The Tullow Oil (LSE: TLW) share price plunged to a low of around 9p in March 2020, its lowest level on record. However, since touching this low, the stock has achieved a modest recovery. It is currently changing hands around 53p.
Over the past 12 months, shares in the company have increased in value by 75% overall.
And while I usually stay away from speculative oil companies, I have started to pay close attention to the Tullow share price as the firm’s recovery begins to gain traction.
Rising oil prices
As an oil explorer and producer, shares in Tullow are closely tied to the oil price. In recent months, the oil price has returned to pre-pandemic highs, improving the outlook for oil explorers and producers worldwide.
Rising prices have entirely changed the outlook for the Tullow Oil share price. This time last year, analysts were worried about the company’s ability to continue as a going concern. The group was haemorrhaging cash, and its balance sheet was in tatters.
Thanks to higher oil prices, this is no longer the case.
According to a trading update issued today, the company’s production measured 61,200 barrels of oil per day in the first half of 2021. For the full year, management is targeting average output of 55,000 to 61,000 barrels of oil per day.
Based on production in the first half, management reckons the company is on track to produce revenues of $700m for the first half of the year. This is based on an average oil sale price of $58 per barrel.
Cash flow for the period could total $200m while net debt could fall to $2.3bn. Liquidity and group free cash is seen at $700m.
These figures suggest that the oil group is finally back on a stable footing, which is incredibly positive news.
Tullow Oil share price risks
Despite the company’s progress, it still faces plenty of challenges. The oil price is incredibly volatile, and there is no guarantee it will stay at current levels for an extended period. If the price of oil drops, Tullow’s revenues and cash flow could fall as well.
Further, the firm’s elevated debt level means it relies on banks and lenders to remain lenient. Tullow could struggle to keep functioning as a going concern if its creditors decide to pull the plug.
Based on these reasons, even though the company has made a monumental amount of progress over the last 12 months, I would not buy the stock for my portfolio today.
That being said, I would not rule out further gains for the Tullow Oil share price. If the company’s performance continues to improve and management remains laser-focused on cash generation and debt reduction, I think the business has potential. But for me, the stock is just too risky at present.
Rupert Hargreaves 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.