It’s not quite the heady days of 2014 but oil producers are celebrating all the same as Brent crude prices are above $60/bbl for the first time in two years. But does this mean it’s time to buy into the recovery of Tullow Oil (LSE: TLW)?
On the one hand, the medium-term outlook for oil is looking much improved as years of capex tightening and the OPEC production curbs have resulted in relatively weak supply for the world economy. That economy, while growing slowly, still has positive momentum and high demand for fossil fuels.
On the other hand, Tullow’s main issue, its debt, remains a problem even after a rights issue in April raised $721m from shareholders. This cash infusion helped bring net debt down to $3.8bn or 3.3 times EBITDAX, but this still dwarfs cash flows and left gearing significantly higher than the company’s 2.5 times target.
Furthermore, the recent upswing in prices likely won’t mean any sea change in Tullow’s outlook in the short term. In H1 2017, the company’s average realised price for oil was $57/bbl due to a very wise hedging programme. And in this six-month period, operating profits were only $0.24bn if you exclude the negative effects of a $0.64bn impairment.
While oil prices reaching and stabilising at $60/bbl will be welcomed by Tullow, this figure suggests it won’t result in any massive increase in cash flow even as production levels rise. On top of this, the company’s shares largely reflect recent oil price improvements and at 19.4 times 2018 earnings don’t look like any great bargain to me. In short, I see plenty of better places to park my cash right now.
Smooth sailing from here on out?
One company I’m taking a closer look at is Global Ports Holding (LSE: GPH), which operates concessions at large cruise ship ports in Barcelona, Malaga and Venice, among others, as well as some commercial ports in Turkey and the Adriatic.
The group has benefitted immensely from the popularity of cruise holidays in recent years as its long-term concessions often allow it to set tariffs as well as operate commercial services such as retail outlets. In the half year to June, passenger numbers at its ports rose 14.1% year-on-year (y/y) while the volume of bulk cargo processed at its commercial ports rose 7.2%.
However, group revenue during this period fell 5.7%. Weak demand for Turkish holidays following the geopolitical problems in that country caused cruise ship revenue to collapse by 15.9% at the group level as its large and high-margin Turkish ports suffered low visitor numbers.
That said, GPH is still in a good position to grow in the years ahead as it consolidates its position as the largest commercial cruise terminal operator in the world. This is because the company has a relatively large war chest to go out and make acquisitions. That is due to $73m in proceeds from its IPO and its net debt-to-EBITDA ratio at a manageable 2.9 times, which is in line with its high margin business that has decades-long contracts.
However, with the medium-term outlook for Turkish tourism murky and a valuation of 19.3 times forward earnings, I won’t be buying Global Ports Holding shares right now, despite solid growth prospects and what analysts expect to be a 6.2% dividend yield this year.
