Like Premier Oil and EnQuest, Tullow Oil (LSE:TLW) is saddled with a heavy debt burden. This is possibly preventing it from progressing in its quest for oil and weighing its share price down.
Tullow Oil bills itself as Africa’s Leading Independent Oil Company and for a long time now the speculation surrounding its basins in Ghana and Uganda have been keeping shareholders invested and debt financing in place.
Problems in Africa
Some African countries are notoriously difficult to work in and inconsistent government policies are hurdles to negotiate. Unfortunately, an ongoing tax dispute with the Ugandan government has held the company back in recent years and compounded its growing debt burden.
Last month Tullow Oil gave up on selling part of its one-third stake in the Lake Albert project in Uganda, which it’s developing alongside Total and the China National Offshore Oil Corporation. Tullow has said the Ugandan tax office wouldn’t cut the bill on the transaction and it’s now reconsidering its sale. The state owns the field which is licensed to oil companies.Â
Just this week Ugandan President Yoweri Museveni scolded petroleum multinationals for their ongoing pursuit of tax waivers as a pre-condition for further development of the country’s oil fields. I see where he’s coming from, but it brings oil companies in the region, to an impasse and continues to halt the building of a critical export pipeline.
Tullow Oil share price
The Tullow Oil stock price has risen 9% in the past three months but is down 8% in the past year. Some analysts believe it will continue to perform well in the year ahead, but I’m not so confident and see its sky-high debt pile as a ball and chain.
Tullow has a trailing price-to-earnings ratio (P/E) of 24 and earnings per share of 9.3p. It was trading at a forward P/E of 10.6 back in March so it has more than doubled in six months, which suggests investors gained confidence in the stock, but perhaps it’s now at risk of being overvalued.
Back in 2008 when many oil companies were suffering, Tullow rode out the credit crunch by selling assets, securing $2bn debt funding and an equity placing. Although the share price has been affected in recent years by the suppressed oil price, again it has survived and reduced its annual net loss in each of these years, even generating a small profit in 2018.
In August and September, Tullow made discoveries in Guyana with multi-billion barrel potential, proving further that when luck’s on its side, it can still deliver a share price increase.
The company resumed paying its dividend in February this year after a four-year suspension and has a dividend yield of 1.87%, which in my book, is not high enough to deem it a good income stock. But if the good news keeps coming, then a dividend increase could be on the cards too.
This £3bn FTSE 250 company is not immune from political turmoil elsewhere in the world, though. A spike in the oil price can help it pay down its debt but equally a fall in the oil price will hold it back. If the oil price rises significantly, unfortunately, that probably means some kind of political conflict that won’t be good news generally. I don’t consider Tullow Oil a sensible buy, either for beginner investors or long-term holders.