Will Tullow Oil (LSE: TLW) go bust? It’s the question many investors are asking. Indeed, with Tullow’s share price trading around 17p, things aren’t looking good for the oil and gas exploration firm. However, there may be an upside.
Tullow’s shares have recovered 70% from their March low of 10p. This is not a bad increase and may have made a few people some hefty capital gains, for which they can probably thank the recovering oil price.
Moreover, it’s the previously plummeting price of oil that may be partly responsible for some of Tullow’s financial woes. Many analysts believe the oil price will rise again.
But, will an increase in the price of oil change the fortunes of Tullow’s shareholders?
Oil market predictions
Investment bank Goldman Sachs is currently bullish about the oil market. Indeed, the price of Brent crude is estimated by the bank to grow by up to 44%, to $65 per barrel, by autumn 2021. It has even recommending Brent as an “effective hedge against uncertainty” for investors.
Goldman believes the availability of vaccines for Covid-19 will support global growth, increasing the demand for oil. It notes in its briefing that there has been a ‘steady rally’ of long-dated oil prices, meaning the market is bullish about oil in the long term. This should be good news for Tullow Oil shares.
As a specialist exploration and production company, Tullow’s revenues and profits rely on a high oil price. The higher the price, the more the potential profit. But, of course, the opposite applies too.
And the question for Tullow shareholders is whether the company can survive long enough to reap the benefits, assuming the banks’ analysts are right.
Tullow Oil share price fundamentals
Tullow has a solvency problem. It half-year results show pre-tax losses of £1.44b. This compared with a £268.4m profit at the equivalent point last year. Production’s dropped 10% and revenue by 16% over the same period, driven by write-offs and impairments.
In addition, Tullow Oil is looking for capital. It hopes to raise $1b from upcoming asset sales. It wouldn’t surprise me if a rights issue is also being discussed, given the low share price and high gross gearing – or debt-to-equity – ratio of 88%. This would help to raise cash and lower the gearing. By comparison, oil major BP‘s gross gearing is around 40%.
Any capital raised from financing activities would likely be used to pay down debt. However, we’ll know more towards the end of the year what’s in store for Tullow at its Capital Markets Day. If the market likes what it hears, and Tullow manages to sell its assets, the shares will likely reflect the new optimism.
However, I don’t think Tullow’s shares are a sensible long-term investment right now because there’s too much at stake. That said, if you’re bullish about the oil price, and can afford a little risky speculation alongside your balanced investment portfolio, Tullow shares could be a good choice. The capital gains could be large.
