Tullow Oil Plc

Tullow Oil PLC (LON: TLW) is FTSE All-Share listed Oil & Gas Exploration Company, which manages production and development activities across Africa, South America, Europe, and Kenya.

Rationale for Valuation – Avoid at GBX 26.20

• In the short-term, the UK market is likely to remain under pressure due to increased market volatility.
• The Company’s EV/EBITDA, EV/Sales and Price/Earnings multiples are significantly higher as compared to the Oil & Gas industry multiples, reflecting overstretched valuations.
• In H1 FY20, the Company’s net margin and Return on equity are in the negative zone.
• The stock has underperformed the index (FTSE 250 index) during the last year period and delivered a negative return of around 44.81%.
• From the technical standpoint, shares were trading below the short-term support level of 20-day (GBX 31.74) simple moving average prices, which reflects a downtrend in the stock and can decline further.

Key Risks

• Also, the lack of exploration and appraisal success can lead to failure of the balanced business model.
• Moreover, insufficient capital to pursue business opportunities and manage operations can create funding issues.
• The fluctuation in oil prices can impact the financial position.
• It is also exposed to oil & gas prices fluctuation and political & fiscal instabilities.

Trading and Operational Update (as on 27 January 2021)

• In 2020, the production was in line with the expectations.
• Group working interest oil production for FY20 was averaged 74,900 bopd and was in line with guidance.
• The Company expects 2020 revenue to be approximately USD 1.4 billion in FY20, with a released oil price of USD 50.8 per bbl.
• For 2020, the capital and decommissioning expenditure stood at approximately USD 290 million and around USD 50 million, respectively.
• It has reduced its net debt to around USD 2.4 billion, with a free cashflow of USD 430 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/EBITDA Approach (NTM) (Illustrative)

Conclusion

In 2021, the Company expects Group working interest oil production to average 60-66,000 bopd, capital expenditure to be around USD 265 million, and underlying operating cash flow to be around USD 0.5 billion. In February 2021, Jubilee new oil offloading system is expected to be ready for a first lifting. In Jubilee and TEN, the Ghana oil production for the year to date was in line with anticipations.  Meanwhile, the Company’s production for 2020 was in line with the management expectations, with a reduction in net debt. The Company has shown a strong balance sheet and will generate positive free cash flow. Notwithstanding, the urgency of climate change can drive the global demand for clean and flexible sources of energy in the future. Further, the business is more exposed to the economic uncertainties arising from the Brexit and Covid-19 pandemic. In the future, the Company may face emerging headwinds and cost pressures. The stock made a 52-week low and high of GBX 7.17 and GBX 52.84, respectively.

Based on the factors as highlighted above, we have given an “Avoid” recommendation on Tullow Oil at the closing price of GBX 26.20 (as on 1 February 2021), with support from few catalysts needs to be evaluated at a later stage such as decent prospects of London market and improved investors sentiments.

Pharos Energy Plc

Pharos Energy PLC (LON: PHAR) is a FTSE All-Share listed independent Oil & Gas exploration and production Company. It has exploration, production, and development interests in the region of Egypt, Israel, and Vietnam.

Rationale for Valuation – Avoid at GBX 19.30

• Price to Earnings metric is in the negative zone as compared to the Oil & Gas industry multiple.
• The stock has underperformed the index (FTSE All-Share) during the last three months period and delivered a negative return of 59.46% in the last year.
• The top-line performance has declined, and the profitability margins remained in the negative zone for the period.
• The Company is dependent upon funding through external sources to run its business operations.
• From the technical standpoint, the 20-day simple moving average price is currently at GBX 19.81, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• The Company operates in multiple geographies, and profits can be impacted negatively due to foreign exchange rate fluctuations.
• Any failure to generate substantial free cash flow can affect the business prospects of the Company.
• Besides the liquidity risk, the Company operations are subject to regulatory and environmental risk.

Trading and Operations Update (in respect of the financial year to 31 December 2020, as on 13 January 2021)

• In 2020, Group working interest production was 11,373 boepd net, which was in line with production guidance.
• For 2020, the Group revenue stood at USD 140 million, with Vietnam revenues of approximately USD 87 million and Egyptian revenues of around USD 30 million.
• On 31 December 2020, the cash balances were around USD 24 million, with net debt of USD 33 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

In 2020, the Vietnam and Egypt productions were in line with the 2020 production guidance. The infill-drilling programme is targeted to increase gross production at TGT from ~15,000 boepd to approximately 20,000 boepd in 2022. It has adopted several cost-cutting measures and postponed the dividend payment (until the crisis gets subside). The Covid-19 has resulted in increased volatility and reduced liquidity, which has impacted the company’s share price. Overall, the Company is still in the development stage. The stock made a 52-week low and high of GBX 10.00 and GBX 48.00, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on Pharos Energy at the closing price of GBX 19.30 (as on 1 February 2021).

*All forecasted figures and Industry information have been taken from Refinitiv, Thomson Reuters.

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