Tullow Oil

Tullow Oil PLC (TLW) is a London, United Kingdom-headquartered Africa’s leading independent oil and gas company which works across all stages of the oil life cycle from exploration to production. The group is an Africa-focused oil group with operations across 15 countries and interests in 80 exploration and production licences. The group’s operations are differentiated in three operating segments: East Africa, West Africa and New Ventures.

Financial Highlights (H1 FY 2019, in $m)

(Source: Company Filings)

Total group working interest production during the period surged by 9.1% for the period to average 86,300 boepd (1H FY 2018: 79,100 boepd), while the working interest production was 89,000 boepd (1H FY 2018: 91,000 boepd) if the impact of production-equivalent insurance payments from the Jubilee field is included. As strong market prices led to a loss on the realisation of hedges, the realised oil price after hedging declined to $64.3/bbl (1H FY 2018: $67.5/bbl). Revenue of $872 million was reported during the year, against $905 million in H1 FY 2018, as the company had to experience losses due to hedging programme. As a result of the phasing of non-routine activity in the second half of FY 2019, underlying cash operating costs during the year was $145 million or $9.0/boe (1H FY 2018: $181million; $10.9/boe). The company reported a gross profit of $527 million and operating profit of $388 million. Net financing costs during the period were $120 million and profit before tax amounted to $268.4 million. The profit from continuing activities rose to $103.2 million (1H FY 2018: $54.5 million), and the company reported free cash flow of $181 million, down from $390 million in H1 FY 2018. Basic earnings per share were 7.4 cents (1H FY 2018: 3.9 cents), and the company declared an interim dividend of 2.35 cents/share (c. $33 million). In the first half of FY 2019, capex stood at $248 million and net debt reduced to $2.9 billion, with gearing declining to 1.8x.

Valuation Methodology
Method:  Price/Cash Flow Approach (NTM)


Share Price Commentary

Daily Chart as at 01-August-19, before the market closed (Source: Thomson Reuters)
 
On 01 August 2019, at the time of writing (before the market closed, GMT 11:30 am), TLW shares were trading at GBX 192.25, down by 0.75 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 273.90/GBX 163.30. The company's stock beta was 1.93, reflecting more volatility as compared to the benchmark index. Total outstanding market capitalisation was around £2.72 billion, with a dividend yield of 1.96%.

Conclusion
Due to mechanical issues experienced during the completion of the Enyenra-14 production, full-year working interest oil production forecast was revised down to 89-93,000 bopd, a target which had already been reduced from its outlook of 93,000-101,000 bopd in January. However, the company has continued to pay a dividend, reduce debt and invest in future operations as its portfolio of low-cost West African production has continued to provide a decent financial base. In the first half of next month, the group is expecting to get the first results from its drilling programme off Guyana, where a three-well exploration drilling campaign was underway, which would provide important insights about the future developments of the company.

Based on the headwinds faced by the group, and supported by valuation done using the above method, we have given a "HOLD" recommendation at the closing price of GBX 193.75 (as on 31 July 2019) based on 3.20x NTM Price/Cash Flow (approx.) on FY19E Cash Flow per share (approx.).
 
*Peers of the company are EnQuest PLC, Premier Oil PLC, Kosmos Energy Ltd, Aker BP ASA, Cairn Energy PLC, Lundin Petroleum AB
*All forecasted figures and peers have been taken from Thomson Reuters.

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