The FTSE 250 index might have touched its highest ever levels this month after the election results were announced, but not every share price is going through the roof. Quite the contrary. Just look at oil and gas producer Tullow Oil (LSE: TLW) that lost 72% of its value in early December after it announced its 2020 guidance. It has started recovering since, but is still 70% lower than its value two months ago.
The dramatic fall can suggest one of two potential courses of action. One, the situation is so bad, that TLW is no longer an investment worth its while. Two, this is a good time to buy shares in TLW because the price just doesn’t get any better. So which of the two courses of action should we take? To assess this, I think it’s imperative to look at the guidance in some detail. Here are the main takeaways.
Lowered expectations
It has cut its 2020 production forecast, after already having announced cuts to 2019 production in November. Next, in line with this, it expects a reduction in cash flow in the next year as well. And it also said it’s “disappointed” in the performance, but added that it’s “taking decisive action to restore performance, reduce our cost base and deliver sustainable free cash flow.” And finally, related to that, it’s bringing its dividend payments to a halt.
Dividends matter little here
Of these issues, I’m least concerned about the dividends. Its dividend yield stands at 8.7% at present, but that’s because of the sharp price dip. Just before the announcement, it was at 3.9% and in November, before it revealed the first production cuts, the yield was 2.6%. That the FTSE 250 yield averages at 3.2% puts this in context. In other words, until not very long ago, TLW’s dividend yield was actually lower than that of the index and the only reason it has risen so much is because investors are losing confidence in the stock. If dividends are the reason you invest, I’d encourage considering far more secure FTSE 100 stocks instead.
Look out for financials
I am also waiting and watching what it says next about its financials. Cash flow is indicative, but doesn’t necessarily mean that the company is going to revert to losses after turning around in 2018. In fact, for the first half of 2019, it has already clocked a profit. Further, if there’s an increase in oil prices as the global economy picks up in 2020, Tullow could still end up ahead, despite production cuts. So far though, it doesn’t seem likely. The IMF says that based on futures contracts, the prices in 2020 won’t be much different than in 2019.
TLW will release two updates, in mid-January and mid-February, which should guide investors further. I think we can be prepared for reduced earnings forecasts and it would also be good to know more about its challenging debt situation. I’d wait for these updates before making any investing moves.
