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Share tip of the week

Each week, our analysts put the spotlight on a company from our list of recommended shares to buy. As always, it's recommended as a medium/long term investment (approximately 18 to 36 months). This week's share tip of the week is...

Tullow Oil (TLW)

  Company Sector Current price

  Tullow Oil (TLW) Oil & Gas Producers  190.85 c  +2.25%    Growth Higher  Buy
 Analysis last updated on 23/02/18 at 184p Recommended stop loss of 20%

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Company overview

Tullow Oil plc explores for and produces oil and natural gas. Its main operations are in East and West Africa.

Our view

[h3]Under/over valued?[/h3]

In the past the company had a great exploration track record but the last few years have seen the success rate diminish with disappointing drill tests in various regions, this along with the group's relatively heavy debt load resulted in the shares being punished as oil prices dropped since the middle of 2014.

During the period of low oil prices, management changed their focus away from capacity expansion and exploration to reduce costs and the debt load while keeping focus on high margin projects and operations in East and West Africa.

The group had a fairly successful year during 2017 in terms of production, they averaged 89,100 boepd from their key productive assets in West Africa which was ahead of expectations. This along with higher average oil prices saw revenues rise from $1.27bn in 2016 to $1.723bn in 2017 and reported a small operating profit of $22m as opposed to $755m loss the previous year. The was also a significant improvement in the free cash flow of $543m compared to an outflow of $792m as the net debt dropped to roughly $3.5bn from $4.8bn.

The company will not pay a dividend for a while as the focus is to deleverage the balance sheet, reduce costs and improve the free cash flow. Naturally, this stock is highly geared to the underlying price of oil due to its high debt level. This is therefore a stock for investors wanting to take a contrarian approach to the oil price, looking for capital growth and willing to accept a high level of risk. Drip feeding is advised.

Bullish points

  • Group production guidance for 2018 has been raised to between 86,000 - 95,000 boepd.
  • Tullow has had the support of governments in the regions in which it operates who are keen on developing their oil infrastructure. Oil export pipelines are to be developed.
  • In the low oil price environment, they cut back on capital expenditures, but outlook has recently improved and the group are once again looking to increase capex slowly.
  • They restructured their debt position lowering financing costs and extending their credit facility. A rights issue has helped reduce the debt burden further.

[h3]Bearish points[/h3]

  • The group operates in politically sensitive regions.
  • Disappointing exploration results and past capex programmes, along with lower oil prices have led to asset writedowns. Further write-downs are possible.
  • The net debt has come down to $3.5 billion but this is still relatively large and there are concerns that it could become unmanageable if oil prices pull down once again.

Comment updated 23 February 2018

[h3]Author: Helal Miah, Investment Research Analyst[/h3]

The facts

Forecast Estimates 2018

Earnings per share 14.2p

P/E 12.7x

Dividend yield 0.0%

Month(s) company is expected to go ex-dividend


View our previous recommendations

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Valued using at least 15 minute delayed prices (where available)