Two FTSE All-Share Listed Resource Stocks Amidst Price War & Covid-19 Outbreak: Tullow Oil & Premier Oil

While the whole world is fighting a battle with a fatal disease Covid-19 contagion, the Oil & Gas Producers are also concerned with falling oil prices due to price war led by Russia and Saudi Arabia. When oil productions have gone down, facilities are lockdown, employees are getting furloughed, then such pressure on oil prices could be disastrous for oil producers. Let’s discuss two such FTSE All-share listed Oil & Gas Producers - Tullow Oil PLC and Premier Oil PLC and understand how they are sailing through such challenging circumstances.

On 3^rd April 2020, the stock price of both the companies surged significantly by 47.99% and 23.46%, respectively. Some of the key highlights are presented below which led to the rally:

• Tullow Oil has identified further cost savings of USD 85 million and got approval for USD 1.9 billion debt facility, while they are slashing their Capital expenditures and differing activities across the portfolio.
• Premier Oil also announced the issue of the share capital of 839,862,713 Ordinary Shares of 12.5 pence on 1^st April 2020, and when OPEC announced a meeting with Russia on Monday, the investors got a hope for oil prices to be pacified and hence, oil prices soared.

(Source: The International Association of Oil & Gas Producer)

Let’s understand the scenario at the macro front for oil producers

In the beginning of March in Vienna when, Russia and Saudi Arabia and other major OPEC countries had met last to discuss the reduction of oil output amidst the coronavirus outbreak, oil traded at the price of over $50 a barrel. However, when Saudi Arabia raised production and reduced the oil selling price, it led to an oil price war between the ruling players and subsequently on 9^th March 2020, the oil prices plunged by 20% with the forward curve for 2020 and 2021 dropped to nearly USD 38 per barrel and USD 42 per barrel, respectively. On 2^nd April 2020, when the US President Donald Trump tweeted that Russia and Saudi Arabia would come to an agreement soon and price war to be pacified, the crude price rose 25% to USD 25.32 per barrel. In reaction, the oil Cartel OPEC, Saudi Arabia and Russia decided to meet on Monday (6^th April 2020). Meanwhile, the US President stated on Friday (3^rd April 2020) that, Saudi Prince and Russian President wants to stabilize the oil market. However, the while house stated that they are not negotiating with both the parties. At last reported data, Brent Crude oil future price surged significantly by 16.33 per cent to $34.83 per barrel and WTI crude oil future price accelerated by 14.42 per cent to $28.97 per barrel.

Now, we will through light on the business model, strategies, recent developments and financial position of both the companies.

Tullow Oil PLC (LON:TLW)

(Source: Company Website)

Tullow PLC is headquartered in London and operating as an oil and gas exploration and production company. It has operations in Africa and South America, and their portfolio spans around 80 licenses in 15 counties with nearly 879 employees. The net oil and gas production in the financial year 2019 was 86,800 boepd.

Strategic Focus for Sustainable Growth

• Generating low-cost oil and gas production for robust and sustainable cash flows.
• Progressive development from new fields and delivering value from Uganda and Kenya projects.
• The Effective and efficient organization through streamlining business activities, integrated approach to ensure safety and control oil and gas operation.
• Commitment to sustainability by responsible approach towards the environment, equality, transparency with keep energy transition in mind.
• Meeting financial goals by conservative capital structure and robust balance sheet.

Business Model to Create Value

(Source: Annual Report)

Tullow’s business required exploring and monetizing oil from their portfolio across South America and Africa and hence, generating the cash flow from production, discoveries and exploration of oil resources with prudent capital structure and cost-efficiency.

Recent Developments to Ponder Over

• 3^rd April 2020: Tullow updated about the strengthened liquidity during the Covid-19 crisis and unveiled plans to slash capex by 30% in 2020.
• 9^th December 2019: Paul McDade has stepped down as Chief executive officer (CEO), and now Dorothy Thompson has been appointed as temporary CEO.

Decent Financial and Operational Performance in the Current Challenging Environment

• The company has underperformed in the financial year 2019 both financially and operationally. In 2019, Tullow Oil generated $1.7 billion in revenue and, after $490 million of capital investment in the business, delivered $355 million of free cash flow. This reflects that the company has generated healthy levels of underlying free cash flow; however, it made a substantial loss, following changes to its long-term oil price assumption and TEN reserves reduction.
• The combination of all these results was a full-year EBITDAX of $1.4 billion in 2019 (2018: $1.6 billion) and Net debt to EBITDAX gearing level of 2.0 times (2018:1.9 times). For 2019, the net debt reduced to $2.8 billion from $3.1 billion. While this shows that the business is still progressing against the ambition to decrease debt significantly, the pace of debt reduction was impacted by lower production, and no proceeds from the Uganda farm-down and therefore below the predictions.
• The group achieved several milestones with Project Oil Kenya; however, the continued lack of progress in the farm down of the Lake Albert development in Uganda was a disenchantment. The working interest production, including the impact of production-equivalent insurance payments from the Jubilee field, averaged 86,800 boepd in 2019, a decline of 3.5% from the previous year (2018: 90,000 boepd). The decrease was driven by no gas production from the United Kingdom assets in 2019 and subsurface and facility challenges in Ghana. The company's realized oil price for 2019 after hedging stood at $62.4 per bbl and before hedging was $64.3 per bbl.
• Accomplished the bi-annual redetermination of TLW's RBL (Reserves Based Lending) credit facility with the debt capacity of 1.9 billion US dollar, which was approved by the lending syndicate. As a result, the company has free cash at the start of Q2 FY2020 and c.$700 million liquidity headroom of undrawn facilities. This level of headroom represents that the Board expects the reduction in the company's future capital. Tullow has decreased facility commitments to c.$2.2 billion from $2.4 billion.

(Source: Company Presentation)

Share Price Performance

Daily Chart as of April 3^rd, 2020, after the market close (Source: Thomson Reuters)

Tullow Oil PLC shares closed at GBX 17.285 on 3^rd April 2020, up by 47.99% versus the previous day closing price. Stock's 52 weeks High is GBX 254.71 and Low is GBX 7.17.

Business Outlook Scenario Amid Oil Prices Volatility

As per the current challenging environment, the company has confirmed that the debt capacity has been imperative and securing the ongoing support of the RBL lending banks. Recently, the company has given the positive news, which shows a robust hedging strategy and the strength of the producing assets. Guidance for production in 2020 stays unchanged. Working interest oil production is projected to average in the range of 70,000-80,000 bopd, while the Group production was in line with anticipations. The company is intending to raise over USD 1 billion through portfolio management. Therefore, the business is responding decently to the challenges presented by the Coronavirus (COVID-19) pandemic. While reservoir development and net pay at this site are lower than the pre-drill estimates, the business is generating decent levels of underlying free cash flow for the growth of the business of the company.

Premier Oil PLC (LON:PMO)

(Source: Company Website)

Established in 1934, Premier Oil PLC is the United Kingdom-based company engaged in all stages of oil and gas exploration production with interest in Southeast Asia, North Sea, Latin America, the Falkland Islands and Pakistan with 78.4 kboepd of production in the financial year 2019.

Strategic Progress

• Operating in a responsible manner with safety measures.
• Holding a commercially advantageous position by focusing on high-quality assets.
• Maintaining decent liquidity and capital.
• Acquire right talent at work.

(Source: Company Website)

Accomplishments in the Recent Past

• 5^th March 2020: Elisabeth Proust had joined the board an independent Non-Executive Director, effect from 1^st April 2020.
• 7^th January 2020: The group has proposed acquisition from BP for USD 625 million for the Andrew Area and Shearwater assets, representing 25% interest.
• 28^th March 2019: The group announced the disposal of Premier Oil Pakistan Holdings to Al-Haj Energy Ltd for the consideration of USD 65.6 million.

Quick View on Recent Financial Highlights

• From the perspective of a recent trading update, the company's assets performed well with a production of 76.6 kboepd in February end. The business has hedged around 30 per cent of its oil and gas entitlement production for FY2020 at $60/bbl of an average oil equivalent price. The group has decent liquidity with undrawn facilities of around USD 330 million and unrestricted cash of USD 135 million in February end.
• Coming to the financial year 2019 results, led by an increase in the revenue from UK based business, the revenue increased to USD 1,584.7 million in FY19 as compared with the previous year (FY18: USD 1,397.5 million). The operating profit declined to USD 455 million in FY2019 from USD 531 million in the financial year 2018, driven by an increase in the operating expenses for the period. Led by the increased sales revenue and the Group's tax loss position in the UK, the profit after tax surged to USD 164.3 million as compared with the previous year (2018: USD 133.4 million).
• During 2019, the company generated positive free cash flow of USD 327.4 million which was directed towards further strengthening the balance sheet and debt reduction. On 31st December 2019, the net debt stood at USD 1.99 billion. The company has reduced more than $900 million of net debt since October 2017. For the current period, EBITDAX from continuing operations stood at USD 1,230 million, a surge of USD 139 million against the previous period EBITDAX of USD 1,091 million.

Share Price Performance

Daily Chart as of April 3^rd, 2020, after the market close (Source: Thomson Reuters)

Premier Oil PLC shares closed at GBX 22.84 on 3^rd April 2020, up by 23.46% versus the previous day closing price. Stock's 52 weeks High is GBX 120.70 and Low is GBX 10.02.

Business Outlook Scenario Impact due to Covid-19 Chaos

Production guidance for the full year is expected to be in between from 70 kboepd to 75 kboepd. The group's management is in discussions to reduce the capex program in 2020 and has suggested savings and deferrals of USD 100 million can be achieved with the reductions. With the assumption of reducing USD 100 million from capex 2020 and oil price of USD 35 per barrel for the remaining year, the company expect its cash flow to be neutral in FY2020 excluding the positive cash flows from potential disposal proceeds or the proposed UK acquisitions. In UK production, the proposed acquisitions expect to add material cash generative. All operated projects would be developed by the company on a net-zero emissions basis. The company is delivering a pipeline of high impact exploration wells, with targeting 300 mmbbls of a net risked resource over the next 18 months. The ongoing outbreak of Coronavirus could impact the company's operations in the near term.

Comparative Stock Performance of Tullow Oil PLC & Premier Oil PLC with FTSE All Share Index

Source: Thomson Reuters

In the last one-year, TLW and PMO share price performance have decreased as compared to the FTSE All Share index performance.