These are tough times for oil explorers, with Brent crude plunging from more than $80 to around $66 a barrel. The industry fears a ferocious bear market as supply rises, demand falls, and President Donald Trump gives Iran wriggle room on sanctions.
Into Africa
This is bad news for FTSE 250-listed Tullow Oil (LSE: TLW), which has fallen almost a third in six months. But it’s up 2% today after publishing its November trading statement, with CEO Paul McDade hailing “another period of very solid delivery from Tullow against the backdrop of continued volatility in the oil price.”
He said Tullow is generating high levels of free cash flow from its West African assets, making good progress towards project sanctions in East Africa and finalising its 2019 exploration programme, which should include high-impact wells in Guyana.
Cash flows
McDade said that having laid strong business foundations, embedded a financially disciplined culture, and repaired its balance sheet, Tullow is “now focused on delivering growth and returns to our shareholders.”
Tullow has narrowed full-year oil production guidance to 87,000-91,000 bpd, with all fields producing in line with expectations. Free cash flow is now forecast at around $700m, with net debt reducing from $3.5bn to $2.8bn by year-end, and gearing set to fall from 2.6x to 1.8x. Tullow has also identified multiple attractive prospects in Guyana.
Tough times
Like most oilies, Tullow has been through a tough time and is trading 74% lower than five years ago. City analysts reckon that earnings per share (EPS) will fall 33% this calendar year, but could rebound next, rising 38%. Its stock trades at a tempting 10.1 times earnings, but you’d have to be brave to buy it now amid signs of a global slowdown. Although plenty of people were doing just that this morning.
Today has been less positive for upstream oil company Premier Oil (LSE: PMO), its stock down almost 4% despite publishing a trading operations update that showed production rising and net debt falling.
Roll out the barrels
Premier has delivered year-to-date production of 78,400 barrels of oil equivalent per day, up from 76,200 in the first half. Forecast full-year production is around 80,000 barrels. 2018 operating costs are unchanged at $17-$18 per barrel, giving a decent margin even with oil at $66, while forecast development, exploration and abandonment expenditure has fallen to $365m, reduced from previous guidance of $380m.
Premier trimmed net debt to $2.52bn at 31 October, with a year-end forecast of $2.4bn, and chief executive Tony Durrant said it’s now generating significant free cash flow, with a low cost base, and tightly-controlled capital spend. “We are on track to deliver material debt reduction in 2018 through 2019, substantially improving our balance sheet,” he said.
Big discount
The £735m group now awaits appraisal of its “world class Zama discovery” later this month, and soon begins construction activities for its “high-value Tolmount gas project in December.”
EPS are forecast to be flat this year, then surge 80% next, although falling oil prices could hit that. Trading at just 6.3 times earnings, there could still be an opportunity here. Especially if oil falls further.