Why I’m avoiding Tullow Oil plc like the plague

Royston Wild explains why Tullow Oil plc (LON: TLW) remains a risk too far for savvy investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Energy goliath Tullow Oil (LSE: TLW) was recently dealing higher in Wednesday trading, despite slashing its 2016 output target. Indeed, the fossil fuel play remains within striking distance of recent 15-month highs of 288p per share.

Production targets fall

Tullow Oil announced that net oil production from West Africa is likely to clock in at 64,000-67,000 barrels per day in 2016, down from its prior estimate of 62,000-68,000 barrels.

First oil at the company’s TEN project off the coast of Ghana had been achieved back in August on time and within budget. But Tullow Oil advised today that

production ramp up has been slower than expected due to water injection commissioning taking longer than planned which has limited the volume of water injected to date.”

In better news, however, Tullow Oil confirmed that it will begin to generate free cash flow during the current quarter, and added that

we are well placed to begin the process of both refinancing and paying down our debt in 2017.”

Fears over the company’s financial health have long dogged the black gold producer, which expects to record net debt of $4.9bn at the close of 2016.

Cash concerns

That is not to say that Tullow Oil is quite out of the woods, even after inking $345m worth of new loan commitments from existing lenders in October. The business believes the new commitments

will largely offset the impact of the scheduled amortisation in April 2017 and will ensure Tullow has appropriate headroom throughout 2017 as it refinances its bank facilities.”

But the very-real possibility that oil prices could remain depressed around or below the $50 per barrel marker could put paid to Tullow’s optimism.

Indeed, the company’s decision today to reduce its 2016 capital expenditure forecast to $900m, down from a prior estimate of $1bn, illustrates the ongoing pessimism washing  over the sector. And capex in 2017 is expected to clock in at a much-more-modest $300m-$500m.

Investors remain hopeful that exploding volumes following the TEN startup will drag earnings higher again and soothe pressures on the balance sheet. But if Tullow Oil encounters further operational or financing problems, and crude prices fail to meaningfully recover, I reckon its share price could reverse sharply. And a P/E rating of 17.7 times for 2017 leaves plenty of room for a correction.

Wood you?

But the oil producers are not the only ones to suffer from a period of prolonged oil price woe, of course. Tullow Oil’s decision to rein in its capex budgets mirrors similar moves by industry giants like BP and Statoil in recent weeks, and bodes badly for the likes of John Wood Group (LSE: WG).

The engineering giant, like Tullow, has also seen its share price surge in recent weeks. Indeed, Wood Group’s share price hit levels not seen since mid-2014 in October, with news of new contract wins from Hibernia and Suncor Energy bolstering investor confidence.

But the prospect of oil market oversupply dragging for longer than expected leaves Wood Group in danger of facing further revenues pressure in the near-term and beyond. Like Tullow Oil, I reckon investment in the oilfield services play is far too risky at the current time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young black female footballer training on stadium pitch
Investing Articles

My JD Sports Fashion share price prediction for the second half of 2024

The JD Sports Fashion share price hasn't yet recovered from January’s slump. So will the retailer's stock bounce back in…

Read more »

Investing Articles

Up 47% in a week! Can the Capita share price continue to rocket?

The Capita share price has smashed the market in the last week, and Harvey Jones wonders whether it has the…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

What could the second half of 2024 have in store for the BAE Systems share price?

After a strong first six months of the year, what could be coming next for the BAE Systems share price?…

Read more »

Growth Shares

2 FTSE 100 stocks that are outperforming these MAG7 members

Jon Smith reveals some FTSE 100 stocks that offer him a viable alternative to the Magnificent 7, based on recent…

Read more »

Investing Articles

My Scottish Mortgage shares just paid me £14.88. It’s another step towards making a million

Harvey Jones has just received a measly dividend from his Scottish Mortgage shares, but he's got big, big plans for…

Read more »

Investing Articles

FTSE 100 shares: is Barclays a standout buy?

Barclays shares are among the FTSE 100's top performers and this Fool thinks they have further to go. He explains…

Read more »

Black woman using loudspeaker to be heard
Investing For Beginners

At 52-week highs, here’s what may be next for the Lloyds share price

Jon Smith notes the strong rally in the Lloyds share price in the recent past and explains why the good…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

These UK shares are stinking out my ISA. Time to sell?

Paul Summers has been reviewing some of the worst-performing UK shares in his portfolio. Has the time finally come to…

Read more »