Do Today’s Results Make Tullow Oil Plc A Buy?

Is the red ink finally done flowing at Tullow Oil Plc (LON: TLW)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The headline numbers for Tullow Oil (LSE: TLW) over the past year weren’t pretty and the group’s annual report is splattered with red ink. However, the City’s reaction thus far seems to encourage the view that management has done all within its power to react to lower oil prices.

While an operating loss of roughly $1.1bn is a worrying number, it’s a massive 44% improvement over last year’s $2bn loss. Management will point to this improvement as a sign of better days to come, but I remain leery. Although strong hedging and vicious cost-cutting narrowed yearly losses significantly, the company still added $900m of debt to the balance sheet last year.

Leverage has truly proven to be a double-edged sword for Tullow. When oil prices were above $100/bbl the company was an investor darling as debt was piled on to fund rapid expansion and share prices rose as high as £15.66. But, now that crude prices have plummeted, the company’s staggering $4bn of debt has sent shares careening down to £1.50. Tullow’s position as a pure exploration & production company means it lacks the downstream refining assets of a BP or Shell, which would allow it to ride out low oil prices without adding significant debt. Therefore, Tullow can cut costs as much as it likes, but if crude prices don’t rebound significantly it will continue to harm future growth prospects.

Should you invest £1,000 in Lloyds Banking Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group made the list?

See the 6 stocks

Low-cost assets

Debt aside, major restructuring and cost-cutting have made underlying operations very appealing. The company has the Ghanaian TEN Field coming on-line in mid-July, which will increase overall production numbers by 15%. With targeted operating costs per barrel a mere $8, TEN will be substantially cash flow positive for Tullow. This nearly-$5bn project finally getting off the ground will also significantly reduce the need for debt going forward. Tullow does have a very good base of low cost assets, with all West African projects estimated by analysts to be break-even in the $38-$45/bbl range. If crude prices rebound to this level or above, the massive mountain of debt may finally begin to be whittled away.

Long term though, I remain skeptical that Tullow is a bargain purchase even at today’s prices. Despite significant low-cost assets, the company’s highly leveraged position worries me. At $4bn, net debt is a massive four times the record earnings posted in 2012, when a barrel of crude fetched three times what it does today. Even if oil prices rise significantly, shareholders will find that the majority of profits will be flowing to debt holders. Investors will also find the dismal balance sheet a major hindrance to Tullow’s ability to expand. Given these issues, I believe there are better bargains to be had elsewhere in the industry, particularly Petrofac and Premier Oil.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Charticle

Here are the latest growth and share price targets for Nvidia stock

Ben McPoland checks out the latest forecasts for Nvidia stock to assess whether it might be worth considering for a…

Read more »

Growth Shares

Yikes! This could be the most undervalued growth stock in the FTSE 100

Jon Smith flags up a growth stock with a low price-to-earnings ratio and a share price back at 2020 levels…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

3 beaten-down FTSE 250 shares to consider buying before the next bull market

Paul Summers thinks brave investors should ponder buying some of the FTSE 250s poor performers before they recover strongly.

Read more »

Investing Articles

Gold prices soar while the Fresnillo share price slumps. What gives?

With a gold bull market in full swing, this Fool argues that the falling Fresnillo share price may not remain…

Read more »

Investing Articles

2 FTSE 100 shares I’m avoiding like the plague right now

While the FTSE remains packed with opportunity, many of the index's blue-chip shares could be at risk as trade tariffs…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Here’s how an investor could aim for a million buying under 10 shares

Christopher Ruane explains why doing less, not more, of the right things could be the key to success as an…

Read more »

Investing Articles

Could this new risk cause a stock market crash?

Tariffs and a potential recession are two major stock market risks right now. But there’s another risk that concerns Edward…

Read more »

Investing Articles

This 10-stock ISA portfolio could yield £1,380 in passive income a year!

Here's a portfolio of dividend shares that could produce £115 of monthly passive income for investors who maximise their ISA…

Read more »