Tullow Oil slashes capex, suspends dividend; warns on impact of lower prices

Tullow Oil swung to a full year pre-tax loss of $1.6bn driven by $2bn in exploration writeoffs, suspended its dividend and warned future results would be “adversely” hit by sustained oil prices at current levels.

The company, which was last week demoted from the FTSE 250, forecast free cash flow for 2020 of $50m - $75m at $50bbl and breakeven at $45bbl. It also cut capital expenditure by 30% this year to $350m with an option to go further and maintained full year production guidance.

Tullow added that it would axe more than a third of its workforce and would try to raise $1bn from portfolio management activities.

It also warned that "unprecedented market conditions" increased risks on the firm's ability to operate as a going concern if it could not progress portfolio management.

Oil prices have plummeted on a slump in demand due to the coronavirus which has hit air travel globally. Saudi Arabia started a price war this week after failing to agree production cuts with Russia in an attempt to stabilise prices.

Tullow accused the Saudis of cutting prices “in an attempt to prioritise market share rather than price stability”.

“These recent events will continue to have an impact on oil price volatility. Tullow prudently manages its commodity risk and is well hedged with 60% of 2020 production hedged at a floor price of $57bbl and 40% hedged at a floor price of $52bbl for 2021,” the company said on Thursday.

“Realised oil prices for January and February 2020 averaged over $60/bbl. If oil prices remain at or below their current levels for an extended period of time, this would adversely impact our future financial results.”

Tullow said 60% of 2020 sales revenue had been hedged with a floor of $57bbl and 40% of 2021 sales revenue hedged with a floor of $53bbl.

“Working interest oil production is expected to average between 70,000 and 80,000 barrels of oil per day and year-to-date, group production is in line with expectations,” the company said.

AJ Bell investment director Russ Mould said Tullow's decline from a one-time member of the FTSE 100 index had been "as dramatic as any soap opera".

“For shareholders it has been a depressing story, reflected in the fact that the stock was priced at £15 back in 2012 and today is below 15p," he said. "The business also took on too much debt and the previous oil price crash in 2014 laid its vulnerabilities bare for all to see."

Mould questioned the likelihood of Tullow raising $1bn through asset sales as it would be selling selling projects "at a time when oil prices are significantly depressed and will be working from a very weak negotiating position, so this total could prove overly ambitious".