For 18 months, one topic has dominated questions from Tullow Oil’s investors: debt. By the end of 2016, the Africa-focused explorer and producer was sitting on a whopping $4.8 billion pile of debt, the combined effect of the oil price slump and the costs of investment in its Ten field off the coast of Ghana. That gave the company an uncomfortably high gearing of more than five times earnings before exploration expenses, a key measure for oil explorers.
Things are improving, however. Higher oil prices, increased production and a rights issue helped to bring net debt down to $3.5 billion by the end of last year, reducing the gearing to a smidgen higher than Tullow’s target of 2.5 times. By the end of March it had trimmed this to $3.4 billion.
“Any concerns there might have been about financing, I think we have taken all of that off the table,” Les Wood, its chief financial officer, said yesterday. A recent $800 million bond issue had pushed all its debt maturities out to late 2021. It passed a recent covenant test with “flying colours” and, he said, had flexibility to withstand a fall back in oil prices.
If Brent crude prices average $60 a barrel this year, Tullow Oil expects to generate free cashflow of $500 million, giving it plenty of funds to reduce debt. Even if Brent were to average only $50 for the year, it still expects to generate more than $200 million — and has hedged to protect itself from any steeper falls. At $70, it expects to generate a very healthy $700 million of free cash.
“People have got to the point now that the conversations are about what’s happening with production and exploration,” Mr Wood said. Tullow produces most of its oil from fields off Ghana, although it has stakes in other fields in west Africa. It reported first-quarter production of 87,700 barrels per day, within the 82,000 to 90,000 barrels guidance for the year, with fields in Equatorial Guinea performing particularly well.
The biggest growth prospects come in east Africa. Tullow is also gearing back up for frontier drilling this year in Namibia, followed by Guyana and Surinam next year.
Questions at Tullow’s annual meeting showed a renewed interest in another area: dividends. Tullow Oil scrapped its dividend in early 2015, shortly before it tumbled out of the FTSE 100 amid the oil price rout. Mr Wood said in February that it could look at resuming returns to shareholders this year and, two months of rising oil prices later, sounded upbeat.
The decision will be overseen by Dorothy Thompson, the no-nonsense former chief executive of Drax who is Tullow’s new chairwoman. She is replacing Aidan Heavey, Tullow’s founder and former chief executive.
Still, the tease of possible dividends is not the main reason to consider Tullow: even in its heyday, it yielded little more than 1 per cent. As such, share price performance is key.
Tempus last looked at Tullow in January, when its shares were trading close to 220p — not far from yesterday’s close of 229p, which was down 4 per cent on lower crude prices and perhaps profit-taking. The shares dipped as low as 173p in mid-February, but have rebounded, which suggests that they have been largely tracking the oil price.
If you’re an oil price bull, therefore, Tullow looks like a good bet. Tempus takes a more cautious view: present crude prices are well above what most industry-watchers expected at the start of the year and, with Brent still above $73 yesterday, there is plenty of downside risk that could offset any rally Tullow would enjoy if it succeeds in its exploratory drilling.
The east African projects provide significant medium-term growth prospects. However, such projects remain subject to development risk.
ADVICE Hold
WHY Drilling excitement offset by risk of oil price falls and development risk
Boohoo
The share price of Boohoo.com has been volatile for a year, as investors worried that its rampant sales growth was coming at the expense of margins, so there were plenty in the City yesterday fearing that the fast-growing fashion retailer’s annual results would disappoint.
In the event, Boohoo’s numbers went some way towards easing any concerns. Its revenues of £579.8 million, up 97 per cent, and gross margin of 52.8 per cent were slightly ahead of expectations. Better still, the growth came from all regions — even Britain, where clothing sales have been muted. Nasty Gal and Pretty Little Thing, two recently acquired brands, made healthy contributions to revenues and pre-tax profit rose by 40 per cent.
Boohoo, a favourite among fashion-conscious younger buyers, was founded in Manchester more than a decade ago. Mahmud Abdullah Kamani and Carol Kane, its co-founders, developed a loyal following for their fast and affordable fashion lines — £20 party dresses, for example — and quick delivery times.
Indeed, part of the brand’s appeal is its short lead times, meaning that products can progress from the design stage to stores within six weeks. Television screens dotted around its HQ are updated every 15 minutes with bestselling items so that buyers can place larger orders if necessary.
Having a finger on the pulse of fashion has driven strong growth at Boohoo, which has 6.4 million active customers on its website, up 22 per cent on last year. It has three million more customers on its Nasty Gal and Pretty Little Thing sites.
The retailer’s focus has to be on convincing investors that its expansion is sustainable, not least as revenue growth appeared to slow slightly in the final quarter. The success of substantial investment in infrastructure, which includes a new distribution extension that will support £1 billion of future sales and a new warehouse for Pretty Little Thing, also will be monitored closely.
Boohoo said that trading this year had made a “strong start” and that growth in revenue and margins was expected. At a tough time for most retailers, it appears a solid prospect.
ADVICE Buy
WHY Stock down sharply from peak and more growth ahead
