Is Tullow Oil in trouble?

Multi-year lows in the price of oil and a string of bad fortune have left Tullow Oil in a tight spot. 

Oil drum
Source: Bloomberg

The collapse in the price of oil could not have come at a worse time for Tullow Oil, as the exploration company recently went through a phase of encountering dry wells. The Irish company is feeling the pinch on both fronts as falling energy prices and a run of bad luck are denting the share price. Even though the firm conducts the majority of its business in Africa, the latest well it abandoned was in Norway.

The pressure is beginning to show as the oil explorer slashed its budget for capital expenditure by 60% in November, and oil has dropped considerably since then. It is often said that the cream always rises to the top and these testing times in the oil market have proved this. Tullow Oil’s willingness to take on risk and endure relatively high costs paid off when Brent crude was close to $100 per barrel, but now the company is suffering for it.

The oil industry can be feast or famine, and in March 2012 the share price flirted with £16 when the company reported record profits and rising dividends. The current climate looks very different, and now the stock price is at its lowest level since June 2007. Short sellers show no mercy as the falling oil price has hit the most vulnerable exploration companies harder than the titans of the industry.

In July the company posted first-half revenue of $1.26 billion and an adjusted net loss of $75 million, and the consensus was for revenue of $1.29 billion and an adjusted loss of $84 million.

Tullow Oil will release its full-year figures in February 2015, and traders are expecting revenue of $2.45 billion and adjusted net income of $110 million. Their forecasts equate to a 7% decline in revenue and a 35% drop in adjusted net profit.

Equity analysts remain surprisingly bullish on Tullow Oil and, out of the 34 recommendations, 20 are buys, 12 are holds and only two are sells. The average target price is £6.45 which is nearly 70% higher than the current price. Investment banks are also very bullish on Royal Dutch Shell, of which there are 20 buy ratings, 11 holds and one sell. The average target price is 21% above the current price. When comparing market capitalisation, Royal Dutch Shell is 71 times bigger than Tullow Oil, and so you would expect it to be better positioned to withstand a drop in the price of oil.

While the oil market is in turmoil, pressure will remain on the stock, and any rallies are likely to be short lived. The short-term target is 350p and 300p will be the medium-term view. 

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