What I’d do about Tullow Oil’s crashing share price

Here’s what I think now as the Tullow Oil share price is down over 50% in a month

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investors in Tullow Oil (LSE: TLW) have had a nightmare before Christmas. A torrid December has seen the share price fall by over 50% meaning the FTSE 250 oil explorer has lost over £1bn from its market value.

What’s behind the fall?

The oil producer, which is African-focused, has recently revealed that its 2019 oil production would fall to 87,000 barrels per day. It had previously indicated it would be producing 89,000.

On top of that lowering of forecasts, even worse is the news that next year’s production is predicted to average between 70,000 and 80,000 barrels of oil per day (bopd), while over the next three years it expects an average of 70,000 bopd.

To compound investors’ misery, at the beginning of the year, management believed production could hit 100,000 barrels a day in the second half of 2019.

It has been a tough couple of months as these downgrades are not isolated. Only back in November the firm had problems with its Ghana drilling operations, which led to a reduction in output. This was made worse by the discovery of heavy crudes at a significant discovery off the coast of Guyana.

Heavy crudes are often priced at a discount due to the extra refining costs that are required to treat them.

Analysts have questioned whether Tullow can generate enough cash now to cover its short-term liabilities. The fact that it is being questioned and the risk it poses to the company’s survival, explains the dramatic share price fall. The change in circumstances is also likely to push up borrowing costs for the company.

A longer-term view

Assuming Tullow does survive in the short term, what could the longer term hold? It’s hard to know exactly – the shares are now obviously much cheaper, but the significant operational problems at the company alongside a reliance on the oil price, makes it very risky to me, even if it does make it.

The group is very indebted, which perhaps isn’t unusual for an ambitious oil producer, but it does make life more difficult when things go wrong. And remember it is in an industry where the company has little control over pricing – the price of oil is determined by global supply and demand.

As my colleague Kevin Godbold pointed out, “the balance sheet in last July’s half-year results report disclosed net debt of around $3bn, yet annual operating profit has been running close to just $600m.”

So investors need to consider what the future looks like for oil. Demand for the product isn’t going away any time soon, but with environmental concerns creeping up the political agenda and consumers turning against single-use plastics – which require oil to produce – it’s not hard to see a future where oil is in less demand.

With the FTSE 100 oil producers trying to move into other areas of energy production, I think that’s the way forward. Tullow Oil looks like even if it does survive, it could face too many issues to make it a good investment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Andy Ross 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.

More on Investing Articles

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »

Investing Articles

Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income

This company’s ‘clean’ dividend record looks attractive to me and I’d consider buying some of the shares to hold long…

Read more »

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »