Tullow Oil (LSE:TLW) dealt a devastating blow to investors this week when a profit warning saw its share price falling by almost 70% in a single day. This came along with the suspension of the not-long-reinstated dividend and the resignation of two of its top executives.
The FTSE 250 company had been in a rut for a while and this was the straw that broke the camel’s back. In mid-November, it suffered a 20% crash in one day, and it continued to fall until its further 70% plunge on Monday.
Some warning signs had been appearing including a production shortfall, operational problems in Africa and its considerable debt.
Astute investors will have noted the warning signs back when the 20% share price drop happened and many would have sold. But for some unlucky investors who didn’t, this overall decline will have all but wiped out their investment in the firm.
So what’s now in store for this battered energy stock? Remaining investors in Tullow will be dubious of its ability to bring in forecast results, and there’s increased chatter around the prospects of a sale.
It has convertible bonds outstanding of $950m. Of this, $300m is due to mature in 2021, with the remaining $650m due the following year. But while its production levels have been cut by a third, it still has the oil reserves it claimed, so given enough time, there is a possibility it could recover.
In the meantime, the Tullow Oil share price is in the unenviable position of enduring one of the worst single-day performances on the London Stock Exchange this decade!
The nature of the oil industry, a suppressed and unstable oil price, and other problems that come with the locations in which Tullow’s oil reserves are situated, are all factors working against the share price.
Lower production means lower cash flow available, so investors may be asked to step in to help raise further cash to help pay down debts. The integrity and credibility of management is now in doubt and I think it will take a long time for Tullow to recover from this crash. I don’t see it recovering the 80% losses some shareholders have incurred any time soon, but it has made slight gains this week. At the time of writing, its share price is 58p, which is an improvement on Monday’s low of 39p. However, in the aftermath of a big drop like this, the share price may continue to be volatile for some time.
From risky to rosy
Oil companies are always a riskier investment than other UK equities, but I think they’re a particularly unwise investment for beginners. With the world in chaos, political unrest, climate change activism in full force and the risk of terrorist attacks on refineries, I think newcomers to stock market investing would do best to seek their fortunes elsewhere.
If we can learn any lessons from this Tullow fiasco, it’s that you should always do extensive homework before buying into a stock. The stories put out by management and pumped up on bulletin boards should be ignored in favour of rigorous research.
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Kirsteen 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.