After a tough few years, things are finally heading in the right direction for independent oil exploration and production company Tullow Oil (LSE: TLW).
Tullow has a market cap of just £3.09bn and interests in more than 80 exploration and production licences across 16 countries. Its speciality is working small oil fields in Africa that have been left behind by the majors. But like every other explorer, it was hit by the collapse in crude.
Tullow has issued its latest trading statement and operational update to a positive market response, the stock up 2.58% at time of writing. Chief executive Paul McDade’s upbeat comments spoke of “strong operational and financial performance in 2017 against the backdrop of continued industry volatility”. The group is expected to generate free cash flow of $500m, nicely beating expectations, due to high levels of operator production and cost capital efficiency savings.
Rolling out the barrels
The group’s balance sheet also improved, with gearing significantly reduced, net debt cut by $1.3bn, and positive momentum expected to continue in 2018. McDade concluded: “With our diverse low-cost assets and high-graded exploration portfolio, enhanced by recent licence additions in Côte d’Ivoire and Peru, we have a strong foundation to grow the business and further reduce our debt.”
Tullow’s West Africa 2017 oil production beat expectations for the year averaging 89,100 barrels a day (bopd). In 2017, overall group production guidance for oil and gas is expected to average between 86,000 and 95,000 bopped, mostly from its flagship Jubilee and TEN fields. It is also pursuing a number of “low-cost, high-impact exploration campaigns for the years ahead,” and recent progress in east Africa is promising.
Pumping out profits
Last November, Tullow announced that it had completed the refinancing of $2.5bn of reserves-based lending credit facilities. McDade anticipates reported revenue of around $1.7bn and gross profit of $800m for 2017. He expects to have cut year-end net debt by $1.3bn across 2017 to $3.5bn.
The story is much improved from when I last looked at the stock in November 2016, when Tullow was struggling to refinance its loan covenants. Brent crude was trading at a punishing $45 which left sector peer Premier pumping into a market glut. Today, Brent is touching $70 a barrel, and could climb higher with the American Petroleum Institute reported a staggeringly large draw of 11.19m barrels of US crude inventories for the week to 5 January, marking six large draws in six weeks. Here are two other oil turnaround stocks to consider.
Hot, hot, hot
Tullow was too risky for me in November 2016 and its share price trades at roughly the same level today, around 226p, so I did not miss out. However, measured over the past six months the stock is up 37%.
As production rises, debt levels fall and Tullow earns more dollars per barrel, the future is warming up. Today’s numbers are positive and a big improvement on recent expectations. As ever, it all comes down to the oil price. If you expect crude to hold above $70 a barrel, or even press onto $75 and beyond, Tullow should be hot stuff. It will always be risky, but you knew that.
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