Africa-focused Tullow Oil loses half its value

More than half of the value of the UK’s Tullow Oil was wiped out on Monday as Chief Executive Officer Paul McDade stepped down and the oil producer scrapped its dividend after failing to meet production targets due to weak performance by flagship assets in Ghana.

The London-listed company has been plagued by technical problems at its Jubilee field in Ghana and a delay in completing a well at the TEN offshore field.

Tullow, which had already cut its output estimates by 14 percent this year to 87,000 barrels per day (bpd), said on Monday its 2020 output would shrink further to a maximum of 80,000 bpd and fall again to around 70,000 bpd in 2021-2023.

Tullow also suffered blows in recent months due to setbacks at East Africa projects in Uganda and Kenya where it is yet to reach final investment decisions, as well as to its plans to develop oil fields in Guyana, one of the world’s hotbeds for exploration, where oil it discovered was of a lesser quality than hoped.

“The board has … been disappointed by the performance of Tullow’s business and now needs time to complete its thorough review of operations,” Executive Chairman Dorothy Thompson said.

Tullow’s director for exploration, Angus McCoss, also resigned.

Investors punished the stock on the news, sending shares of Tullow down to a 19-year low.

In a conference call, the company said it was open to receiving offers to acquire the company at the proper value.

The Africa-focused oil firm also suspended its dividend, which it only reinstated this year after a hiatus since 2015, as it still focuses on reducing its debt pile.

Tullow, which had a market cap of around $2.6bn after the slump in its share on Monday, expects its net debt to stand at around $2.8bn at the end of this year, and $2.6bn at the end of 2020.

It did not change overall reserves estimates for its portfolio. Such downgrades can affect oil producers’ credit lines. Shares in Tullow’s partner in Ghana, Kosmos Energy, fell around 8.5 percent.

Free cash flow is expected to come in at a minimum of $150m next year at an oil price of $60 a barrel, less than half of this year’s expected $350m. The group also slashed its capital expenditure programme and cut costs at its operating fields.

“There were warning signs that communication within the organisation was a concern, given the production downgrades already seen in 2019 – for us the question now is around whether the business needs an additional injection of equity,” investment bank Stifel said in a note.

Tullow has $300m in debt due in 2021 and a further $650m in 2022. Tullow’s chief financial officer, Les Wood, said the group was “comfortable” with its covenants with banks.

“The depth of the production cuts are … a surprise, particularly given the mechanical nature of a number of the issues. Expect guidance to be beatable but it will take some time to rebuild trust in the story,” BMO analyst David Round said.