Tullow Oil Plc-Investment Analysis Report

Introduction

This paper is our evaluation of the performance of Tullow Oil Plc. The aim is to guide investors considering the company’s corporate bonds on the international capital market to make informed decisions.

We have analysed the company’s financials and future business prospects, as well as the current global and market conditions, and have identified the micro and macroeconomic factors that hold the potential to affect the performance of Tullow Plc’s bonds.

Tullow Oil Plc is a multinational oil and gas exploration and production company headquartered in the United Kingdom (UK). The Group has 30 oil exploration and production licenses across eight countries mainly in Africa and South America.

Currently listed on the London, Irish, and Ghanaian Stock Exchanges, Tullow has offshore production in Ghana, Gabon, and Cote d’Ivoire, and has made material discoveries in East Africa. The company has been developing its project in Northern Kenya.

Tullow also has exploration and appraisal activities in Argentina and Guyana in South America.

Macroeconomic impact on the petroleum industry, 2023

Global inflation is set to decline from 8.8% to 6.5%, according to the International Monetary Fund (IMF). Like in 2022, inflation will be one of the major factors determining the prices of oil this year. Oil analysts believe inflation will have a bullish impact on crude oil prices.

Also, with the removal of COVID-19 restrictions in China, economic activity in the second-largest economy in the world is set to increase the demand for oil in 2023 and this development will put upward pressure on crude oil prices.

Although the expectation of a global recession may reduce the pressure on oil prices, the impact may not be significant. The reopening of the Chinese economy, high global inflation, and the tight supply stance of OPEC will have a much bigger impact on oil prices.

According to ING Group, a combination of lower Russian oil supply and OPEC’s supply cuts means that the global oil market is expected to tighten over 2023. ING expects a growing deficit over the course of the year, which suggests that oil prices should trade higher from current levels.

There are also bearish factors on prices of crude oil such as China’s refinery utilisation rates which are lower than in previous years, low retail sales in China, and mobility in Beijing and Guangzhou which remains 45% and 35% less than the previous year.

Also, some analysts say the rate of increase in inflation is slowing while unemployment in the US is expected to increase by 1%. They say demand from emerging markets will remain under pressure owing to a strong dollar.

Petroleum industry outlook 2023

The oil and gas industry is one of the largest sectors in the world in terms of dollar value, generating an estimated $5 trillion in global revenue in 2022[1]. The past year was profitable for oil and gas producers due to high oil prices fuelled mainly by geopolitical factors.

However, the medium-term outlook remains uncertain. Global oil demand is set to rise by 1.9 mb/d in 2023, to a record 101.7 mb/d, with nearly half the gain from China following the lifting of its COVID restrictions. Jet fuel remains the largest source of growth. [2]

According to the International Energy Agency (IEA), world oil supply growth in 2023 is set to slow by 1 mb/d following last year’s OPEC-led growth of 4.7 mb/d. An overall non-OPEC rise of 1.9 mb/d will be tempered by an OPEC drop of 870 kb/d due to expected declines in Russia.

The Energy Information Administration (EIA) in the United States (US) forecasts global oil production for 2023 to average 100.7 million b/d. Potential petroleum supply disruptions and slower-than-expected crude oil production growth could lead to higher oil prices, while the possibility of slower-than-forecast economic growth may contribute to lower prices[3].

Ernst & Young (EY) also observed that price increases spurred by geopolitical factors allowed companies to fund spending out of their earnings and still return capital to shareholders in 2022. This allowed share prices to decouple in a positive manner from underlying oil and gas prices.

However, buyers of natural gas are reluctant to sign long-term purchase agreements, given the questions about climate change and future demand requirements. Similar questions complicate capital planning or approval for long-term projects where the price and demand uncertainties are seemingly growing, despite current conditions that underscore the viability of oil and gas through the energy transition[4].

EY suggests that oil production companies can address the concerns of climate change and future oil demands by managing the energy transition from hydrocarbons to renewable energy. Optimization through the energy transition will require thinking in terms of portfolios of energy technologies, rather than a single asset or asset class.

EY further advises oil companies to manage emissions with innovative digital technologies that allow them to execute growth strategies aligned while making progress on various emission metrics such as carbon intensity of production.

Tullow Oil Plc Financial Statement and Balance Sheet (2018-2022)

2018: Tullow oil recorded a total revenue of $1.9 billion and a gross profit and profit after tax of $1.1 billion and $85 million respectively. Tullow also posted a free cash flow of $411 million. The company recorded year-end net debt of $3.1 billion and capital investment of $423 million. Tullow’s West Africa oil assets performed strongly and delivered net production of 88,200 bopd. The group’s total assets stood at $10.6 billion and its total liability at $7.7 billion, bringing its net assets to about $2.9 billion.

2019: In 2019, Tullow posted revenue of $1.68 billion, a gross profit of $759 million, and recorded a loss after tax of $1.69 billion. According to the company, the loss after tax was driven by exploration write-offs and impairments amounting to $2 billion including the revised Uganda write-off. Free cash flow was $355 million and year-end net debt was $2.8 billion. Tullow commenced an exploration campaign in Guyana. The company’s total assets for the year were $8.3 billion, total liability, $7.3 billion, and net assets $983 million.  

2020: The group’s revenue for the year was $1.3 billion, gross profit $403 million, and a loss after tax of 1.2 billion. The loss was driven by non-cash exploration write-offs and impairments totalling $1.2 billion (pre-tax). Underlying operating cash flow of $598 million and pre-financing cash flow of $625 million were recorded for the year. The group’s total assets were further decreased to $6.5 billion.

2021: Revenue of $1.2 billion was recorded for the year, gross profit of $634 million, and a third consecutive loss after tax of $81 million primarily driven by exploration costs written off, impairments, restructuring costs, and other provisions. Underlying operating cash flow of $711 million and free cash flow of $245 million were recorded. The group’s total asset was $5.5 billion, and its total liability was $6 billion.

Mid-2022: After making losses three years in a row, Tullow recorded a mid-year gross profit of $620 million and profit after tax of $264 million. Total revenue for the period was $846 million with realised oil price of $87/bbl after hedging. Capital investment in the first half of 2022 was $156 million plus decommissioning costs of $29 million.  The company had a total asset of $5.9 billion and a total liability of $5.4 billion.

Tullow Oil’s future business prospects

On January 1, 2023, Tullow Oil plc announced the appointment of Richard Miller as Chief Financial Officer (CFO) and Executive Director of Tullow. Richard has extensive oil & gas and financial experience. He has been acting as Interim CFO since April 2022 and has been with Tullow for over 11 years.

In December 2022, Tullow announced the signing of a Production Sharing Contract (PSC) for an offshore exploration license in Côte d’Ivoire. Tullow will operate the license with 90% equity, the remaining 10% is held by PetroCi.

With this new exploration license, Tullow hopes to strengthen its position in the Tano Basin where significant prospectivity has been identified within the proven Cretaceous turbidite plays, similar to the plays which are produced in the adjacent TEN and Jubilee Fields.

Conclusion

Although Tullow Oil Plc is yet to release the full 2022 financial report, the company is set to post a 2022 end-year profit after tax due to the high oil prices in 2022. The company’s long-term issuer is rated Caa1 by Moody’s and B- by S&P, with its bonds trading at discounts.

However, the impressive 2023 outlook for the petroleum industry by oil analysts presents a good opportunity for the company to make a significant turnaround in its fortunes. The company has made changes to its management and is aggressively exploring new opportunities in Africa and South America.

Tullow can reap the benefits of an improved price environment. Oil analysts predict oil to hit a record high in 2023; however, concerns over climate change mean Tullow needs to be more innovative to keep production going while minimizing carbon emissions.

Although Tullow Oil’s performance over the past three years has not been encouraging, the industry’s performance last year and the oil industry’s outlook for 2023 are enough reasons for investors to consider Tullow Oil’s corporate bonds. With SSA sovereigns trading at discounts and potential defaults in coupon payments, Tullow Plc’s bond can be a fair alternative.

Disclaimer: This article has been prepared by GFX Prime, an African investment firm with its registered office on the 2nd Floor, PWC Towers, Cantonments City, Accra Ghana. This article has been issued for information purposes only. GFX Prime does not recommend or propose that any security referred to in this article is appropriate or suitable for your investment objectives or financial needs.

References:

[1]Global Oil & Gas Exploration & Production – Industry Data, Trends, Stats | IBISWorld

[2]IEA (2023), Oil Market Report – January 2023, IEA, Paris https://www.iea.org/reports/oil-market-report-january-2023

[3]EIA revised down global oil production forecasts for 2023 | Oil & Gas Journal (ogj.com)

[4]2023 Oil and gas industry outlook | EY – US