Is the Tullow Oil share price heading back to 500p?

Roland Head looks at the latest numbers from Tullow Oil plc (LON:TLW).

| 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.

The Tullow Oil (LSE: TLW) share price has risen by 69% from the lows of 130p seen in early 2016. Today’s half-year results have nudged the share price slightly higher, but it’s still a long way from the 500p level last seen when oil prices were crashing in late 2014.

I think this could be an opportunity for smart investors. Let me explain why.

The trend is your friend

When Tullow’s 2014 results were published in February 2015, the shares were worth around 340p. That’s about 25% more than they’re worth today, after adjusting for the new shares created in last year’s rights issue.

To understand the potential opportunity here, I think we need to compare some figures from the firm’s 2014 results with the equivalent numbers from today’s 2018 half-year results:

 

Full year 2014

Half-year 2018

Working interest production (barrels of oil equivalent per day)

75,200 boepd

79,100 boepd

Cash operating costs

$18.60/barrel

$10.60/barrel

Capital expenditure

$2,020m

$145m

Net debt

$3.1bn

$3.1bn

Although net debt is roughly the same today as it was in 2014, it’s moving in opposite directions.

Tullow has now largely finished the big projects it was working on when the oil price crashed in 2015. Free cash flow is rising strongly, and the firm has reduced net debt by nearly $800m over the last 12 months.

The figures in this table tell me that conditions in the oil market are now favouring companies such as Tullow, which have cut costs and boosted production with new long-life oil fields.

Now could be the right time

Today’s half-year results show that Tullow sold oil at an average price of $67.50 per barrel during the first half of the year, up from $57.30 per barrel during the same period last year. Revenue rose by 15% to $905m and free cash flow doubled from $205m to $401m.

Although I think a price target of 500p may be slightly ambitious, as debt continues to fall, the firm’s equity value should increase. I expect to see the shares trading between 350p and 400p over the medium term.

At around 220p, the shares currently trade on just 9 times 2018 forecast earnings. I believe this could be a low-risk buy with the potential for decent gains.

Are you looking for excitement?

Tullow’s operations in Africa aren’t without political risk. But Genel Energy (LSE: GENL) operates in much riskier Kurdistan, the autonomous region to the north of Iraq. Despite the conflict that’s spread through much of this region over the last few years, Genel has kept the oil flowing and continued to receive payment for it.

As a result, this seemingly risky stock has become an unlikely cash cow. The firm’s 2017 results showed that its net debt fell from $241m to $135m last year. Free cash flow rose to $100m, thanks to cash operating costs which I estimate at less than $2.50 per barrel.

Although Genel shares have risen by 140% this year, low costs and a strong cash performance means they still look affordable to me. Trading on 9.3 times forecast earnings, this stock isn’t without risk. But if the oil market remains stable, I think shareholders could see further gains.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Warren Buffett owns this FTSE 100 stock. But should I?

Warren Buffett rarely invests in FTSE 100 shares but he does have a position in Diageo. Is it time for…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

After returning 101% in 2024 is this FTSE bank the best share to buy for 2025?

FTSE 100 bank NatWest Group turned out to be the best share to buy at the start of this year.…

Read more »

Investing Articles

Could Helium One be a millionaire-maker penny stock?

Shares of Helium One Global (LON:HE1) have soared 272% so far this year. Should I buy this penny stock while…

Read more »

Investing Articles

Are these 2 unsung FTSE blue-chips the passive income stocks I never knew I wanted?

Harvey Jones says that the FTSE 100 contains fantastic passive income stocks with deceptively modest yields. Here are two he's…

Read more »

A mixed ethnicity couple shopping for food in a supermarket
Investing Articles

Shhhh… These FTSE 250 stocks have quietly more than doubled in 2024

Forget those US tech titans. Our writer takes a closer look at two supposedly 'boring' FTSE 250 stocks that have…

Read more »

Investing Articles

As the Diageo share price flies on a double upgrade is this my last chance to buy it on the cheap?

The Diageo share price has inflicted plenty of pain on Harvey Jones in 2024, but suddenly it's serving up a…

Read more »

Investing Articles

7%+ yields! 3 choices to consider for a Stocks and Shares ISA

Christopher Ruane highlights a trio of FTSE companies each yielding over 7% he thinks investors should consider for a Stocks…

Read more »

Passive income text with pin graph chart on business table
Dividend Shares

How investors might try to turn £10,000 into a chunky passive income

Our writer Ken Hall looks at how the magic of compounding returns might help investors to create a handy second…

Read more »