84), and Cairn Energy PLC(NTM Price/Cash Flow was 5.43). The mean of Price/Cash Flow (NTM) of the company’s peers was 4.19x (approx.).

Method 2: Price/Earnings Multiple Approach (NTM)



To compare TLW with its peers, Price/Earnings multiple has been used. The peers are EnQuest PLC(NTM Price/Earnings was 2.23), Aker BP ASA(NTM Price/Earnings was 17.47), Lundin Petroleum AB(NTM Price/Earnings was 18.03), Pharos Energy PLC(NTM Price/Earnings was 22.98), and Cairn Energy PLC(NTM Price/Earnings was 23.67). The mean of Price/Earnings (NTM) of the company’s peers was 16.88x (approx.).

Share Price Commentary


Daily Chart as at 30-October-19, before the market closed (Source: Thomson Reuters)

On 30 October 2019, at the time of writing (before the market closed, at 9:21 am GMT), TLW shares were trading at GBX 210.7, down by 0.37 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 254.71/GBX 163.30. The company's stock beta was 1.70,reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £2.97 billion, with a dividend yield of 1.79 per cent.

Growth Prospects and Risks Assessment

The company aims at achieving high-margin cash flow to fund its growth, reduce the debt and deliver shareholder returns by creating a business on the back of its low-cost, long-life asset base in Africa, and seeks to build an exciting exploration portfolio, deliver operational targets, maintain cost and capital discipline and further strengthen the balance sheet. The capital investment associated with the operating activities is expected to be around $570 million in FY 2019. However, due to the mechanical issues experienced in completing the Enyenra-14 production, the full-year working interest oil production forecast was revised down to 89-93,000 bopd. The company has made a 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 three new licences in Malvinas West Basin in Argentina.

However, the prices of various commodities which the company markets can be subject to significant fluctuations, and as the prices are affected by global supply and demand, the company does not have any influence on the market prices, which can lead to a significant impact on the financials and affect the business assumptions. Moreover, there is a risk of failure to deliver commercially attractive and timely Kenya development, in addition to the risk of disruption to business due to community and political influence. Inability to make new significant oil discoveries and replenish exploration and subsurface portfolio can also impact the long-term business operations.

Conclusion

Over the last three years, the company’s financials have reported a strong growth, which indicates the strong operations of the group. Over the past three years, revenue has risen at a CAGR of 18.39%, while gross profit rose at a CAGR of 42%. Operating income was up at a CAGR of 142%, while the corresponding growth rate for net income was more than 50%, indicating strong financials over the years.
 
Based on the decent prospects, and supported by valuation undertaken using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 211.50 (as on 29 October 2019) with single-digit upside potential based on 4.19x NTM Price/Cash Flow (approx.) on FY19E Cash Flow per share (approx.) and 16.88x NTM Price/Earnings (approx.) on FY19E Earnings per share (approx.).
 
*The “Buy” recommendation is valid for the current price as covered in the report (as on 30-October-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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