Shares in Tullow Oil fell over 27 per cent today as the London-listed firm reduced its production guidance for 2019 after problems with its Ghana drilling operations.
The figures
The Africa-focused firm said that total oil production for 2019 would now be 87,000 barrels per day, down from an earlier forecast of 89,000.
Cash flow for the year has also been adversely affected by the fall in production, with a full year forecast of $350m (£272.6m).
Tullow Oil said that it is focused on reducing net debt, with expectations of debt of $2.8bn at the end of 2019, down from $3.1bn at the beginning.
Capital expenditure is expected to be around $540m, including $35m for the company’s 33.3 per cent share in Uganda’s Lake Albert development.
Shares fell 20.8 per cent to 163.1p this morning.
Why it’s interesting
In July, Tullow reported that its production well at TEN in Ghana had been suspended, which then also postponed the completion of the site’s water injector well.
In addition to the reduction in production, export from the Ghana fields has been low due to a lack of demand from the Ghana national petroleum company.
In August shares in Tullow shot up after the company reported a significant discovery off the coast of Guyana in South America.
However, samples from the Jethro and Joe wells found that the oils recovered from both wells are heavy crudes, with high sulphur content.
Heavy crudes are often priced at a discount due to the extra refining costs that are required to treat them.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, commented:
“This is a salutary reminder that not all oil is made equal. Heavy and sulphurous crudes are expensive to refine and as a result attract bargain basement prices, that significantly undermines the commercial value of Tullow’s Guyana assets – although the company hasn’t given up hope of finding more profitable oil elsewhere in the basin.
“At the same time problems in the massive West African fields has seen production slip up – and combined with lower oil prices that means free cash flow isn’t going to meet management’s expectations. Throw in troubles closing a deal to reduce its stake in oil fields in Uganda, and 2019 is turning into a bit of an annus horribilis for Tullow shareholders.”
Tullow said that it was assessing the commercial viability of these discoveries.
What Tullow said
Paul McDade, Tullow’s chief executive, said:
“Tullow expects to deliver robust free cash flow for the full year. This has been supported by our continued disciplined capital investment and underlines our commitment to further reduce our debt and pay returns to shareholders.
“However, Ghana production has not met our expectations this year and we are working closely with our joint venture partners to ensure that both fields perform to their potential.”
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Source: City AM. Main image credit: Getty
