Is the Tullow Oil share price an ISA millionaire-maker at current levels?

A push towards strengthening the balance sheet could be the start of a turnaround for the Tullow Oil share price, writes Jonathan Smith.

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Plenty of stocks have seen share price falls due to the global pandemic this year. But some stocks have seen outperformance against a benchmark index such as the FTSE 100. For investors, there are two main ways to play this. Either you can jump on the bandwagon and buy a firm that’s already rallying higher. Or you can buy into a firm that’s struggling (and has a low share price) in the hope of a turnaround. If you’re interested in the Tullow Oil (LSE: TLW) share price, the latter definitely applies!

Before we dig into the reasoning behind buying Tullow at present, it’s worth reminding ourselves of two things. Firstly, that our aim as good investors is to generate profits, and substantial ones at that. It’s not unreasonable or impossible to aspire to make a million from investments over time. Secondly, with the aim of making a million, we need somewhere to house the profits. That is why I use a Stocks and Shares ISA, with an annually resetting allocation. This allows investors to buy and hold stocks without having to pay large capital gains tax on profits when selling a share.

The story so far

The Tullow Oil share price has been falling since late last year. The company announced several production cuts, as a result of new oil fields being found to be too high in sulphur content to be viable. As a result of this, free cash flow was downgraded as well. In the middle of last year it was forecast at around $450m, and by the end of last year this was reduced to $150m.

Add into this a recent dividend suspension and resignation of the CEO and exploration director, and you can see why the share price was at multi-decade lows even before the pandemic. As with most firms, Covid-19 dealt a further blow to the share price. This was compounded by falling oil prices.

The turnaround of the decade?

But from a historically low share price, there are some green shots appearing. 

For example, Tullow confirmed the sale of a project in Uganda to another firm for $575m in late April. These funds will be used to reduce debt as part of a larger $1bn fundraising plan to support the balance sheet. This is positive in both the short and longer term for the share price. Not only does it help liquidity now, but it also reduces expensive debt interest payments going forward.

In the Q1 trading update, it was noted that the average oil price Tullow got was $56 per barrel. The actual oil price was far below this, but the hedging and derivatives the firm used protected it from the fall. Again, this shows to me that the management team at Tullow is being smart in terms of strategy and thinking.

I think Tullow could be a millionaire-maker given the green shoots were are seeing and the historically low share price. With a £20,000 ISA allocation each year for the next 10 years, a return to the 12-month share price highs in the long term would be enough to secure millionaire status. But it’s risky and so not for everyone. More risk-averse investors may want to see further signs of stabilisation before taking the plunge.

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.

Jonathan Smith owns shares in Tullow Oil. 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.

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