Tullow Oil (LSE: TLW) has been under immense pressure as the Covid-19 crisis has added to its chronic debt problems. It gained no respite with the release of interim results Wednesday, and the Tullow share price slumped 25% in early morning trading, before settling at around 10% down.
That’s what a $1.3bn loss can do for a share price. Much of that is down to $1.4bn exploration write-offs and impairments. But Tullow also recorded a free cash outflow of $213m. And saw net debt rise to $3,019m, from $2,948m a year previously.
That’s only a 2% rise in net debt, but what it does to the firm’s gearing is potentially devastating. Tullow reported net debt to EBITDAX (which is EBITDA plus exploration expenses) of 3x. That’s up from 1.8x, and moving in very much the wrong direction for such a heavily indebted company.
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Tullow Oil share price slump
It looks like there’s a financial crisis looming now, as Tullow said its “cash flow projections forecast a potential liquidity shortfall.” It’s evaluating “various refinancing alternatives with respect to the group’s capital structure.”
The Tullow Oil share price is down 70% so far in 2020, and has fallen 92% in two years. And I think this crisis could send it down even further. Tullow is almost certainly going to need a major new cash injection. I’ve been previously bullish on a possible recovery, and I think there’s definitely potential if the oil price slump ends sooner rather than later.
But it all hinges on Tullow’s ability to keep its liquidity going for long enough until its cash flow situation improves. And even if the company can pull that off, I see yet more dilution for existing shareholders before things get better.
More attractive oil buy?
Some smaller oil firms will surely make it out the other side of the pandemic and oil price crises, and go on to greatness. If you want to take a punt on a growth candidate, I think you could do a lot worse than Gulf Keystone Petroleum (LSE: GKP).
Gulf’s finances are looking much better than Tullow’s. In its first-half update released a week earlier, Gulf spoke of “a strong balance sheet with $140m of cash at 2 September 2020.”
Importantly, Gulf is facing no debt repayments until mid-2023. Tullow, by comparison, is facing a re-evaluation of its debt position in January 2021, in advance of the maturity of $650m in Senior Notes in April 2022.
The Gulf Keystone share price has also crashed this year, down 65% in the pandemic crunch. That’s only a little better than the Tullow share price collapse in the same period. And it seems unjust to me.
Superior finances
Gulf scored positive adjusted EBITDA in the half, of $27.5m. It’s a bit less than half the 2019 figure of $59m, after revenue fell by a similar proportion to $49.9m. But the figure that makes me sit up is Gulf’s operational expense per barrel, which it puts at just $2.60. The firm’s full-year capital expenditure is expected to be modest at $40m-$48m. And Gulf has hedged approximately 70% of its second-half 2020 net production, to help protect cash flow.
So which is more attractive right now, the Tullow Oil share price or the Gulf Keystone share price? The answer seems clear to me.
