Tullow Oil (LSE:TLW) shares have been on a rocky road over the past couple of years. The trend has been downwards, due to several reasons and as the share price moves lower, any bounce (when put in percentage terms) can be slightly misleading. For example, as my Foolish colleague Rupert Hargreaves flagged up, technically Tullow Oil shares are up 550% over 12 months. Yet on an actual basis, the shares are trading at only around 49p, a far cry from levels seen in 2019 of 200p+.
Why have Tullow Oil shares fallen?
Before I talk about the strong year-to-date performance, I need to talk through the negative news from last year. Firstly, the stock market crash hit most shares hard in March. As Tullow Oil is seen as a high-risk stock due to the nature of the oil exploration business, investors were keen to sell out.
Add to the mix the fall in the price of oil (briefly going negative) and Tullow Oil shares continued to tumble. After all, if the selling price of the main product is worthless, then it makes it hard for the business to survive. Fortunately, the oil price did rally back quickly, but not before damage was done. Incredibly, Tullow Oil shares actually traded down to around 9p at the lows during last year.
Company-specific issues were in play as well. The large net debt the business has is a logical cause for concern. At the end of 2020, net debt stood a $2.4bn, even with a $575m injection following the completion of a Ugandan asset sale to Total in November.
Tullow Oil shares might be up a lot in percentage terms over the past year, but as the above shows, it doesn’t tell the full story. Over a two-year period, the share price is down over 80%. I think this timeframe more accurately depicts the trend.
Can the share price reach 100p?
Year-to-date, the shares are up 65%, making it one of the best performers in the FTSE 250. The shares benefited from its full-year 2020 results. Although the figures didn’t make for great reading, the outlook was positive. The CEO commented that “we have transformed our cost base, implemented rigorous capital discipline and are well placed to benefit from higher oil prices”.
I think Tullow Oil shares could continue to move higher due to the above outlook. The capital discipline (including debt levels and capex) is a key element in my opinion. If this is made more sustainable this year, it should give confidence for more investors to buy in.
Another 10-20% rally is potentially there, but personally I don’t see 100p as a realistic level to hit in 2021. This would need to see the share price double. The share price has already had such a large move over the past year. Therefore I don’t think it’s the bargain currently that it was at 9p.
If I wanted some exposure to a commodity company, I’d much rather buy into Greatland Gold instead, for reasons I explain here.
