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Can Tullow Oil withstand the price of crude?

Oil prices can be volatile. Oil producers, and their shares, usually move hand-in-hand with the comings and goings of crude. For the most part, I believe well-established and financially secure companies should be able to withstand the short-term price troubles we are currently seeing. The problem for Tullow Oil (LSE: TLW), however, is that it was already having problems to begin with.

Sweet and sour

Last November, Tullow had to announce that the oil it discovered off the coast of Guyana was heavy, and had high concentrations of sulphur. In oil parlance, this is called ‘sour’. Crude that is light and ‘sweet’ produces a higher percentage of valuable derivatives, such as gasoline, when refined. Heavy and sour crude is harder to extract and worth less when it is. With prices as low as they are today, Tullow’s discovery is unlikely to be economically viable.

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The company also had to reduce its production target for the upcoming year, due mainly to problems with its key Ghana project. To add to its misery, it was forced to suspend its dividend and announce that both CEO Paul McDade and Exploration Director Angus McCoss had quit.

It is perhaps no surprise then that the Tullow share price currently stands almost 90% lower than it did this time last year. Most of this drop occurred in the latter few months of 2019. That said, having reached a low of a little more than 9p per share in March, at 20p things have now started to recover a little.

The positives for Tullow

Despite this collection of bad news, there are some small signs of things looking up…kind of.

In March, in its earnings report, Tullow said it would be raising more than $1bn in disposals, as well as cutting staff headcount by 35%. Given current oil prices, however, it seems unlikely that Tullow will see smooth sailing in regards to selling off assets.

That said, just last week the company announced it would be selling its stake in a Ugandan project to Total for $575m. Unfortunately this is deeply discounted, and comes far short of the $900m original deal that fell apart in August. Still it was taken well by the market. This week the share price more than doubled from 10p to 25p.

Things are still far from certain, however. The company has high levels of debt. Generally, it has been dependent on a relatively high crude oil price to make most of its projects financially viable. I have no doubt that crude will soon (in the next 3 to 6 months perhaps?) return to more normal levels. However, I am far less certain whether these will be the kind of values that Tullow needs.

As with many oil stocks right now, there is potential here for good gains to be made. As always, the riskier the investment, the greater the potential reward. Tullow definitely falls in the riskier category. For those able to hold on for the long term, it may be worth a punt. For those looking for a safe haven in these troubling times, however, I would stay away until the oil market becomes less volatile.

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Karl 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.