2018 could be the year that the Tullow Oil (LSE: TLW) share price finally makes a comeback.
Currently, the conditions are perfect for the company. After years of slashing costs and investing heavily in production capacity, this year the group is well placed to produce healthy cash flow from operations, which should allow it to reduce debt and soothe concerns about its balance sheet substantially.
A transformational year
Alongside its full-year 2017 figures, Tullow said it expects production in 2018 to be between 86,000 to 95,000 barrels per day, compared to last year’s 94,700 bbl/d. While the lower production figure is disappointing, higher oil prices should more than make up for the fall.
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For example, last year the average realised oil price for the company was $58.3 bbl. Today, the price of Brent crude is nearly 20% higher at just under $70 bbl. What’s more, Tullow reported a 22% drop in its underlying cash operating cost to $11.1 bbl last year, which only adds to the investment case.
It is also unlikely that Tullow will see a repeat this year of the operational problems that it experienced in 2017. Due to a maritime boundary dispute between Ghana and the Ivory Coast, Tullow was unable to drill wells at its flagship Ten field off the coast of Ghana. The situation has now been resolved and the group has plans to begin “a multi-year incremental drilling programme” this year.
Cash cow
All of the above indicates to me that Tullow is on track to beat last year’s free cash flow generation of $543m, giving it scope to make a substantial dent in its net debt balance of $3.5bn as reported for the end of last year. And as group fiscal stability improves, I believe the market will award the Tullow Oil share price a higher valuation.
As well as Tullow, I believe that higher oil prices also bode well for small-cap explorer Rockhopper Exploration (LSE: RKH).
Binary bet
Rockhopper is essentially a binary play on the colossal $1.5bn Sea Lion field development in the Falklands. This project, which is operated by Premier Oil was put on ice as the price of oil has languished, but with prices heading back to $100 bbl, it’s becoming more likely that Premier will be able to access the funds to press ahead.
Rockhopper expects the final decision on development will be made towards the end of 2018.
While the firm waits for Premier to start Sea Lion’s development, Rockhopper’s production base in the Greater Mediterranean is keeping the lights on.
According to the group’s full-year figures, published today, production from this region averaged 1,200 bbl/d during 2017, producing revenues of $10.4m and a cash flow of $1.6m. There’s also $50.7m of cash on the balance sheet to help fund any future developments as well “new venture opportunities” to help improve production and cash flow.
