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Is Tullow Oil plc still a strong buy after trading update?

This year has been a pivotal one for Tullow Oil (LSE: TLW). The oil and gas company has made debt reduction a real priority, with a fundraising taking place earlier in the year. While its share price has fallen by 20% in the last year, a stronger balance sheet could place the company in a better position for the long run.

The company released a trading update on Wednesday which included further details about its production guidance, cash flow and financial position. Does it still have investment appeal following the announcement?

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Rising production

Encouragingly, the company’s TEN and Jubilee projects appear to be performing relatively well. In fact, production guidance for the full year has been increased from 78,000-85,000 barrels of oil per day (bopd) to 85,000-89,000 bopd following strong production from both assets. The TEN field is expected to exceed guidance of 50,000 bopd due to improved rates in the second half of the year. Meanwhile, the Jubilee development plan has been approved, and drilling is expected to commence next year.

Progress made on both assets could allow the company to deliver higher production over the medium term. This could boost profitability and cash flow, with the latter expected to be $0.4bn for the full year. This is due to help to reduce net debt to $3.6bn, with the prospect of further debt reduction in future years.

Improving outlook

As well as internal progress, Tullow Oil could benefit from external factors. Notably, the rising oil price is good news for the business, since it could provide a boost to its profitability and cash flow in the near term.

Clearly, there is scope for the oil price to remain volatile and even fall after reaching its highest level in over two years. However, supply cuts may continue since Saudi Arabia and Russia have both stated that they wish to support a higher oil price over the medium term. And with demand growth remaining robust, a supply surplus may not be present in 2018.

A higher oil price could also improve investor sentiment towards the oil and gas sector. Tullow Oil currently trades on a price-to-earnings (P/E) ratio of around 19. While this may seem high, the company’s future growth prospects could be impressive given the mix of a rising oil price and higher production. Therefore, there could be upward re-rating potential if investor sentiment continues to improve in response to a higher oil price.

Risk/reward

While investing in an oil and gas company such as Tullow Oil may seem risky, its reward potential also appears to be high. The company is making progress with its strategy to increase production and reduce debt, which could positively impact on its share price. Therefore, based on its overall risk/reward ratio and the progress it is making as a business, it seems to be a strong buy at the present time.

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Peter Stephens does not own shares in any company 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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