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Tullow Oil upgraded after better-than-expected results but debt question marks remain

Deutsche repeated a ‘buy’ recommendation and set a new price target of 225p, up from 210p previously
Offshore oil operations
Tullow beat expectations with its update on Wednesday

Tullow Oil PLC’s (LON:TLW) management is changing its ethos, according to Deutsche Bank analyst David Mirzai, who described Wednesday’s update as being “a long time coming.”

The analyst, in a note, said that aside from a production upgrade, the statement also gave investors tangible proof that Tullow’s new policy of under-promising and over-delivering is bona fide, though he pointed to a potential refinancing as a key focus for investors.

READ: Tullow Oil upgrades production guidance on “strong performance” offshore Ghana

“Tullow has lagged in its traditional coupling to the recent upswing in oil prices, which we think reflects uncertainty over its refinancing,” Mirzai said.

“Realising this milestone is essential to maintaining management credibility in the market.

“Our Buy case is based on Tullow's medium term FCF-generation potential with completion of its refinancing by YE17 remaining the key near-term catalyst.”

Deutsche repeated a ‘buy’ recommendation and set a new price target of 225p, up from 210p previously.

READ: Stockbroker says “stage is set” for Tullow Oil to recover

Better than expected

On Wednesday, Tullow upgraded its production guidance for 2017, thanks to what’s described as a “strong performance” at the TEN and Jubilee fields, offshore Ghana. The oiler lifted the bar to a rate of 85,000 to 89,000 barrels per day.

Capital spending in 2017 is seen to have reduced, with guidance lowered to US$300mln, which in turn sees the year’s free cash flow forecast at around US$400mln.

Tullow also noted that net debt had reduced to US$3.6bn by the end of October and its reserves based lending arrangements are due to complete before the end of this year.

Investors can have more confidence

“[The] beat looks genuine and reflects improved operational performance at its TEN and Jubilee fields, as well as a better return on its loss-of-production insurance claims,” Deutsche’s Mirzai added.

“Tullow's new management team talks to a new focus on "commitment to disciplined spending" and "delivering returns to shareholders'.

“We think that investors can have greater confidence that the company ethos is changing (for the better), but longer term the debate between cash returns vs higher capex remains a talking point.

“Nonetheless, the market will likely continue to view Tullow as a geared play on oil price upside and we expect commodity prices to remain the key driver of the stock in the next 12 months.”

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Tullow Oil plc Timeline

November 29 2018

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