The last year has been good for energy explorers such as Tullow Oil (LSE: TLW), whose stock is up 65% as crude hovers around $80 a barrel. However, its share price is down almost 4% following today’s trading statement and operational update, despite reporting that first-half 2018 oil production in West Africa is expected to average 87,400 barrels of oil per day (boepd), in line with expectations.
Over a barrel
Other numbers were also decent, with first-half group oil and gas production expected to average 90,100 boepd. Overall full-year group production guidance is 89,000-95,000 barrels, a slight increase on its previous range of 86,000 to 95,000.Â
It looks positive enough with CEO Paul McDade reporting “substantially reduced gearing and financial discipline embedded across the group,” allowing it to focus on growth. Tullow is accelerating production and cash flow growth across West Africa, making “good progress” in East Africa and is about to embark on a multi-year frontier drilling campaign targeting high-impact prospects in Africa and South America.
Cash flows
On 25 July, Tullow expects to report first-half revenues of $900m and gross profit of $500m. Free cash flow is a solid $300m. This looks far healthier than July last year, when it posted a £519m half-year loss after booking $642m of payments due to the low oil price.
The future looks promising, with some estimating the £3.3bn FTSE 250 stock’s share price could hit 300p this year, some 25% higher than today’s 240p. Its debt pile remains substantial, even if net debt at June 30 is expected to decrease to $3.2bn, from $3.5bn in 2017. Trading at a forecast 11.7 times earnings, it isn’t overly expensive. Of course the ideal time to buy this stock was one year ago, when it was in the doldrums, but it still looks tempting today.
Updated
Another FTSE 250 energy stock, £4.36bn oilfield services play Wood Group (LSE: WG), also reported today, and again the market response was dour. It is down almost 3% as its pre-close trading update for the six months to 30 June suggested it might struggle to hit targets unless trading picks up in the second year.
Challenging conditions in the Gulf of Mexico hit first-half performance at its Americas arm, while North Sea activity showed only “moderate growth” from a low base. However, management remains “confident of delivering a stronger second half due to our typical second-half bias and the phasing of cost synergies, projects and market recovery”. Its full-year outlook is unchanged.
Positive earnings
The group has capitalised on lower valuations across the industry through its recent tie-up with Amec Foster Wheeler and its stock is up 24% in the last three months. Investors were expecting more today, and have reacted with disappointment. However, the future looks brighter. After two successive years of double-digit negative earnings, City forecasters are pencilling in 3% growth for 2018, and a hefty 22% for 2019.
Recent share price growth has driven up its forecast valuation, which is 15 times earnings. I would have hoped to have shown you a bigger discount. On the plus side, the forecast dividend is 3.9%, with cover of 1.6. One to consider, anyway, if you are bullish about the oil outlook.