Gabon Sale And Jubilee Gas Lift Will Secure Future Stability

Key Takeaways

• Strategic asset disposals and refinancing efforts are aimed at deleveraging, reducing debt costs, and improving earnings and net margins.
  
• Seismic advancements and optimized drilling efforts could boost production, uncover new reserves, and drive future revenue growth.
  
• Operational and financial challenges, including production issues, significant debt, and execution risks, threaten Tullow Oil's revenue, cash flow, and future growth potential.

Catalysts

Engages in the oil and gas exploration, development, and production activities primarily in Africa, Europe, and South America.

• The disposal of Tullow's Gabon business for $300 million aims to accelerate deleveraging, which should reduce net debt and subsequently lower interest costs, improving net margins and overall earnings.
  
• Completion of a 4D seismic campaign could enhance Tullow's ability to identify and tap into bypassed oil, leading to potential reserve growth and future production increases, positively impacting revenue.
  
• Return to drilling activities in Ghana, focusing on reducing natural decline through infill drilling and well optimization, is anticipated to stabilize and potentially increase production levels, boosting future revenues.
  
• The planned installation of an artificial gas lift in Jubilee is expected to improve production rates, potentially adding significant 2P reserves and aiding in revenue growth while extending the life of wells.
  
• Successful refinancing of the capital structure is expected to provide financial stability, reduce debt servicing costs, and enhance free cash flow, which would positively impact net margins and earnings.

Tullow Oil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tullow Oil's revenue will decrease by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 17.6% in 3 years time.
• Analysts expect earnings to reach $191.7 million (and earnings per share of $0.15) by about April 2028, up from $54.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $226 million in earnings, and the most bearish expecting $131 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.1x on those 2028 earnings, down from 5.6x today. This future PE is lower than the current PE for the GB Oil and Gas industry at 9.1x.
• Analysts expect the number of shares outstanding to grow by 2.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.56%, as per the Simply Wall St company report.

Tullow Oil Future Earnings Per Share Growth

Risks

• Tullow Oil experienced production challenges at the Jubilee field, including a steeper-than-expected decline due to water cut issues, potentially impacting revenue and earnings by reducing production volumes.
  
• The company has a significant debt load, with $1 billion net debt forecasted by end of 2025, which affects net margins and interest expenses.
  
• Delayed receipt of gas payments in Ghana and ongoing tax arbitrations could negatively impact cash flow, thus impacting financial stability and profit margins.
  
• Operational reliance on complex projects such as the artificial gas lift and the 4D seismic data campaign introduces execution risks, which if not successful, could affect revenue through lower production.
  
• The focus on cost reductions, while necessary for financial stability, might lead to underinvestment in growth initiatives, affecting future revenue potential.

Valuation

• The analysts have a consensus price target of £0.334 for Tullow Oil based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £0.5, and the most bearish reporting a price target of just £0.14.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $191.7 million, and it would be trading on a PE ratio of 5.1x, assuming you use a discount rate of 12.6%.
• Given the current share price of £0.16, the analyst price target of £0.33 is 51.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.