The oil price is looking strong, and Tullow Oil (LSE: TLW) is among the oil stocks strengthening on the back of it. The Tullow Oil share price is up 54% so far in 2021, though that has to be seen in a long-term context. Over the past two years, taking in the Covid crash and an 89% year-on-year rise, Tullow Oil shares are still down 75%.
And before I consider Tullow as a possible post-pandemic recovery candidate, I see the big crash happened before then. In December 2019, Tullow shocked the market by announcing significantly lowered guidance for the following three years. At the same time, the firm’s chief executive and its exploration director departed.
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In the time since then, Tullow has continued to lower its guidance. Most recently, on 14 July this year, the company dropped it to between 55,000 and 61,000 barrels of oil per day for the full year. That’s down from previous guidance of between 60,000 and 66,000. The company was offloading assets too, but the shares did perk up slightly on the day.
After that, though, the Tullow Oil share price fell again and it’s been erratic since. But we’re still left with that strong year-to-date gain, and the attraction might seem puzzling at first.
Positive cashflow trend
The latest July update does also suggest a welcome positive trend. Tullow is predicting underlying operating cash flow of $600m for 2021. That’s based on an oil price of $60 per barrel for the rest of the year. And we’re seeing higher prices than that, with a barrel of Brent Crude currently going for $73. A sustained $70 would, the company says, boost cashflow by an extra $50m.
That, on the face of it, sounds attractive to me. But I still see the same huge millstone around Tullow’s corporate neck that’s been there for years. I’m talking of debt, which the company has recently restructured, again. This time, in May, a $1.8bn corporate bond package was involved. Tullow estimates year-end net debt at $2.3bn (£1.65bn).
To put that into perspective, Tullow’s current market capitalisation stands at £654m. So debt amounts to two-and-a-half times the value of the entire company.
Tullow Oil share price uptick?
Looking at Tullow now makes me think back to Premier Oil (now Harbour Energy) when I bought. I consistently see two possibilities. Either oil will remain strong and production will improve, the debt will come down gradually, and the shares will continue to gain. Or one of those things will go wrong, and we’ll hit the next crisis.
It’s as if the company is standing on a beach, staring at the sea. Every high tide, it hopes it can keep its head just elevated enough to get some air. Those high tides are Tullow’s debt crises. And they seem to be rolling in almost interminably. So far, Tullow has breathed through each high tide, but its neck has got a bit too wet on occasion for my liking.
So for me, even if the Tullow Oil share price might be getting a bit of life back in the second half of 2021, I’m keeping away. And that’s not just Tullow, I’m steering clear of all heavily indebted companies.