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 company manages production activities and developments across Africa, South America, Europe and Kenya.

Recent News
On 17^th February 2020, the company announced that the Marina-1 exploration well has not encountered significant hydrocarbons. The well tested positive for some minor gas formations however there were no indications of hydrocarbons.

Trading Update - FY2019 (31st December 2019, USD, Billion)

(Source: Interim Report, Company Website)

On 15th January 2020, the company issued its trading update for the financial year 2019. In the financial year 2019, the company’s revenue was USD 1.7 billion primarily driven by the realised post-hedge oil price of $63/bbl. The company’s gross profit was USD 0.7 billion. In the fiscal year 2019, the company’s capital expenditure was USD 490 million. Free cash flow for FY2019 is expected to be $350 million. The net debt reduced to USD 2.8 billion with gearing around 2.0 times. For 2020, the company expected capital expenditure of $350 million, with an additional $100 million expected to be spent on decommissioning.

The company would provide a full financial and operational results for FY2019 on 12 March 2020.

Share Price Performance  

Daily Chart as on 24^thFebruary 2020, before the market closed (Source: Thomson Reuters)

On February 24^th, 2020, Tullow Oil Plc shares were trading at GBX 38.13 at the time of writing before the market close (at 12:53 PM GMT), down by 5.70 per cent against the last day closing price. Stock's 52 weeks High and Low are GBX 254.71/GBX 36.65.

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering in the oversold zone, which is strengthening the upside move.

Valuation Methodology


*Peers: Premier Oil Plc, Enquest Plc, Hurricane Energy Plc, John Wood Group Plc, IGas Energy Plc, Petrotal Corp and Diversified Oil & Gas Plc

Conclusion
The company’s financial performance has declined during the fiscal year 2019. The company is facing multiple internal as well as external issues such as change in management, economic factors, etc. which are hindering its growth. Other risks and uncertainties include financial risk, liquidity risk, economic and political risk and cyber risk which could affect the overall business of the company. The company forecasted its production to average between 70,000 and 80,000 bopd in the year 2020 and average around 70,000 bopd for the following three years. With positive implications for both the Orinduik and Kanuku blocks, the Carapa-1 result is an essential exploration outcome. While reservoir development and net pay at this site are lower than the pre-drill estimates, the company is generating enough free cash for the growth of the business of the company. The company’s fundamentals have remained intact and it retained a high-quality exploration portfolio. The company looks promising and sustainable for the long term.

The company’s revenue and gross profit have grown from $1,606.6 million and $591.3 million respectively in FY 2015 to $2,047.6 million and $1,081.6 million in FY 2018, delivering growth of 8.4 per cent and 22.3 per cent respectively on CAGR basis.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 36.65 (as on 24th February 2020 at 8:38 AM GMT) with lower double-digit upside potential based on 5.99x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and information have been taken from Thomson Reuters.                                                           
*Currency exchange rate taken for 1 US Dollar = 0.7748 GBP.

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