What I’d do about Tullow Oil’s 65% share price crash this week

The Tullow Oil (LON: TLW) share price is down more than 65% since Friday. Here’s my take on what investors should do.

| 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.

The dividend policy being pursued by Tullow Oil (LSE: TLW) has been boggling my mind. Even with debt of $2.95bn, the company employed a “capital returns policy of intending to pay shareholders at least $100m per year.”

I thought that was plain crazy, as I generally do when a company pays out dividends while shouldering big debt – it’s effectively borrowing money to give to shareholders.

Sudden halt

The dividend policy came to a halt on Monday, but not for the good reason that Tullow’s board had finally seen sense. No, it was down to a shock profit warning as the company slashed production guidance and suspended the dividend, and CEO Paul McDade and exploration director Angus McCoss both resigned.

Oil and gas production is now expected to fall by around 20% over the next two years, with free cash flow set to decline to around $150m in 2020, from a 2019 level of $350m. The idea of paying out $100m per year in dividends seemed ill-advised anyway, but it would be insanity to try it when cash flow is plummeting. So, no wonder the dividend has been put on hold, but right now I’d be far more concerned about the impact on Tullow’s debt repayment programme.

And I’m still puzzled by two things. One is that the firm saw fit to reintroduce dividends so soon after its debt almost brought it to its knees. And I can’t figure out how Tullow couldn’t have seen this latest catastrophe coming a little earlier.

Production woes

I know the firm has been hit by unprecedented production problems this year at its TEN and Jubilee oil fields in Ghana, but those things happen in oil exploration, and I think a company in that business should focus on getting its balance sheet as defensive as possible.

I think the Tullow board has served shareholders badly this year, and the departure of McDade and McCoss is probably an appropriate response. But where does that leave us now?

Tullow came too close to going bust during the oil price crash, and that spectre is surely looming on the horizon once again. At the halfway point at 30 June, Tullow reported gearing of 1.8 times. Six months prior to that, gearing stood at 1.9 times, and a year prior it was up at 2 times. So it’s been coming down, but only at a glacial pace – and that was at previous cash flow levels. At least the company has no near-term debt maturities, so that might provide a bit of breathing space.

Cash strapped?

Now that cash flow is set to be severely reduced, I really can see gearing heading back in the wrong direction again. My Motley Fool colleague Roland Head suggests that Tullow could be forced into a new round of fundraising, after having raised $750m in 2017’s rights issue, and I think he’s likely to be right.

Tullow Oil was slowly pulling itself out of the mire, albeit with a badly misguided (in my view) dividend policy. But the recovery has come to a sticky halt and we could see it getting sucked back in again over the next couple of years.

Tullow Oil shares? I wouldn’t go within a mile of them.

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 considered so you should consider taking independent financial advice.

Alan Oscroft 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

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

1 dividend stock with a juicy yield to boost returns!

This Fool likes the look of this dividend stock to boost his passive income stream and explains why he would…

Read more »

Happy male couple looking at a laptop screen together
Investing Articles

Here’s 1 growth stock primed for long-term growth and returns!

Jabran Khan is hunting for a growth stock to boost his holdings. Could this financial advisory business be the right…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

3 FTSE 250 shares I bought for extra dividends

I plundered the FTSE 250 index to find these three cheap stocks with ailing share prices. All three firms pay…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’m buying cheap FTSE 100 stocks to boost my passive income!

Buying dividend stocks today could considerably improve the amount of passive income I make. Here are some FTSE 100 stocks…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Am I crazy for buying Royal Mail shares?

Royal Mail shares have collapsed by almost half in 2022. And with group profits falling and strike action under way,…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

2 recession-resistant stocks to buy right now

After the pandemic slump, we're now facing a UK recession. Many are looking for recession-resistant stocks to protect their money.

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Investing Articles

This FTSE 100 stock continues to fall! Should I buy shares?

This Fool takes a closer look at a FTSE 100 quality assurance stock. As the shares continue to fall, is…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

Is the Rolls-Royce share price about to surge?

The Rolls-Royce share price continues to fall as market patience wears thin. But could it be on the brink of…

Read more »