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The Tullow Oil share price falls on earnings. Should I buy now?

Oil pipes in an oil field
Image source: Getty Images.

The Tullow Oil (LSE:TLW) share price took a slight hit last week following its interim earnings. Despite appearances, the report did show some encouraging progress on the firm’s road to recovery. Let’s take a closer look at what’s been going on these past few months, and whether the recent dip is an opportunity to add some shares to my portfolio at a discount.

The recovering Tullow Oil share price

I’ve previously explored why the share price initially collapsed. But as a quick reminder, the management team had enormous hopes about two oil fields located in Guyana. In 2019, a study of the reservoirs confirmed they were contaminated by heavy oil. And just like that, the group’s main growth project became economically unviable, leading to the stock collapsing. To make matters worse, the pandemic hit a few months later, triggering a crash in oil prices.

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Since then, the company has made some significant progress in turning the ship around. In fact, over the last 12 months, the Tullow Oil share price has risen by an impressive 140%, even with the recent decline.

Looking at the interim report published last week, revenues came in slightly lower at $727m versus $731m in 2020. At first glance, that seemed like disappointing figures. That is until considering the fact that only a total of 61,230 barrels of oil were produced. This was in line with previous guidance, and by comparison, 74,900 barrels were produced last year. It seems the recovering oil prices have helped offset the impact of the temporary shutdown of some of Tullow Oil’s production facilities.

While the top line may have been lacklustre, the bottom line looks far more promising. The higher oil prices enabled gross profits to nearly double from $164m to $321m. And after paying operating costs and taxes, these profits came in at $93m versus a loss of $1.33bn in 2020.

Needless to say, that’s good news. So why did the Tullow Oil share price fall? And what are the risks moving forward?

The Tullow Oil share price has its risks

The risks that lie ahead

It seems not all investors were too pleased to see further planned shutdowns spreading into 2022. As a result, the total production forecast for next year lies between 58,000 and 61,000 barrels. Obviously, that’s lower than what was produced this year. And if oil prices were to stagnate or fall, total revenue — along with profits — would likely suffer.

As these shutdowns are only temporary, I wouldn’t usually be too concerned. However, in the case of Tullow Oil, the company has a significant pile of debt to contend with. In the recent report, management said it had succeeded in bringing down its net debt obligations from $3.02bn to $2.29bn. But overall leverage remains high. And any fall in profits will likely slow down the much-needed restructuring process of the company’s balance sheet.

With that in mind, I can see why some investors have decided to close their positions, leading to the recent fall in the Tullow Oil share price. But overall, I’m a lot more confident in this business compared to a couple of months ago. I still believe a complete stock recovery will be a multi-year process. But in my opinion, management is taking the right steps. Therefore, despite the risks, I would consider adding it to my portfolio.

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Zaven Boyrazian has no position in any of the shares mentioned. 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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