Considering the Tullow Oil share price? Here’s an option for you

If you’re worried by the Tullow Oil share price, but are bullish about the price of oil, here’s an option to consider, says this Fool.

| 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.

Will Tullow Oil (LSE: TLW) go bust? It’s the question many investors are asking. Indeed, with Tullow’s share price trading around 17p, things aren’t looking good for the oil and gas exploration firm. However, there may be an upside. 

Tullow’s shares have recovered 70% from their March low of 10p. This is not a bad increase and may have made a few people some hefty capital gains, for which they can probably thank the recovering oil price.

Moreover, it’s the previously plummeting price of oil that may be partly responsible for some of Tullow’s financial woes. Many analysts believe the oil price will rise again.

But, will an increase in the price of oil change the fortunes of Tullow’s shareholders? 

Oil market predictions

Investment bank Goldman Sachs is currently bullish about the oil market. Indeed, the price of Brent crude is estimated by the bank to grow by up to 44%, to $65 per barrel, by autumn 2021. It has even recommending Brent as an “effective hedge against uncertainty” for investors.

Goldman believes the availability of vaccines for Covid-19 will support global growth, increasing the demand for oil. It notes in its briefing that there has been a ‘steady rally’ of long-dated oil prices, meaning the market is bullish about oil in the long term. This should be good news for Tullow Oil shares.

As a specialist exploration and production company, Tullow’s revenues and profits rely on a high oil price. The higher the price, the more the potential profit. But, of course, the opposite applies too.

And the question for Tullow shareholders is whether the company can survive long enough to reap the benefits, assuming the banks’ analysts are right. 

Tullow Oil share price fundamentals

Tullow has a solvency problem. It half-year results show pre-tax losses of £1.44b. This compared with a £268.4m profit at the equivalent point last year. Production’s dropped 10% and revenue by 16% over the same period, driven by write-offs and impairments.

In addition, Tullow Oil is looking for capital. It hopes to raise $1b from upcoming asset sales. It wouldn’t surprise me if a rights issue is also being discussed, given the low share price and high gross gearing – or debt-to-equity – ratio of 88%. This would help to raise cash and lower the gearing. By comparison, oil major BP‘s gross gearing is around 40%.

Any capital raised from financing activities would likely be used to pay down debt. However, we’ll know more towards the end of the year what’s in store for Tullow at its Capital Markets Day. If the market likes what it hears, and Tullow manages to sell its assets, the shares will likely reflect the new optimism.

However, I don’t think Tullow’s shares are a sensible long-term investment right now because there’s too much at stake. That said, if you’re bullish about the oil price, and can afford a little risky speculation alongside your balanced investment portfolio, Tullow shares could be a good choice. The capital gains could be large.    

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.

Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »