2019 proved to be a disastrous year for Tullow Oil (LSE: TLW) and its share price. Investors have been used to price drops in recent years, but the 64% reversal suffered last year was catastrophic. And it hasn’t got off to the best of starts in 2020 after issuing a disappointing exploration update on the first trading day of the new year. That sent its share price sharply lower in the morning and despite bouncing back a little, it is still down by 7% as I write.
Whoops!
So what has Tullow said to spook traders on Thursday? Well on the plus side, it said that it had struck oil at its Carapa-1 exploration well off the coast of Ghana. News that results came in below pre-drilling forecasts was less encouraging, however, although no exact readings were given.
Commenting on the results, chief operating officer Mark Macarlane said: “While net pay and reservoir development at this location are below our pre-drill estimates, we are encouraged to find good quality oil which proves the extension of the prolific Cretaceous play into our acreage.
“We will now integrate the results of the three exploration wells drilled in these adjacent licences into our Guyana and Suriname geological and geophysical models before deciding the future work programme.”
Once bitten
Unpredictable and often disappointing exploration and production reports are part-and-parcel of the oil and gas industry. Unfortunately for investors in Tullow, though, this has been the norm for the past several months.
The driller’s share price fell off a cliff in November after it scaled back production estimates for the third time in 2019 because of long-running drilling problems at the En14-P production well in the TEN offshore field in Ghana, allied with mechanical problems at its Jubilee asset. As a consequence, full-year output estimates were slashed to 87,000 barrels per day from a prior estimate of between 89,000 and 93,000 barrels.
Twice shy
But that November fall paled in comparison to the drop in December following another shocking update, one in which it cut its 2020 production to between 70,000 and 80,000 barrels per day and advised that it anticipated output of 70,000 barrels for the following three years.
With its key assets performing “significantly below expectations”, Tullow axed the dividend and vowed to reassess future investment plans too. And it also decided to cut both chief executive Paul McDade and exploration director Angus McCoss adrift, meaning that key decisions will need to be made without someone currently in the hot seat. It gives plenty for shareholders to chew over (or should that be stew over?) before the next trading statement is released on January 15, and a full and frank financial and operational update is given when full-year results come out on February 12.
Investment in the oil sector is already becoming an increasingly risky business as the global economy (and thus energy demand) cools, and non-OPEC nations gradually ramp up crude supply to put further pressure on the oil price outlook. And clearly the operational problems over at Tullow Oil add another significant layer of danger. The company’s forward P/E ratio of 8.5 times might make it cheap on paper, but it’s trading at bargain-basement levels for a reason. I won’t be touching it with a bargepole.
