27th January 2023
Tullow Oil is keen to steer the focus away from the state of its balance sheet and towards the production it can generate from its oilfields in Ghana, Gabon and Kenya. Trumpeting leverage reduction and the chance of lower interest costs as the chief benefits of a since-terminated bid for Capricorn Energy, its cash-rich rival, hasn’t helped.
Yet there is also the fact that the need to bring down debt, while at the same time funding production growth, has prevented Tullow from capitalising as much as rivals on booming commodities prices and returning cash to shareholders. Indeed, Tullow pays no dividend and is not forecast to declare one before 2025 at the earliest.
Cash generation is in a better position. Even after funding $426 million of investment and decommissioning expenditure, free cashflow stood at $267 million. This year, free cashflow is expected to be slightly lower at $200 million, after an increase in spending.
As part of its 2021 refinancing, the group was forced to hedge production at less favourable oil prices, although around two thirds of those are due to roll off in May. That might partially explain why debt reduction has been “painfully slow”, as analysts at Panmure Gordon put it. Net debt was $1.9 billion, compared with $2.1 billion at the end of 2021. Tullow’s leverage had reduced to a ratio of 1.3 at the end of December, although it would have been at a multiple of one had the Capricorn deal gone through.
Tullow’s cost of capital remains high, with two outstanding bonds maturing in 2025 and 2026 with coupons of 7 per cent and 10.5 per cent, respectively. There are no plans to refinance the debt any time soon.
True, an enterprise value of only 2.8 times forecast earnings before interest, taxes and other charges is cheap, but a lowly valuation does not make Tullow special. Energy majors such as Shell and BP, as well as Harbour Energy, Britain’s biggest independent producer, also trade at undemanding valuations and offer investors generous cash returns. Without a dividend on offer, there doesn’t seem to be much to merit getting behind this stock.
Original article here: https://www.thetimes.co.uk/article/its-time-for-another-round-at-diageo-3b72fphzk
Author: Emma Powell, Tempus Editor, The Times
Director, Research Analyst, Oil & Gas