Over the last 12 months, the Tullow Oil (LSE:TLW) share price has surged by almost 400% and is now back to trading at pre-pandemic levels. Like many other oil businesses, 2020 was a tough year. But even before Covid-19 started disrupting the industry, the Tullow Oil share price was already crashing.
In 2019, it lost 75% of its value. What happened? Will the stock price recover in 2021? And should I be adding the company to my portfolio? Let’s take a look.
Tullow Oil share price: the crash of 2019
Tullow Oil is an exploration and production company of crude oil. Extracting this material from the ground is a fairly complex process that can introduce substantial challenges, as this particular company discovered in 2019.
The management team had built-up considerable investor expectations throughout the year regarding two new oil fields in Guyana. These sites had the potential to bring stability to the petroleum system in the region. However, the reality turned out to be quite the opposite.
After further investigation, both sites were found to be polluted with heavy oil. Without going too deep into material science, heavy oil is a highly viscous material. In other words, it doesn’t easily flow into production wells, making the process of extracting the tar-like substance significantly more challenging. This discovery ultimately brought the financial viability of these new sites into question.
A few months later, Covid-19 hit. And global operations ceased, leading to the Tullow Oil share price experiencing its largest drop in over twenty years.
A slow recovery
Like many other businesses, Tullow Oil was significantly impacted by the pandemic. By the end of last year, total revenue dropped by 19%, and the firm reported a net loss of $1.22bn. Furthermore, due to the planned temporary shutdown at one of its main sites, the total oil production forecast for 2021 has decreased to 60,000 – 66,000 barrels. In comparison, total production in 2020 was 74,900 barrels.
Needless to say, this isn’t fantastic news. But, there are some signs of recovery. The net loss, while substantial, was approximately $450m less than the loss of 2019. Ongoing negotiations with creditors allowed for total debt levels to drop from $4.5bn to $4.15bn – an 8% decline. And all the while, as lockdown restrictions get slowly lifted thanks to the vaccine rollout, oil demand is back on the rise. As such, oil prices have returned to levels above $60/barrel.
In my opinion, these are some promising trends, especially since the management team have announced that its assets in West Africa will substantially boost production levels as of 2020.
Closing thoughts
Overall I believe Tullow Oil, and subsequently, its share price is back on track. However, the business still has a long road ahead before recovering from its 2019 debacle that is likely going to be a multi-year journey.Â
Personally, I think there are far better investment opportunities available today. Therefore I won’t be adding the stock to my portfolio.Â
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Zaven Boyrazian does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.
