Tullow Oil (LSE: TLW) released its annual results today, with chief executive Paul McDade saying the FTSE 250 firm “made excellent progress in 2017.” As a result, it posted its first annual operating profit in three years.
The shares are up 2% at 187p, as I’m writing, giving the company a market capitalisation of £2.6bn. This is still well below the valuation it once commanded. In an improved oil price environment and after today’s results, is Tullow a top turnaround buy?
Improving performance and bright future
The Africa-focused group’s revenue of $1.72bn was 36% ahead of 2016, as its working interest production surged 32% to an average of 94,700 barrels of oil equivalent per day (boepd).
Despite $682m of write-offs and impairments, it managed a small operating profit of $22m, although after net finance costs of $310m and a tax credit of $111m, the statutory bottom-line was a loss of $189m. However, with the write-offs and impairments being non-cash items, the cash flow picture was considerably better: the company generated free cash flow of $543m.
Tullow got through the oil rout with a millstone of debt, helped by supportive lenders. Net debt remains relatively high at $3.5bn but is falling and is now only just above management’s target level of below 2.5 times EBITDAX (earnings before interest, taxes, depreciation, depletion, amortisation and exploration expenses).
Looking ahead to 2018, the company has guided on production of between 86,000 and 95,000 boepd. City analysts are forecasting earnings per share (EPS) of around $0.20 (14.4p at current exchange rates), giving a price-to-earnings (P/E) ratio of 13. This looks an undemanding rating to me as I see scope for production upgrades this year, while the company’s valuable development and exploration assets bode well for the longer term. As such, I rate Tullow an attractive ‘buy’.
Moving towards full potential
Also on my buy list of turnaround oil stocks is Gulf Keystone Petroleum (LSE: GKP). This producer, whose operations are in the Kurdistan Region of Iraq, is a smaller company than Tullow, having a market capitalisation of £268m at a current share price of 117p.
Gulf Keystone hasn’t released its results for 2017 yet but said in an update in January that average gross production for the year was 35,298 bopd. It also guided on production for 2018 of between 27,000 and 32,000 bopd, the lower range being due to a delayed investment programme from last year.
Subject to the resolution of certain commercial matters and the government continuing regular payment of monthly invoices, management intends investing to expand production capacity to 55,000 bopd in the near-to-medium term. This would be a significant step towards development of the full potential of its field and production of around 100,000 bopd.
For 2018, City analysts are forecasting EPS of around $0.15 (10.8p), giving a P/E of under 11. Visibility on commercial agreements and payments appears to be improving in Kurdistan and with Gulf Keystone having a strong balance sheet and looking more confident about investing to increase production, the low P/E makes the shares look very buyable to my eye.
