Will the Tullow Oil share price recover in 2021?

The Tullow Oil share price has surged by over 400% in less than a year. Is now the time to buy? Zaven Boyrazian investigates.

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The Tullow Oil (LSE:TLW) share price has been on fire these past 12 months, increasing from 11p all the way to 57.5p today. That’s a rise of over 400%! Is this a sign that the stock is finally recovering from its mishaps of 2019? And should I be adding the business to my portfolio? Let’s take a look.

Why did the Tullow Oil share price crash in 2019?

Tullow Oil is an exploration and production company for crude oil. Its share price suffered a major hit towards the end of 2019 that was only exacerbated by the pandemic. So what happened?

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This seems to be a classic case of over-expectations by the management team. In the months leading up to the share price crash, the company had been hyping up two new oil fields in Guyana. What was supposed to be a dream discovery that would re-risk the petroleum system in the area quickly turned into a nightmare.

After further analysis, Tullow Oil discovered that both sites were contaminated with heavy oil. Why does that matter? Heavy oil is a highly viscous material, meaning it cannot easily flow to production wells under normal conditions. Therefore, drilling and extracting the tar-like substance is exceptionally difficult, which questions the financial viability of both these sites.

Then the pandemic created significant disruption for the entire oil industry and triggered a sharp decline in oil prices. Combining that with the heavy oil discovery resulted in the Tullow Oil share price plummeting by 95% between October 2019 and March 2020 – the largest drop in over two decades.

Tullow Oil share price

The road to recovery

In its 2020 full-year results, the pandemic’s impact on the business was made pretty clear. Total revenue fell by 19%, and the company reported a loss of $1.22bn. What’s more, due to a planned shutdown at one of its main sites, the total production forecast for 2021 fell to between 60,000 and 66,000 barrels for 2021. By comparison, 74,900 barrels were produced in 2020.

But there’s reason to be optimistic about the future. The reported loss wasn’t as big as 2019’s $1.69bn, and the firm’s debt levels are falling thanks to ongoing negotiations with its creditors. Also, oil prices are now back to nearly $70/barrel as travel restrictions are beginning to ease. And the management team has noted that its assets in West Africa are expected to significantly boost production as of 2022. 

Overall, this is undoubtedly good news for Tullow Oil, and consequently, its share price has returned to pre-pandemic levels. However, there is still a long way to go before completely recovering.

The bottom line

Personally, I think the Tullow Oil share price is already on track to return to 2019 levels. But due to the reduced production forecasts, this recovery will likely be a multi-year process.

For now, I’m going to wait and see how things develop throughout 2021, so I’m not adding the stock to my portfolio today.

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