Barclays hails Tullow Oil's dividend suspension as "pragmatic"

The company recorded a pre-tax loss of $2.05bn last year, compared with a profit of $313m in 2013, after taking impairments of $729m and exploration cost write-offs of $1.66bn.

Tullow also announced plans to deliver cash savings of $500m over the next three years which will be realised through reductions in capital expenditure, operating costs and administrative expenses.

The annual report “provides some concrete evidence of Tullow’s determination to reset its cost base and retain financial flexibility”, Barclays said.

The bank said the move to suspend the decision was “pragmatic” given the company’s current capital commitments, while the cost-savings target “represents a statement of intent from management focused on ensuring Tullow remains a low-cost oil producer, developer and explorer”.

Barclays acknowledged that Tullow could exceed its net debt-to-earnings before interest, tax, depreciation and amortisation threshold of 3.5 during 2016 if Brent remains below $60 a barrel.

“However, the actions outlined on costs and the dividend clearly improves Tullow’s financial flexibility. We believe such actions should ensure the company remains in constructive dialogue with its lenders,” the bank said.

As it stands, Barclays said it remains comfortable that Tullow has the financial headroom and financial flexibility in place to fund the business through the TEN development, even with Brent crude at $50 through 2015 and 2016.

“Conversely, the business is well placed to benefit from a gradual recovery in oil prices as it expands its production base.”

The bank gave the stock a 550p target price, representing upside from Wednesday’s price of 407p, down 1.8% on the day.