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Alan Green on Boris wrecking the economy, plus Tullow Oil #TLW & Arkle Resources #ARK on UK Investor Magazine podcast
Alan Green and Jonathan Roy ask whether Boris is wrecking the economy, plus we review results from Tullow Oil #TLW and an update from Arkle Resources #ARK on the UK Investor Magazine podcast
Atlantic View – Sell Tullow Oil #TLW, group still facing an existential crisis
by John Woolfitt, Atlantic Capital Markets
Fundamentals & Statement Summary
Oil and gas exploration and production company Tullow Oil (TLW.L) has interests in over 70 exploration and production licences across 14 countries. The group today announced half year results for the six months ended 30 June 2020, and reported a working interest production average of 77,700 bopd, in line with expectations, generating revenues of $731m ($872m); gross profit of $164m and a loss after tax of $1.3bn (profit of $103m). A $418m impairment charge on property, plant and equipment and recorded exploration write-off costs of $941m were mainly driven by a write-down of the value of its Ugandan assets.
As of June 30, Tullow reported net debt of $3.0bn; gearing of 3.0x net debt / EBITDAX and liquidity headroom and free cash of $0.5bn.
Production guidance improved to between 73,000 and 77,000 barrels of oil equivalent per day from between 71,000 and 78,000 to reflect recent strong performance in Ghana, although offset to some extent by production curtailments in Gabon.
Group organisational restructuring is well advanced and forecast to deliver cash savings of over $350m over three years, significantly in excess of the previous target of $200m. This will deliver annual sustainable cash savings of over $125m from 2021. Evaluation of various refinancing alternatives with respect to the Group’s capital structure is also ongoing.
Alongside a newly restructured board, including non-Executive Chair Dorothy Thompson and senior oil and gas executive Mitchell Ingram in as a non-executive director, newly appointed CEO Rahul Dhir commented:
“Despite the very tough conditions in the first half of this year, we have successfully delivered reliable production and major, sustainable reductions to our cost base. We are also close to completing the important sale of our interests in Uganda. The quality of Tullow’s assets remains robust.
Since my arrival as CEO, we have been developing new plans for our business, with the support of our Joint Venture Partners and expert advisors. These plans will deliver enhanced value from our assets to benefit all our stakeholders including our host countries and investors. We will host a Capital Markets Day towards the end of 2020 at which we will update the market on these plans to deliver on Tullow’s true potential.”
Chart and Technicals
Source: FactSet and Hargreaves Lansdown
Tullow’s well documented problems are clearly reflected in the charting price action, and while a precipitous pre-COVID fall in Q4 2019 occurred well before the crisis kicked in, an all time low just over 7p serves as a reminder that the oil industry can turn industry bellwethers into penny stocks at the drop of a hat. Since that time, Tullow shares have recovered and from mid April onwards have held or deviated either side of the 50-day MA line, dropping below the MA envelope in late July. If shares can recover the 50-day MA at 24p by mid October, then the falling 200-day MA currently at 39p is a distant prospect, however current divergence indicates a retest of 7p all time lows.
Summary and Atlantic View
The former oil industry bellwether has today put a brave face on what is otherwise an existential crisis. Earlier this year Tullow had highlighted the risk to its own survival, citing a material uncertainty that it would be able to operate as a going concern. The solid production and forward guidance from Ghana are a standout amidst horrendous debt levels, ($3bn) and write-downs from the sale of Ugandan assets. Despite forward guidance on cost savings, there is little sign at present that Tullow can realistically get on top of the debt pile – something the newly appointed management team will need to get to grips with as an absolute priority. Until / when the board can demonstrate clear progress in this regard, Atlantic rates Tullow shares as a sell into any strength, down to the all time lows of 7p. Sell.
To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here
Atlantic Capital Markets Month Ahead – Keep Your Shorts On In September
Alan Green and John Woolfitt, Director at Atlantic Capital Markets discuss the month ahead.
We discuss the US Fed August meeting, and indications from Fed boss Jerome Powell that the administration was prepared to ride with higher inflation around 2%. The markets seems to translate as low interest rates for years to come…John gives his view.
John discusses the resilience of mining and commodity stocks in the face of the economic turmoil and Coronavirus threat, along with some of the trading calls from Atlantic over the past month.
Finally we look at some trading ideas and upcoming corporate news in September from Halfords #HFD, Meggitt #MGGT, JD Sports #JD, Travis Perkins #TPK, Tullow Oil #TLW and Costain #COST. Given the volatility in the markets, John advises using the Atlantic Alerts system – moving after the results not before. “If the tide goes out, make sure you’ve got some shorts on”.
Ian Pollard – Dunelm #DNLM caution over political uncertainty
Dunelm Group plc DNLM saw reported profit before tax rise by 24.3% in the 26 weeks to to the 29th December and strong like for sales up by 6.9%. Revenue was up by a comparatively small 1.2% and basic earnings per share by 23.8%. The Winter sale is described as having traded well but there is caution about the outlook for the remainder of the financial year due to the continuing political uncertainty in the UK. The interim dividend is to be increased 7.1%
Syncona Ltd Sync produced a continuing strong performance across the group of companies for the quarter from the 1st October to the 31st December. Blue Earth demonstrated strong sales momentum, whilst Nightstar, Autolus and Freeline all made excellent clinical progress. The remaining Syncona companies in the Life Science portfolio continued to make positive progress in the quarter.
Galliford Try plc GFRD claims record pre-exceptional profits and a strong first half group performance.for the six months to the 31st December. When one looks at the actual statistics, however, the performance is not quite as strong as the company would have us believe. In fact on both a pre exceptional and statutory basis, apart from those profits, everything is down, including even the dividend which has had to be sliced by an unhealthy 18%. At Linden Homes the private average selling price fell by 5% at £352k which will be very unwelcome news amongst the rest of the housebuilding industry. The Chief Executive tries to put a brave face on it and and describes the outcome as a strong financial and operational performance.
Tullow Oil plc TLW continues to be underpinned by its West African business which performed strongly in 2018. The year to 31st December saw operating profit rise from 22$m to 528$m and last years loss of 175$m turned into a profit of 85$m, whilst gross profit rose from 815$m to 1082$m
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