Tullow Oil PLC – Shareholders Approved the Proposed Uganda Deal

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 29 July 2020, the Company is expected to release the next trading update, while H1 FY20 results are expected to be announced on 9 September 2020.

Recent News

15 July 2020: In the shareholder meeting, 99.93% shareholders voted in favour of the proposed sale of East African Crude Oil Pipeline System and an entire stake in Blocks 1, 1A, 2 and 3A in Uganda. The transaction is expected to complete in the H2 FY20.

Trading Update (as on 23 April 2020)

In this update, the Group affirmed regarding the sale of Uganda interests to raise over US$1 billion in proceeds. Further, the Company announced that the new Chief Executive Officer (CEO), Rahul Dhir would be joining in July 2020. During the Q1 FY20, the production remained in line with the expectations (averaged 75,800 bopd). The production in West Africa was not affected by the time of update; however, the key workstreams in Kenya were suspended due to COVID-19 restrictions. Also, the Company has completed the business review, and have been able to reduce the cost base to establish a more efficient organisation. Further, the Group successfully managed to secure the RBL (Reserves Based Lending) facility with headroom of around US$700 million at the beginning of Q2 FY20.

Share Price Performance


1-Year Chart as of 24 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Tullow Oil PLC’s shares were trading at GBX 28.55 on 24 July 2020 (before the market close at 8.38 AM GMT+1), down by 4.46% against the last day closing price. Stock 52 week High and Low were GBX 251.31 and GBX 7.17, respectively.
From the technical standpoint, 14-day RSI is currently in the oversold zone, which means there is a good potential for a short term rebound in the stock price.
 
Valuation Methodology



Risk Assessments

 The demand for the produced commodities has been nosedived while there is global supply concern following the Covid-19 restrictions. The Company reported significant losses in FY19, and there can be a liquidity crunch. The production in Kenya has also been suspended due to Covid-19.

Conclusion

The Company has achieved two significant milestones recently, with the appointment of new CEO and proposal disposal of interests in Uganda (Lake Albert Development Project) for the consideration of $575 million. The Group is progressing well towards the target of raising over $1 billion through proceeds to reduce net debt, and thus, securing a conservative capital structure and strengthen the balance sheet. Overall, the Group has made substantial changes to the cost base while the production remained in line with expectations during the Q1 FY20. Overall, the Company has a quite diverse base of assets with around 80 exploration and production licences across 15 countries, which shall operate in a more cost-efficient manner after the recent business review. Moreover, the Company has substantial liquidity to take up the future opportunities with the redetermination of our Reserves Based Lending facility.

Based on the decent prospects which are supported by valuation done using the above method, we have given a “SPECULATIVE BUY” recommendation at the current price of GBX 28.55 (as on 24 July 2020, before the market close at 8:38 AM GMT) with lower double-digit upside potential based 1.05x Price/NTM Cash Flow (approx.) on FY20E Cash Flow Per Share (approx.).

MC Mining Ltd – Met Conditions for Loan Restructuring with IDC

MC Mining Ltd (LON: MCM) is involved in acquisition, exploration, development, and operation of thermal and metallurgical coal projects in South Africa. The key projects of the Company include Makhado Project (hard coking oil), Vele Colliery (semi-soft coking coal), Uitkomst Colliery (metallurgical coal), and the Greater Soutpansberg Projects (coking and thermal coal).

Recent News

21 July 2020: The Company affirmed that it had satisfied the condition of the Industrial Development Corporation of South Africa Limited (IDC) for the restructured loan agreement. Subsequently, the Group can now draw down US$2.4 million for the advancing in the Makhado hard coking coal project.

Market Update (as on 18 May 2020)

The Company affirmed that it has been taking necessary precautions for reducing the threat of Covid-19 spread to contractors, employees, and other stakeholders. From 1 May 2020, the South African Government reduced the restrictions for the operations at the Uitkomst Colliery, from level 5 to level 4. Hence, it is operating at 50% of mine’s labour capacity now while the Company is experiencing a strong customer demand. On the other hand, activities at the Vele, Makhado, and Greater Soutpansberg Projects remained suspended. Further, the Company was anticipating that negotiation agreement with IDC will provide them with extended liquidity. 

Share Price Performance

MC Mining Ltd’s shares closed at GBX 6.00 on 23 July 2020. Stock 52 week High and Low were GBX 42.60 and GBX 5.50, respectively.

From the technical standpoint, 14-day RSI is currently close to an oversold zone, which means there is a good potential for a short term rebound in the stock price.
 
Risk Assessments

The business model of the Company requires substantial funds to operate, and hence, the prolonged suspension of activities at major projects can pose a major risk to the liquidity position. Macroeconomic conditions, political uncertainty, and currency fluctuations can impact commodity prices, and thus, the cash flows and profitability.

Conclusion
During the FY19, the bottom-line was improved, albeit the profitability remained in the negative territory. Moreover, the Company is witnessing a strong customer demand now, and it can grab the opportunity since it has got approval for operating at 50% capacity over the Uitkomst Colliery project. Also, the average prices for hard coking coal during the third quarter improved to $149/t, while the demand for South African coal remained robust. Therefore, the Company shall reap the full benefits of the improved demand and prices as soon as it returns to operations at the full-scale.

Based on the above rationale, we have given a "Hold” recommendation on the stock, at the closing market price of GBX 6.00 as on 23 July 2020.
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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