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Is the Tullow Oil share price too cheap to ignore?

Early in the pandemic shutdown, Tullow Oil (LSE: TLW) looked like it was on the verge of going bust again. Between the beginning of 2020 and the middle of March, the Tullow Oil share price plunged by a massive 88%.

If ever I saw a share that was priced to go bust, that was it. Even the company itself questioned its survival prospects. While reporting a $1.7bn pre-tax loss, Tullow spoke of a “perfect storm” of low oil prices and high debt and told us it was cutting a third of its workforce. This was on 12 March, and the Tullow Oil share price touched rock bottom barely a week later.

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But since then, we’ve seen a remarkable recovery. If you managed to buy at the bottom, you’ll now be sitting on a five-bagger. We don’t see short-term profits like that very often, and Tullow Oil is perhaps the one I’d have least expected it from.

The share price is more closely tied to the oil price than most. At Tullow’s lowest in March, oil was fetching around $25 per barrel. Perhaps surprisingly, as the oil price kept on falling and dipped below $20 in April, Tullow shares started to pick up again. It seems reports of the death of Tullow Oil were greatly exaggerated.

Have the Tullow bulls got it right?

I’ve kept well away from heavily indebted oil companies myself, after a fortunate escape with Premier Oil. But I think the bulls just might have called this one right.

The crash in oil demand at the start of the Covid-19 crisis could have turned out much worse. But so far, it looks to have been relatively short-lived, and the early supply glut is easing. It’s possible we might see a second downturn, but the further we get, the less likely I think that is.

I do think the Tullow Oil share price will still closely track the oil price for the rest of the year. And while that’s happening, the firm has but one goal — to avoid going under. To do that, it reckons it can operate at break-even with oil prices at around $35 or above. Right now, we’re looking at $40 a barrel. On the face of it, that’s enough to keep Tullow going, but there really isn’t much safety margin there.

Still tempted by the Tullow Oil share price?

The world is in dire current economic turmoil. but can still support an oil price of $40. That convinces me that, once we get out of the far side of the current crisis, sustainable oil prices will be higher than that. I’ve long thought that a long-term price of $60-$70 per barrel is likely, and I still do.

Tullow does have another escape route should oil dip again in the short term — selling assets. This is very much not the time to get best prices for offloading hydrocarbon developments, but there’s a lifeline there.

There’s still plenty of risk associated with the company, and it’s risk that I’m not willing to take these days. But a younger me looking for capital growth might well be jumping at the Tullow Oil share price today.

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Alan Oscroft 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.