Tullow Oil vs Brent spot price

 Further to my blog post looking into some of Tullow's high level financials as an introduction, I thought I'd take a quick look at Tullow vs the Brent spot price. 

Rolling the clock back a year or three Tullow tended to track Brent as many other oil companies do. I know it's a bit simplistic to say, but if the oil price (OP) went up 10%, a company whose main product is the production of oil would naturally go up 10% too; even if the rise in the OP was to then reverse a few months later (you'd expect the share price of the oil company to reverse at the same rate).

Exploring for and producing oil is an expensive business; this is often financed by debt and when the OP is high the number of projects started increases. Again - that's obvious.

Some oil fields in the OPEC+ group, such as those in Saudi get slowed down by 1m barrels of oil per day (BOPD) so that as a country they produce 11m BOPD instead of 12m for example. This reduction in supply helps to balance the supply and demand and move the resultant OP either upwards or downwards.

Right now, it's expected that we might be in for a mismatch between demand and supply. In the short term due to the Texan freeze, and in the medium term due to the slightly lower supply than necessary. Some of this deliberately caused by OPEC+ and some accidentally caused by lack of planning and investment.

For a particular company such as Tullow, it might produce an average of 60,000 BOPD for 2021, or 63,000 or 66,000. At one of the lowest costs of production in the world at $11 per barrel it's reasonable to expect that after all costs and debt repayment are taken into account that 2021 should be a good year for the company.

As the dollars roll in, it's also reasonable to expect that capex will be set aside to grow next year's production number. The advantage here is that the company is likely to be able to produce significant free cash flow with the OP north of $50 (at least $500m annually before capex costs). As production is increased from existing fields, or with the prospect of newly discovered fields there are only the marginal costs to take care of and the company can be more efficient with its return on investment.

Looking back over the last year or two in the graph below comparing the Tullow share price with the Brent spot price, it's clear that there were fears about the level of debt, the lower oil price and the slow down due to the pandemic all took their toll on the company.

The capital markets (writing debt for Tullow) are taking a more optimistic view of the world as shown in the bond prices for Tullows debt due for repayment in 2022 and 2025. There has also been a recent agreement on 26th Feb with Tullow's lending banks approving their strategic plan and ongoing plans to produce capital to repay the net $2.4bn of debt. Tullow has a track record here, and has repaid $2.4bn of debt over the last 5 years. With $125m of annual savings announced in January, it's possible that they will be quicker this time. They certainly plan to get net debt down to $1bn to $1.5bn in the not too distant.

The question now is where next for the share price? (shown as the blue line below). The purple line is the Brent Oil Spot Price. Prices are shown as a percentage of those around 18 months ago. Click on the graph for a bigger picture.

Please do your own research and don't take this as investment advice. I own shares in Tullow, as I think they can close the gap. I'm also happy to share my research. There are some companies that disagree and have borrowed 7 to 8% of Tullow shares in the hope that they will reduce in price; many of these positions were opened up at a time of a lower oil price, lack of vaccine for covid19, start of global slowdown, and prior to Tullow releasing $180m with the sale of one of their fields. A couple of these short positions have been reduced in recent weeks, including one that has been almost paid back since the agreement with Tullow's banks announced last week.