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Tullow Oil’s shares are on an upward charge

If drilling and exploration plans go as expected, production could rise to 150,000 barrels per day by the 2020s
If drilling and exploration plans go as expected, production could rise to 150,000 barrels per day by the 2020s

Investors in Tullow Oil can take comfort, perhaps, from the rather more upbeat tone that the company has adopted of late. It raised production targets in November and yesterday outlined a plan to increase output by more than 60 per cent going into the next decade.

Tullow was founded in 1985 in the small Irish town of the same name by Aidan Heavey, who is still its chairman. It was listed on the London and Irish stock exchanges the following year and today has its headquarters in London, although it continues to focus mainly on seeking out and extracting African oil and gas. It has more than a thousand employees, as well as interests across dozens of countries.

Investors with reasonable memories probably can recall Tullow shares being worth more than £12 in the early months of 2013. A steady fall from that high point quickened when the oil price began to move downwards in the last quarter of 2014. The final dividend was suspended at the start of 2015 as the company wrote down the value of many of its operations and began a cost-saving drive after its first annual loss in 15 years.

Paul McDade was promoted from chief operating officer to chief executive last April to replace Mr Heavey. It wasn’t the easiest of starts, but since announcing an operating loss of $395 million for the first half of 2017 and a disappointing well result in Surinam, Mr McDade’s job appears to have got a little brighter. A long-running maritime border dispute between Ghana and Ivory Coast that stymied expansion of Tullow’s Ten offshore field has been resolved, allowing expansion of the huge site.

The refinancing of the group’s $2.5 billion reserve-based lending facility was oversubscribed, which lessened the likelihood of having to issue additional shares to shore up the balance sheet.

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And yesterday the company said that its west African oil production had beaten expectations, at 89,100 barrels per day, while gas in Europe added the equivalent of a further 5,600 daily barrels.

Improved levels of free cashflow generated in 2017 helped to trim net debt by £1.3 billion to $3.5 billion at the end of the year. Revenue will be about $1.7 billion, with gross profit set to come in around $800 million.

The forecast for 2018 is for production levels to be maintained, with a target of between 86,000 and 95,000 barrels a day. Development drilling off Ghana on Ten and on the Jubilee field near by is pencilled in to start in February and it is expected that far greater production will be brought on stream at both sites. Alongside that, Tullow is making progress on prospects in Kenya, Ivory Coast, Namibia and, slightly further afield, in Peru.

Mr McDade has indicated that further debt reduction is likely across this year, while capital spending will be in the region of $460 million. A sale of part of Tullow’s operations in Uganda is at an advanced stage, while sites in Pakistan also are likely to be offloaded this year.

If its drilling and exploration plans go as expected, the company believes that its production could be nearer to 150,000 barrels per day as it moves into the 2020s. With a much reduced cost base, that type of increase should give a bit more flexibility on reducing its debts and moving further into new frontiers, such as South America.

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Tullow’s shares were changing hands for about 150p in June last year, but they have been on an upward charge in recent weeks and have been going for around 220p. There could be more to come if Mr McDade continues to beat targets and the oil price rises.
Advice Hold
Why Progress has been made in the turnaround. However, there is a lot of debt and investor sentiment could be tested if oil falls back again

Interserve
If the outsourcing industry was a football match, then you know what the chants would be from Interserve’s opposing fans: “Are you Carillion in disguise?”

Its trading update would suggest not. While Carillion faces an existential crisis, with bankers, ministers et al wondering if it’s worth saving, Interserve took them aback by stating, in not so many words: We may have screwed up, but this is a fundamentally sound business.

Interserve is one of those private companies that provides public sector services. It was big in the private finance initiative boom, with more than 40 contracts, notably building schools in Cornwall and Manchester. It constructed buildings and lives off the contracts to maintain them over the next 25 years. Formed from the Douglas and Tilbury construction companies, it is one of the country’s largest employers of workplace cleaners and caretakers. Heavily exposed to public spending, it recently scored the contract for the part-privatisation of the Probation Service. It has annual revenues of £3.5 billion and 80,000 employees.

There is not an outsourcer on the London market that has not gone through a cataclysm in recent years. Interserve’s was in thinking that it could build energy from waste plants despite having no background in the game. It is paying the price for a messy withdrawal, with net debt spiralling to £513 million in a business that typically should carry few borrowings. For context, it expects to make pre-tax profits of little more than £50 million. Its bankers have agreed a stay of execution, although its market value has fallen to £175 million.

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Debbie White, who must have spent her four months as chief executive wondering what she is doing here, said yesterday that she had identified up to £50 million of savings. The market answered by lifting the shares 19½p to 119p.

Few game plans survive contact with the enemy on the pitch. Interserve is in business with a public sector with no money and no strategic direction. It has a chief executive and a chairman, Glyn Barker, unproven in the situation. It is a sector not merely unloved by investors but actively mistrusted.
Advice Avoid
Why Too many unknowns

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