Tullow Oil still finding it tough

The company will announce its second-quarter revenue numbers on 1 July, and the share price is still struggling.

Oil barrels
Source: Bloomberg

The firm has tightened its belt due to the collapse in the price of oil. It is making the best of a bad situation, but the share price is still locked in the downward trend. There is a high correlation between the price of oil and the share price of Tullow Oil over the past nine months, and although Tullow’s stock price has somewhat bounced, the outlook is still bleak.

Last year, the Irish oil explorer posted its first full-year loss in 15 years as it was forced to write down $2.8 billion in relation to asset values. Cost cutting to the tune of $500 million has been set out, and the dividend suspended, and the latter may cause more harm than good. Tullow Oil is not short of cash, and it is ‘well funded’ as it can dip into its debt facility if required, but the company will have to weather the storm that is low oil prices.

As I previously stated, Tullow Oil doesn’t have the refinery business like mega companies, and thus it loses out when the price of the underlying commodity is low. In the first-quarter update, the company stated its full-year production guidance will remain unchanged. But in circumstances like these, medium-sized energy companies are not keen on ramping up production; only the titans of the industry have that luxury.

Tullow Oil was demoted from the FTSE 100 in to the FTSE 250 index this year. This was due to the drop in market value on the back of the fall in oil. In April, Goldman Sachs cited Tullow Oil as a potential takeover target as the major players look for relatively cheap companies that have proven wells.

Tullow Oil will release its first-half numbers in July, and the market is anticipating revenue of $829 million and operating profit of $160 million. The company will announces its full-year numbers in February 2016, and the market is expecting revenue of $1.72 billion and net adjusted income of $112 million. The year previous the firm posted revenue of $2.21 billion and an adjusted loss of $1.47 billion.

Equity analysts are bullish on Tullow Oil, and out of the 33 ratings, 13 are buys, 15 are holds, and three are sells. The average target price is 455p, which is 25% above the current price. Investment banks are bullish on BP, and of the 34 recommendations, six are buys, 21 are holds, and seven are sells. The average target price is 456p, which is 2.7% above the current price.

Tullow’s share price has been in decline for over three years, and the initial target is 325p, and a move through will put 280p on the radar. Any moves higher will encounter resistance at 378p, and if that mark is taken out, 400p will be brought into play. 

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