Worrying times for Tullow Oil

Standard & Poor’s downgrade leaves rating with negative outlook, suggesting further cut

Storage tanks at Tullow Oil’s Ngamia 8 drilling site in Lokichar, Kenya. File photograph: Baz Ratner/Reuters

Storage tanks at Tullow Oil’s Ngamia 8 drilling site in Lokichar, Kenya. File photograph: Baz Ratner/Reuters

 

Tullow Oil, which saw its stock slump 72 per cent on Monday, after lowering its production guidance and the exit of its chief executive and exploration director, has subsequently clawed back more than a quarter of its losses as bargain hunters have crept in from the sidelines.

However, its main shareholder has gone in the opposite direction, selling off almost half its stock on Thursday, leaving it with a 3.6 per cent stake and position just outside the Tullow’s top-five investors.

Debt ratings firm Standard & Poor’s moved on Friday to downgrade its rating on the exploration group’s creditworthiness by one level to B, which is five rungs deep into junk status. It also left its rating with a negative outlook, suggesting it could be cut further.

Tullow had already been under pressure, having cut its 2019 production forecasts before it moved on Monday to cut its medium-term guidance amid issues in its Ghanaian fields: Jubilee and TEN. In addition, it warned last month that two oil fields found off the Guyana coast in South America contained heavy oil with high levels of sulphur, placing a question mark over their commercial viability.

“Although we understand that it plans to use its financial flexibility to offset the lower profitability and maintain positive free cash flow, we see a less robust business that has weaker credit metrics,” said S&P, adding that the executive exits have created “some uncertainty regarding the company’s strategic direction”.

“In our view, the company’s credit metrics may remain fairly volatile over the short term. If the production projection for its oil fields matched the lower part of the company’s guided range or if oil prices matched our medium-term working assumption of $55 per barrel, the adverse impact could be significant.” Worrying times.

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