Tullow Oil (LSE: TLW) released an update Wednesday, ahead of first-half results due on 24 July. For me, it’s the company’s balance sheet that matters above all else at the moment. And on that score, chief executive Paul McDade’s statement that “our balance sheet remains strong and we expect another year of solid free cash flow generation” is encouraging.
From predicted first-half revenue of approximately $900m, Tullow expects to record a gross profit of around $500m. Underlying cash flow for the half is put at around $100m, which might sound a bit low.
But an estimated $450m free cash flow figure for the full-year sounds more impressive. The firm says: “This figure is expected to increase to around $650 million following completion of the Uganda farm-down.”
Debt
The trouble is net debt is still expected to stand at around $3bn at 30 June. That’s a net debt to adjusted EBITDAX multiple of 1.9, and I don’t like that. There’s “liquidity headroom of unutilised debt capacity and free cash” of around $1bn, which is probably a sufficient buffer. But would it be enough to cope with another prolonged downturn in oil prices?
A new slump is not expected, but neither was the last one. And the oil price, despite the recent uptick on the back of renewed Middle East tension, has been struggling to stay above $60 levels.
I think Tullow is probably out of the woods. But with that debt, I’m really not seeing the shares, priced on a forward P/E of 11, as good value.
Recovery
On the safety front, Gulf Keystone Petroleum (LSE: GKP) seems to have been moving in the opposite direction to Tullow.
Stability in the Kurdistan region of Iraq has improved significantly in the past couple of years. And in a lot of ways, I prefer the risks of operating in politically less developed parts of the world where there actually are large proven oil reserves than in, say, West Sussex, where we still don’t really know if there are any useful quantities of oil to be had. On that score, I’d certainly go for Gulf Keystone right now before I’d risk any cash on UK Oil & Gas, for example.
The other big change is in Gulf Keystone’s financial position. From verging on insolvency in the face of delivering oil and not getting paid for it, the company has progressed so far as to be paying its first dividend — with confirmation following the firm’s AGM released this week.
Record year
The 2018 year brought in record revenue of $250.6m, with post-tax profit climbing from $14.4m in 2017 to $79.9m. Critically, the company reached December with a cash balance of $295.6m (up from $160.5m a year previously), and that’s a far cry from its precarious position those few short years ago.
The turnaround started when the Kurdistan Regional Government agreed to start regular monthly oil payments, and many of us were wary of such promises at the time. But the payments have been reliable every since.
I’m still very cautious of recovery situations these days, staying out at least until I’m convinced the recovery has actually happened. But at Gulf Keystone, I really think it has.