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It has been a good six months for shareholders of tulle oil (LSE:TLW), and the share price rose 36%. However, that still leaves the stock a whopping 83% lower than it was five years ago.
So, with the stock so far below where it used to be and recent momentum looking positive, should I fill my boots?
Continued business strength
The business continues to do well.
First half revenue fell 10% compared to the same period last year. But that was due to falling oil prices, as volumes actually increased slightly. Oil price volatility remains a risk (but also an opportunity) for both revenues and profits.
In fact, I believe the recent rise in the Tullow Oil share price has been largely driven by strong oil prices and the prospect of further consolidation in the sector following ExxonThe huge acquisition of Pioneer.
The full-year outlook shared so far seemed pretty decent to me in most respects. The main concern I had when reading it was the net debt of $1.7 billion. This equates to around £1.4bn, roughly three times the company’s current market capitalisation.
At the time, Tullow said it was “advance a range of options to address debt maturities and position the business for successful refinancing”. Yesterday (November 13), he announced that he had obtained a five-year, $400 million loan.
Concerns about debt levels
This takes pressure off the company for now when it comes to maintaining liquidity on its balance sheet.
However, it does not solve the underlying debt problem. To illustrate why this has helped lower the share price, first half after-tax profits from continuing operations were $70 million. But that was after paying net financial costs of $135 million.
In other words, (assuming equivalent tax treatment) after-tax profits would have almost tripled if the company had not spent so much on financing its activities.
What could be expected from the assessment?
If oil prices go down, I think stock prices could soon follow suit. But with some analysts predicting record oil prices on the horizon, that could be good for the company.
However, to return to levels similar to their all-time highs, I believe it is necessary to drastically clean up the balance sheet. Higher oil prices could help if the company uses profits to pay down debt. In times of high interest rates, having so much debt is a millstone for Tullow’s finances.
But while a higher oil price could drive Tullow Oil shares higher, the debt situation alone deters me from adding the company to my investment portfolio.
