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How to value Tullow (updated model)

 It's been an interesting week for the oil markets as OPEC+ met up and decided not to increase production for a while. Brent closed at $70.2 on Friday night in the US, and the US goverment had a mamoth 24 hour session to approve a $1.9Tn support package for the economy. 

Back to Tullow Oil and further to my blog post on the 5th I realised that I hadn't accounted, in my valuation model, for the $125m of restructure savings that Tullow referenced in the January trading update 

Another update with kudos to MatchKing on the LSE discussion board is more detail on the hedging position for 2021 for Tullow. As you may recall from the January RNS, Tullow increased revenue by an additional $0.2bn with hedging insurance last year. The update is detailed in this circular on page 15 which in summary is that 60% of Tullow revenue is hedged with a floor of $48 and cap averaging $67. As such, I've added another row into the spreadsheet that shows that my previous estimate of an average Brent price of $65 for the year is unchanged at $65 (shown with the black border). In the green box which is an upside with Brent at an average of $70, this now becomes a realised price of $68.2 after the insurance/ hedging cost.

Here's the revised valuation model (click to expand)


So, recapping, there is an extra row adding in the $125,000 extra benefit from restructuring and a new row for the realised OP.

At the bottom of this back of the fag packet model is what the share price would be if you required a 20% return on investment. As such in the black box the valuation is £1.55 a share now for an average OP of $65 for '21 and a valuation of £1.73 for an average OP of $70 for the year.

The percentages are based on a marcap of £718m which is 50.76p a share. As such if you think the OP will average $70 for the whole of 2021 and you think Tullow will hit the middle of their 60-66k bopd range then this is described in the green box and represents a current return on a share purchase at 50.76p of 68.3% this year before debt repayments. If you purchased the same share at £1.73 according to this model (which is quite simplistic) this would give a 20% return before debt repayments.

Please make sure that you should do your own research. I'm happy to share mine. I own shares in Tullow Oil and this is not investment advice.

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