The FTSE 250 oil and gas company Tullow Oil (LSE: TLW) has had a disastrous few months at the stock markets. Its woes started late last year, when it posted two successive disappointing updates. I was keenly awaiting the mid-January update to see if it would change the fortunes for the sagging share.
No avail. Its share price fell by another 16% on the day of the latest update as Tullow reported even lower production of 86,700 barrels of oil per day (bopd) for 2019, compared to 87,000 bopd in December. However, I don’t think the latest update is all bad. Here’s why.
Financials aren’t all bad (or good)
First, let’s consider the financials. These are neither just good or bad, but a mix of both. On the positive side, TLW’s financials are unchanged from both November and December, despite the latest production cuts. Further, it’s expected to remain profitable for the second year running, and its net debt is expected to go down to $2.8bn from $3.1bn last year.
However, there are downsides too. November’s free cash flow expectations for 2019 might be unchanged at $350m, but they are still lower than the numbers seen in 2018. Revenue and earnings too, are expected to be slightly lower at $1.7bn and $0.7bn compared to the last year.
Unchanged production expectations
Two, its production expectations for 2020 remain unchanged at 70–80,000 bopd from the last two updates. Here too, however, it’s still lower than the levels seen in 2019.
In this scenario, it’s tempting to consider the price impact of recent geopolitical tensions on oil companies. But I’d hold back. While events like these could increase oil prices, they can also lower demand. A deep demand impact is bad for oil producers, who can still lose despite any gains from higher oil prices.
Besides this, short-term spikes in oil prices don’t always last. A few weeks ago, crude oil saw a spike in price as stress mounted between the US and Iran. Now, it’s dropping as the coronavirus outbreak is expected to impact human life and consequently the economy. I’d buy expectations of higher oil prices due to, say, a better economy in 2020 as compared to 2019. But so far there’s no proof of prices rising for that reason either.
So, 2020 may well be muted for TLW, especially if there are cuts to its production estimates as we move further into the year. There’s of course the possibility that it could turn out to be a good year, as my colleague Rupert Hargreaves pointed out recently.
This only goes to show that there are multiple elements to consider with regards to TLW, which include a high dividend yield. For that reason, it makes for a complex story. I’d wait for this one to simplify before deciding the next steps.
