Business Overview
Tullow Oil Plc (LON: TLW) is a leading oil & gas exploration and production company. The company has its business across 15 countries. The West Africa team manages production activities and developments in West Africa and Europe while the East Africa team manages the exploration activities in Kenya. The New Ventures team focuses on exploration activities across Africa and South America.

Trading Statement (13^th November 2019)
Full-year free cash flow is forecasted to be around $350 million. This decline is due to lower production and lower oil prices in much of the second half of the year. Net debt is expected to be around $2.8 billion. Gearing is expected to increase marginally to 2x, reflecting lower EBITDAX. The company has liquidity or free cash flow of $1 billion. Capital expenditure of the company for the year is expected to be around $540 million.

Financial Highlights – H1 Financial year 2019 (30^th June 2019, $, million)

(Source: Interim Report, Company Website)

In the first half of the financial year 2019, the company’s revenue was $872 million as compared to $ 905 million in the first half of the fiscal year 2018. This was due to lower realised oil price in the first half of the financial year 2019. Gross profit of the company was in line with the expectation to $527 million. Profit after tax of the company was $103 million in the first half of the financial year 2019 as compared to $55 million in the first half of the fiscal year 2018. This was due to exploration costs written off during the period. Net debt of the company reduced to $2,948 million, which shows a positive level of indebtedness of the company.

Share Price Performance

Daily Chart as on 4^thDecember 2019, before the market closed (Source: Thomson Reuters)

On December 4^th, 2019, Tullow oil Plc shares were trading at GBX 135.45 at the time of writing before the market close (at 10:35 AM GMT), up by 1.68 per cent against the last day closing price. Stock's 52 weeks High and Low are GBX 254.71/GBX 130.95.

Valuation Methodology


*Peers: Petrofac Ltd., SDX Energy Plc, Genel Energy Plc, Nostrum Oil & Gas Plc and Hurricane Energy Plc

Conclusion
The company has delivered a good set of financial numbers with robust profits and free cash flow. The company’s low-cost West African production continued to provide a financial base for the business. The company continued to reduce debt and paid dividends to shareholders. Though, the company is facing some uncertainties such as inability to discover new oil reserves, risk of disruption of business due to political or regulatory issues, insufficient liquidity and funding capacity, volatility in oil prices etc., the company is capable of sustained growth. The company is generating enough free cash for the growth of the business of the company. The company’s production is performing well across most of its assets. The company looks promising and have the capability to grow its business.

Based on the decent prospects which are supported by valuation done using the above method, we have given a “BUY” recommendation at the current price of GBX 132.70 (as on 4^th December 2019, at 8:15 AM GMT) with single-digit upside potential based 3.83x NTM EV/EBITDA (approx.) on FY19E EBITDA per share (approx.).
 
*All forecasted figures and information have been taken from Thomson Reuters.

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