When Tullow Oil pushed out its chief executive and head of exploration on Monday, slashing its production forecasts and scrapping its dividend in the process, its board knew it would have to face the wrath of disappointed investors.
But they could not have imagined the scale of the revolt, with a near 70 per cent share price collapse in the FTSE 250 oil and gas explorer ranking as one of the worst single day performances by a significant London-listed company this decade. More than £1.4bn was wiped off Tullow’s market capitalisation, valuing the company that was once worth more than £14bn at a little over £560m. The litany of excuses offered for the production downgrade included one minor technical problem: more water than expected had been flooding into its flagship oilfield.
Investors quickly concluded that, much like the troubled field off the coast of Ghana, Tullow’s prospects have now been severely diluted. From pitching itself as a fast-paced growth stock operating on the oil industry’s frontiers — but one that was also capable of paying dividends — the new leadership, under temporary executive director, Dorothy Thompson, has been forced to paint a far more prosaic future.
Tullow’s production will be almost a third lower than forecast as recently as the start of this year, averaging just 70,000 barrels of oil equivalent a day from 2020, down from closer to 100,000 b/d previously. The lower output will have a significant impact on the company’s free cash flow, which pays for dividends and funds new exploration and is expected to shrink to just $150m, from $500m previously forecast. A bigger issue may also be one of trust, with some investors saying they feel they have been taken in by an executive team that was at best wildly overconfident in its abilities. “There’s a decent-sized gap that’s opened up between Tullow’s latest guidance and what we were led to believe was possible,” said Thomas Martin at Numis, who covers the stock. “There will be investors and analysts everywhere thinking that whatever I thought I knew about Tullow I will now need to question and reset.”
In a market where oil companies are already struggling to find favour, with environmental concerns and long-term questions over demand growth dominating investor sentiment, Tullow was already navigating a difficult path. The oil company has largely focused its operations in Africa since it was founded in Ireland in 1985, often exploring in countries that are not yet established among the top ranks of producers on the continent. It also has prospects in Latin America. But it has had a volatile history; since its share price peaked in 2012, when oil was soaring, it has run into problems with debt and lower crude prices. Its shares had fallen by 75 per cent even before Monday’s collapse, as oil prices crashed from above $100 a barrel in late 2014.
“Tullow has had a number of operational problems in recent years, severely damaging its credibility,” said one top 20 investor. “If it can appoint a CEO with genuine operational expertise and enter a period of successful execution, then it could recover long-term value.” Analysts said Tullow had never lost its enthusiasm for frontier exploration. Al Stanton at RBC Capital Markets said the two departing executives — chief executive Paul McDade and Angus McCoss, head of exploration — had both been with the company for more than a decade and were closely wedded to its belief in growth through finding and exploiting new fields. “Explorationists are, by their nature, optimists and there tend to be a lot of them in the E&P sector and perhaps there is a tendency to too often give them the benefit of the doubt,” said Mr Stanton.
One question for Tullow’s board is whether the management team had created an atmosphere where bad news could not filter up, or where those who wished to take a more conservative approach to presenting the company’s prospects were pushed to one side. Mr Stanton pointed to a capital markets day last year at which Tullow had talked up the prospect of its fields in Ghana being potentially able to produce around 200,000 b/d — even though they were still in the relatively early stages of development and are now expected to produce less than half that amount. “There’s a belief in the industry that big fields tend to get bigger,” Mr Stanton said. “[But] internally the team that thought that was too aggressive clearly weren’t getting heard.”
Ms Thompson, the former Drax boss and non-executive chair at Tullow, denied the company had an issue with communicating bad news to senior management, arguing she had found “a very open culture” since joining last year. “I don’t think there’s been a culture of fear,” Ms Thompson said, but acknowledged there was room for improvement in how they had pitched the company, including a discovery in Guyana that Tullow later had to tell investors was of very heavy oil, which may not be commercially viable. That announcement caused a 25 per cent share price drop last month. “In hindsight there were elements of communication we wish we had done better,” Ms Thompson said, adding that the decision to remove two of the company’s top executives was “really about underperformance of the business over a period of time”.
Tullow will now need to find ways to pay down its medium-term debt. It is not in immediate danger but has a convertible bond of $300m maturing in 2021 and $650m of bonds maturing in 2022. It has more than $1bn in borrowing capacity tied to a reserve-based lending facility, but that will start to reduce in size next year under its terms. Analysts are now openly discussing whether the company will need to turn to already bruised investors with a rights issue to raise capital or whether it will find itself on the block.
While its production has been sharply revised lower, its oil reserves have not been. Ms Thompson denied the company was looking at a rights issue but would not — as a listed company — rule out a sale of some or part of the business. “Tullow is effectively always available at a price,” said Jamie Hosie at Barclays.