Tullow Oil (LSE: TLW) shares have plunged in value this year.
As the price of oil has crumbled, the oil producer’s share price has followed suit. At one point it was down by nearly 90% for the year. The stock has since staged a modest recovery, but it’s still almost 50% below the level at which it started the year.
However, with oil prices recovering, the outlook for Tullow Oil’s shares is starting to improve. This could mean that the stock has the potential to produce substantial returns for investors.
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At the beginning of March, Tullow Oil warned that it was facing the “perfect storm” of falling oil prices and high debt levels. If this perfect storm continued, management warned, there was a genuine risk the company could collapse.
Luckily, the fortunes of Tullow Oil’s shares improved dramatically in April. It managed to agree on a firesale of its remaining stake in a Ugandan project to France’s Total for a deeply discounted $575m.
Eight months before this deal was agreed, Tullow’s interest in the project was valued at $900m.
Still, Tullow managed to buy itself some breathing room with this cash infusion. The company’s lenders also agreed to extend its $1.9bn debt facility.
These developments removed any immediate threat to the company’s solvency.
The oil price also rallied substantially over the past few weeks. It is now dealing at around $40 per barrel, up from $20 at the end of May, and $30 in mid-March.
These tailwinds have helped Tullow Oil shares rally by nearly a third over the past month. There could be further gains ahead for investors.
Rising demand
At the height of the coronavirus crisis, the world’s demand for crude oil dropped by around 20%, or 20m barrels of oil per day. This sent shockwaves through the global oil market, and the price of black gold plunged.
Demand has steadily improved over the past few weeks. Forecasts now suggest total oil demand for the rest of the year will be just 10% lower than in 2019. On top of this growing demand, production cuts have reduced excess supply in the market.
These factors suggest that the price of oil could continue to rise throughout the rest of 2020.
That would be great news for Tullow Oil shares. Tullow reckons it can break even on a cash basis with oil at $35 a barrel, which suggests the company is generating cash at current oil prices.
If the group can keep this up for the rest of the year, and pay down some of its massive debt pile, investor confidence should start to return. That may mean Tullow Oil shares could rise substantially from current levels. Indeed, with the stock down 50% year-to-date, it appears to offer a wide margin of safety at current levels.
As such, Tullow Oil shares may be an attractive acquisition as part of a well-diversified portfolio at current levels.