Tullow Oil nudges guidance higher as business 're-set' with lower costs

Tullow Oil has taken action to "re-set" the business for the new oil price environment and slightly increased its guidance for full-year production after enjoying strong West Africa oil production in the first half.

Tullow, which remains rumoured to be a potential takeover target for BP, said its West African oil production averaged 66,500 barrels per day (bpd) and so it has upped its 2015 working interest production guidance for West Africa to 66,000-70,000 bpd from 63,000-68,000 bpd.

This oil was sold on average at a realised post hedge oil price of $71.4 per barrel, down from $106.7 in the same period last year.

It said this level of production total revenue for the first half would be £0.8bn versus consensus forecasts of $821m, gross profit £0.3bn (consensus is $318m) and pre-tax operating cash flow £0.5bn. Capital expenditure is also expected to be elevated to $1.9bn this year.

Elsewhere, the TEN Project in deepwater offshore Ghana has remained within budget and was said to be on track for first oil in mid-2016, while in Europe, despite the April sale of a Dutch gas asset, European gas production was within guidance at an average of 8,100 barrels of oil equivalent per day (boepd).

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Average working interest production guidance in Europe, having been adjusted by 1,000 boepd to account for this sale, is now 6,000-8,000 boepd from 6,000-9,000 boped.

In East Africa, the company has made "steady progress" with good appraisal and test results from wells in Northern Kenya and strong support from the Governments of Kenya and Uganda regarding the export pipeline and the sanction of the Lake Albert oil development.

"We have taken a number of important steps to ensure that Tullow remains on a firm financial footing. This approach is paying off with good progress across the business in the first half of 2015," said chief executive Adrian Heavey.

Heavey added that Tullow, which was relegated from the FTSE 100 earlier this year after its shares were hit by the oil price sliump, has continued to build its inventory of exploration prospects "to provide options when market conditions improve".

Brokers still see plenty of potential in the company's shares, with the average broker price target is 455p.

"Losing 58% in its share price over the past year, there may be takeover and consolidation speculation within this industry that could well attract investors," noted Brenda Kelly at London Capital Group.

Likewise, the summary from analysts at Panmure Gordon was: "Overall, this looks a positive statement from an operational point of view, but the impact of low oil prices on the company’s overall financial position is obvious."

While Canaccord said: "Not much that's genuinely new or company changing in our view but we think there is enough news around production and outlook for a positive market response after a weak SP performance in May."