The Tullow Oil (LSE:TLW) share price is down more than 90% over the past 10 years, but made small gains today. The London-headquartered firm was a highly promising hydrocarbons outfit that employed a more localised business model than the oil majors — coincidentally, this was the topic of my PhD research.
However, things didn’t go to plan. Challenges with host governments and two oil price collapses left the firm in a bad place.
Despite this, JP Morgan recently resumed its coverage of shares of Tullow Oil at “overweight“. So, maybe I should consider this stock for my portfolio?
Why did the share price collapse?
Tullow’s problems started much earlier than the pandemic. The firm — which focuses on frontier assets in nascent hydrocarbon producing economies — submitted its field development plans to the Ugandan government in 2013.
However, the Ugandan government delayed its response. In fact, Uganda still hasn’t achieved ‘first oil’. Observers suggested that President Yoweri Museveni was keen to develop local capabilities first to ensure that Uganda’s oil industry wouldn’t function as an economic enclave.
This hit the Tullow share price. But there was another issue in Uganda. Tullow became embroiled in a tax dispute with the government as it attempted to farm down its operations.
And this was compounded by the 2015-2016 oil price crash, which hit smaller producers more than the majors, which had more cash in reserve. The pandemic had the same impact with spot prices crashing towards $0.
Net debt climb into the billions, which still weighs on the balance sheet.
Is now the time to buy?
Analysts at JP Morgan recently deemed Tullow Oil to be “overweight” following a period of “restriction” after the announcement of the firm’s merger with another British independent, Capricorn.
The bank said that the combination of the two companies would be strategically beneficial. JP Morgan added that the merger would add scale in terms of both production and reserves while strengthening the balance sheet.
Due to Capricorn’s “significant” weighting to cash and Tullow’s share price, the latter would be paying only 56c for each dollar on the former’s balance sheet. Capricorn’s cash could be key to unlocking Tullow’s contingent resource potential.
JP Morgan set its price target at 82p, considerably above the current share price.
I’ve also largely avoided oil and mining stocks this year, anticipating that they would fall on the back of Chinese lockdowns. However, that hasn’t really happened and, looking at the long run, I think we’re entering a period of scarcity during which commodity prices will remain high.
Because of that, I’m inclined to think Tullow will be able to achieve the revenue it needs to start paying off it debt and continue growing its portfolio.
There’s also the matter of Tullow’s business model. The group looks to employ and operate more locally than other operators. It sponsors and trains hundreds of people in the countries in which it operates. And this makes Tullow an attractive operator for host governments as well as being leaner. In the long run, this should serve it well.
Risks
The biggest risks revolve around debt and another oil price collapse. The firm may struggle to survive if we entered another period of reduced oil prices.
Despite this, I’d buy Tullow at the current price. The merger and higher oil prices may give this firm a second chance.
