Context is key in investing. New Tullow Oil (TLW) chief executive Paul McDade has pointed to a ‘strong performance’ in the first half despite reporting a $300m post-tax loss. Yet the share price is up 6.7% to 158.6p.
To be fair there are clear bright spots in today’s release. Revenue is up 45.6% to $788m and free cash flow is much improved with an inflow of $205m after a $697m outflow for the same period in 2016. The loss relates to impairments against assets and equipment and without these non-cash items gross profit totalled $300m.
There is progress on the operational front too. Production from the TEN fields offshore Ghana is in line with expectations, the company is enjoying drilling success in Ghana and a high impact exploration well is planned in Suriname towards the end of the year.
Current guidance for group production of 78,000 to 85,000 barrels of oil equivalent per day for the full year is maintained.
DEBT IS STILL AN ISSUE
But? net debt still totals $3.8bn despite a $750m rights issue which completed in April. This again raises the question of whether Tullow raised enough money with its issue, something we wrote about here. Tullow’s big debt pile has meant its fortunes are highly correlated to the oil price and so since prices began to crater in mid-2014 it has lost more than 80% of its market value and its prized FTSE 100 status.
Cantor Fitzgerald analyst Sam Wahab is unconvinced remaining at ‘sell’. He comments: ‘Whilst TEN's cash generation will go some way to shoring up Tullow's free cash flow, we still harbour concerns over the company's highly leveraged position against the backdrop of a challenging sector environment.’
‘With lower prevailing oil prices expected by the market to continue through the second half of 2017, we believe the company's financial position could be under further strain if production rates are not maintained,’ the analysts concludes.
