The Tullow Oil (LSE:TLW) share price is up 12% over the past year. That might sound like a decent return, but it’s not great compared to other oil and gas stocks. For example, hydrocarbons giant Shell is up 48% over the past 12 months, and that reflects the soaring oil price.
But the longer story looks pretty bad for Tullow. In fact, it’s down 70% over three years, and that’s just the tip of the iceberg. It has collapsed over the past decade.
So, let’s take a close look at Tullow’s performance and see whether it’s right for my portfolio.
A decade of setbacks
A decade ago, Tullow shares traded for well over 1,000p each. Today, Tullow is trading for around 50p.
The firm focuses on developing hydrocarbon resources in nascent and frontier markets, primarily in Africa. It is also known for employing a more localised business model than some of its competitors. However, a VP once remarked that sandwiches for its Ghana operations were still flown in from Europe!
But generally, and I explored this at length in my doctoral research, Tullow’s more localised business model was deemed to be leaner than other companies that transitionally employ expatriates and use international supply chains in their global operations.
However, the London-based firm has experienced a number of expensive setbacks, including in Uganda. Tullow submitted its field development plans to the Ugandan government in 2013. But the state never responded to the firm’s plans. To make matters worse, Tullow was hit with a massive tax bill when it attempted to farm down its operations to CNOOC and Total.
Outlook
Things are starting to look up again for Tullow. It recently announced an agreement for a merger with cash-rich British independent Capricorn. And this should help Tullow because it can leverage Capricorn’s cash to progress some of its highly-promising development projects, such as its operations in Kenya.
In a July update, Tullow said free cash flow in the first half was neutral, following an arbitration payment and an acquisition. However, looking to the full year, it reiterated free cash flow guidance of $200m, assuming an average oil price of $95 a barrel.
It expects to produce between 59,000 and 65,000 barrels of oil equivalent per day in 2022.
Yet looking at the year ahead, there is some uncertainty around oil prices. Some analysts see them hitting $65 by the end of the year amid a global economic downturn, others see them soaring to $380 if Russia cuts production.
In the long run, I actually see oil remaining higher for longer as we enter a period of scarcity and intense competition for resources. So I’m actually pretty bullish on oil beyond 2022 and 2023. But I contend there might be better opportunities to buy ‘big oil’ later this year.
However, Tullow is a little different to the big oil firms. There are now some doubts whether the Capricorn merger will go ahead amid concern from that firm’s shareholders. I’m actually holding off buying right now because of this and because of increasing vulnerability, caused by global inflation, in the emerging markets in which Tullow operates.
Right now, I don’t think the Tullow share price is poised to take off.