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.

On 22 April 2021, the Company will hold its Annual General Meeting.

Rationale for Valuation – Expensive at GBX 52.92

• FY20 results were in line with expectations, despite a challenging year.
• The Company has initiated a drilling campaign in Ghana and deliver production growth from 2022 onwards.
• It will deliver low-cost production within a guidance range of 60,000-66,000 bopd.
• In the short-term, the UK market is likely to remain under pressure due to increased market volatility.
• The Company is trading near a 52-week high, and EV/EBITDA, EV/Sales and Price/Earnings multiples are significantly higher as compared to the Oil & Gas industry multiples, reflecting overstretched valuations.
• In FY20, the Company’s net margin and Return on equity are in the negative zone.
• The Company has lower liquidity in FY20, with a current ratio of 0.43x, reflecting insufficient current assets to pay its short-term obligations.
• From the technical standpoint, 14-day RSI stood at ~85.15 (overbought zone), which means the stock price could decline in the short term.

Key Risks

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

Financial Highlights (for the year ended 31 December 2020 (FY20), as on 10 March 2021)

(Source: Company Website)

• The Company saw a strong cash generative business plan, with the underlying operating cash flow of USD 598 million and pre-financing cash flow of USD 625 million.
• In FY20, the revenue decreased to USD 1,396 million as compared with the previous year, with a gross profit of USD 403 million.
• The loss after tax was improved to USD 1,222 million against the previous year (2019: loss of USD 1,694 million).
• The decommissioning and capital expenditure were USD 58 million and USD 288 million, respectively.
• The Company delivered a strong operational performance in Ghana.
• In 2020, the net debt at year-end decreased to USD 2.4 billion against the previous year, with free cash of around USD 1.1 billion.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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. 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. The Company is presently trading near the 52-week high, raising doubts at the upside potential at the current price level. The stock made a 52-week low and high of GBX 7.17 and GBX 57.32, respectively.

Based on the factors as highlighted above, we believe the stock of Tullow Oil is “Expensive” at the closing price of GBX 52.92 (as on 10 March 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.

Greatland Gold Plc

Greatland Gold Plc (LON: GGP) is a mineral exploration and development Company and focused on gold in Tasmania and Western Australia. The operations of the group are differentiated in two operating segments, namely the UK and Australia.

Rationale for Valuation – Avoid at GBX 23.50

• The Company’s EV to EBITDA metric is in the negative zone as compared to the Metals & Mining industry multiple.
• The Company’s profitability metrics are in negative territory, whereas the industry has been delivering positive numbers.
• In the short-term, the UK market is likely to remain under pressure due to increased market volatility.
• The Company has not reported the revenue from the last four years, which raises uncertainty regarding its earning potential.
• The Company is dependent upon funding through external sources to run its business operations.
• From the technical standpoint, shares were trading below the short-term support level of 50-day (GBX 27.00) simple moving average prices, which reflects a downtrend in the stock and can decline further.

Key Risks

• The Company generates revenue through the sale of gold, and if the gold prices remain volatile and low, then it could impact sales.
• GGP is engaged in the business of gold mining, and the operations could impact the environment and the local communities.
• The strikes at the mines for an extended period could halt production.
• The civil disruption or any turmoil in the political situation where the Company operates its mines could impact the operational activity.

Financial Highlights (for the six months ended 31 December 2020 (H1 FY20), as on 9 March 2021)

(Source: Company Website)

• In H1 FY21, the Company is not generating any revenue and has a loss of £2.7 million.
• It is well capitalised, with USD 50 million of loan facility and cash equivalents of £5.9 million as at 31 December 2020.
• The Company has appointed Shaun Day, as a new Chief Executive Officer.
• In the first six months of 2020, GGP made significant progress, with signing the second joint venture with Newcrest and the initial Mineral Resource estimate at its Havieron project.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

In Havieron, the Company identified additional mineralised zones, with a 65,000 million growth drilling programme now underway. Looking ahead, it expects rapid development at Newcrest, Havieron and Greatland, and preparing for the launch of the exploration programme at the Juri JV. Further, the Company also expects that the exploration activities across our multiple will be 100% owned in Paterson. In FY20, GGP is in a strong operational position and is well capitalised, which assess new opportunities in future. As Gold has moved sharply higher in the past six months, the price may experience some consolidation in the near term, due to Covid-19 and monetary stimulus. However, the Company is in the development stage and do no generate any revenue for the period. The profitability margins have remained declined or stagnant. The Company has limited suppliers from which it sources its strategic raw materials, and any breakdown in the supply, especially considering the risk from Brexit, would result in the Group's inability to manufacture and satisfy customer demand. The stock made a 52-week low and high of GBX 2.53 and GBX 38.50, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on Greatland Gold at the closing price of GBX 23.50 (as on 10 March 2021).

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