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In volatile equity markets Tullow Oil has provided investors with good news
In volatile equity markets Tullow Oil (LON:TLW) has provided investors with some good news announcing exploration success in South America. The find comes hot on the heels of discoveries made in Uganda (2005) and Ghana (2007) and makes the company more attractive as an acquisition target although the stock is not necessarily cheap on the basis of current earnings.
What makes Tullow’s new discovery, at Zaedyus in French Guiana, particularly attractive is that it reinforces the company’s view that the two geologies of West Africa and Northern South America are similar which in turn suggests that success in Ghana may be repeated. Encouragingly, Tullow has further offshore blocks in South America in Suriname and Guyana as well as around where it is currently drilling in French Guiana.
Turning to the half year results, Tullow recently reported a profit of US$330 million, which was more the 271% above the same number 2010. The primary drivers behind the result were pricing and volume. Certainly pleasing was the contribution to the result from improved volume, equating to US$264 million. The commencement of sales from the Jubilee oil field in Ghana was the major factor behind the improvement.
Not surprisingly, revenue for the half was 119% higher than the corresponding 2010 number, at US$1.1 billion. Again, the positive impact from better commodity prices and higher product volumes across the half drove revenue higher and shareholders will be heartened as volumes are set to increase further as Jubilee settles into normal production rates.
Cash at 30 June 2011 was US$403.2 million. However, as a result of the major capital expenditure programme and acquisitions in the half (including Nuon E&P and EO Group) the company’s net debt position deteriorated to US$2.6 billion; significantly higher than the same position one year earlier. Gearing therefore rose to 63% - from 5% twelve months earlier - which meant that the company's interest cover also deteriorated to 18.9 times from 57.4 times.
We are of the view the company will use the next 18 months to consolidate its balance sheet, which would see the above debt numbers improve. It is important to note that significant debt leads to heightened financial risks for Tullow however the management recognises the importance of using its current robust financial position as an opportunity to develop future earnings growth.
Confidence in the future is reflected in the 100% increase in first half dividend which has seen the dividend increase to US 4 cents. This move was not only underpinned by higher energy prices but a 35% production rise also played a major role.
We expect Tullow’s news flow over the near-term to be positive given the appraisal and exploration activities currently underway especially in South America. With the continued lift in sales revenue from Jubilee, and the resulting robust cashflow, the company is in an enviable position of being able to expand without dipping too deeply into the debt market.
This report was produced by Senior Research Analyst, Aamer Nawid
