The Tullow Oil (LSE:TLW) share price was up over 3% yesterday, meaning that it opened this morning back above 60p. Over the past year, it has only breached this level and closed above it twice. Once back in March, and now. Apart from this, it has been a rocky road for the shares, which traded sub-15p back in October. Even with fundamental reasons behind the rally, I’m still skeptical if the risk versus reward for this stock really stack up.
Some positive news
Tullow Oil is an oil producer, and explores for fields predominately in Africa and South America. Given the correlation to oil for performance, one immediate reason for the short-term rally is due to the oil prices. For example, yesterday WTI Crude oil broke above $70 per barrel.
This is positive, although isn’t really due to anything specific that Tullow Oil has done. One firm-specific factor that is giving the share price a kick higher in June is the news about chairwoman Dorothy Thompson stepping down. She commented that now was the right time with the “refinancing successfully concluded through our recent bond issue and with a new business plan in place which is progressing well under Rahul Dhir’s capable leadership”.
The Tullow Oil share price has taken this as a positive, viewing the step down as a sign that the finances are under control and the outlook is strong. I don’t quite agree with this viewpoint, but note that it’s a reason for the move back to 60p.
Finally, confirmation came through recently of the sale completion of the Dussafu Marin permit asset in Gabon to Panoro Energy. The sale has generated $700m in liquidity for Tullow over the period involved. Again, this confirmation that everything was processed smoothly was taken as a plus.
My concerns with the Tullow Oil share price
Despite the above being positive drivers for the Tullow Oil share price, I’m still not bullish on the outlook going forward.
The future oil price is tough to forecast. Even if I thought it could continue to rally, I’d probably look to buy a more established and stable oil company such as Royal Dutch Shell. This is because although rising oil prices should boost both the Tullow Oil share price and the Shell share price, I think the stock-specific risk is lower with a company like Shell.
If enough investors think the same as me, then a higher oil price might not boost Tullow shares later this year as much as some may think.
What about finances? In a credit report from April, Tullow Oil are targeting at least $125m of cost savings a year. This is mostly via outsourcing and headcount reductions.
It also managed to refinance around $2.4bn worth of debt in May, kicking out some obligations to 2026. This should ease cash flow issues, but ultimately the debt still needs to be repaid in some form. The large residual debt levels that the company has make it difficult for me to see the company as low risk. After all, what is $125m of savings relative to refinancing $2.4bn?
Overall, I don’t think the Tullow Oil share price will manage to hold 60p, and think if anything, the share price could come lower. That’s why I won’t be adding the stock to my portfolio any time soon.
