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Tullow Oil share price collapse may be overdone

By David Whitehouse
Posted on Wednesday, 11 December 2019 12:00

Reduced Ghanaian offtake of gas from Jubilee helped push Tullow over the edge this week. Here, President John Atta Mills turns on the taps at Jubilee in December 2010. Reuters photo.

The collapse in Tullow Oil’s share price even as its reserves remain largely unchanged is a signal that value may be on the table.

The shares, which were worth more than £13 ($20 at the time) in 2012, now trade at about 48 pence. CEO Paul McDade and exploration director Angus McCoss left on 9 December and the shares fell more than 70% in a single day.

The company, having already cut its output estimates by 14% in 2019, said that 2020 output would drop to a maximum of 80,000 barrels per day (bpd) and then fall again to around 70,000 bpd in 2021-2023.

Panic selling

The fact that the company’s overall reserve base remains largely unchanged has been forgotten, says Readul Islam, an analyst at Rystad Energy in Singapore. Independent reserves audits show that oil reserves are likely to remain “broadly flat” at the end of 2019 from a year earlier, the company said.

Tullow has suffered a perfect storm of problems in Ghana, Uganda and Guyana.

  • The company this week cited significantly reduced offtake of gas by the Ghana National Gas Company from the Jubilee field as well as mechanical issues at Enyenra.
  • In August, Tullow’s agreement worth $900m to sell a stake in the Lake Albert, Uganda project to Total and China’s CNOOC collapsed.
  • The shares slumped in November when the company said that recent oil discoveries in Guyana were heavy crude with high sulphur content.

Some of the problems are of Tullow’s own making.

  • The Africa Report argued on 10 September that shareholders would have been better served by further debt reduction than the resumption of dividends announced by the company in July.
  • Part of this week’s share price collapse was due to the dividend being abruptly suspended again. The withdrawal of the dividend, Islam says, was “the final straw”.

Takeover target?

Tullow says it is now open to receiving offers to buy the company. “The market could realise the bloodletting has been overdone,” Islam says. “Given that the reserves under the ground have not changed that much despite the upheaval above ground, rumours of incoming bids may also further drive up the share price.”

A potential buyer would want “a full understanding of the issues Tullow has had,” says London-based energy analyst James Carmichael. “Lack of progress in East Africa and disappointment in Guyana crude quality are likely to complicate negotiations.” France’s Total has a portfolio that overlaps with Tullow’s in Ghana, Kenya, Uganda and Guyana, Carmichael says, so “they clearly know the assets and could move quickly”.

Still, rival players could see opportunity in buying operated stakes, rather than acquiring a struggling portfolio where it would have “limited scope to improve performance”, Carmichael says.

Debt will be an obstacle to any takeover.

  • In November, the company said that net debt at the end of 2019 is expected to be around $2.8bn, versus $3.1bn at the start of the year.
  • George Cazenove, head of corporate affairs at Tullow, said on Tuesday that the company still aims to get gearing down to between one and two times revenue – but he didn’t say when: “That depends on revenue, not on absolute debt.”

Bottom line:

Tullow shareholders are now sitting on largely the same pile of reserves – and debt – at a savagely reduced price. Debt reduction by new management will be the key to salvaging value.

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