Tullow Oil shares slip on Canaccord downgrade

Canaccord said the issues Tullow highlighted in its 9 November trading update on the Tweneboa, Enyenra, Ntomme (TEN) fields offshore Ghana, raise a “hint of concern” and the scale of projected net debt was substantially more than it had expected.

“More generally, we remain concerned about the concentration of cashflow generation in Ghana,” Canaccord said.

“Over the next two years we expect over 70% of the company's production to come from Ghana, where operating costs are relatively low, derived from less than 20 production wells in Jubilee and TEN.”

In its trading update for the period 27 July to 9 November, Tullow said the production ramp-up at TEN to end-October was hurt by issues with water injection systems. The annualised gross production for TEN in 2016 is now expected to be 15,000 barrels of oil per day.

The business expects to exit the year with net debt at around $4.9bn.

Canaccord said the scale of net debt and the outlook for the oil price provides the “greatest hurdle to investment in our view”.

“We anticipate net debt reducing to around $4.5bn at year end 2017 at our current $60 per barrel assumption, and under that scenario we expect the planned refinancing in '17 to go relatively smoothly,” the broker said.

“But at $50 per barrel our projected net debt would be $4.65bn and under those conditions we believe that the lenders would be inclined to extract more value from the company and equity holders.”

Canaccord said despite its concerns on oil prices and debt, Tullow appears more robust than some of its highly leveraged peers. However, the broker concluded that it is not enough to be an attractive investment, short of significant sustained OPEC production cuts.

Shares fell 3.05% to 254.60p at 1006 GMT.