The Tullow Oil (LSE: TLW) share price has fallen by over 75% in the last 12 months. The oil producer gave investors a massive pre-Christmas dose of bad news when it revealed falling production targets. Unsurprisingly, it was the worst-performing share on the FTSE 250 by some distance.
Falling oil production
Back in November last year, the company announced that oil discovered months earlier off the coast of Guyana in South America was found to be heavy and high in sulphur. This was far from ideal. It means it’s costly, and possibly commercially unviable, to extract.
Not long after, Tullow slashed its oil production forecasts for the coming years due to issues at its key Ghana projects. Showing the extent of its problems, it also suspended its dividend and announced that its chief executive Paul McDade and its exploration director Angus McCoss had quit.
Not done with the bad news, the group warned last month that it expects to report a $1.5 billion impairment charge for 2019 as it cut its long-term oil price assumptions and reduced its reserves estimates.
The oil group is seeking to shave $20 million (€18.2 million) off its annual costs. This is set to involve the explorer cutting a third of its global workforce and closing its office in Dublin. A bounce in the oil price – which could happen given instability on the Middle East – would also be a welcome boost for the group. But clearly that’s a factor beyond its control. And worse, the spread of the Coronavirus has knocked the oil price down.
A takeover may well be the best hope for current shareholders and there have been rumours that much larger French company, Total, is interested. Although even if a takeover did happen it’s far from clear that a premium would be paid for Tullow’s shares give the challenges it faces.
The likely result
Although it has been reported African oil executive Samuel Dossou-Aworet has used market nervousness around the company to build up an 11% stake in the past two months, I think as an ordinary investor, investing in the shares is a very risky thing to do. The company faces severe problems, relies on a high oil price, which is beyond its control, and is facing massive operational challenges.
As it stands, Tullow Oil has around £2.16 billion of debt on its balance sheet – this seems to be a bit of a noose around the company’s neck. It makes it more vulnerable to lenders and reliant on the oil price going up – something that is far from certain.
A new management team may be able to turn the ship but there’s no proof of an improvement yet, so I’d avoid the company. Barclays analysts however have taken a more optimistic view, suggesting the shares might be good for a brave, risk-tolerant investor. They’ve given the shares a price target of 75p. The shares are currently less than 50p.
Andy Ross owns no share 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.