A trading and operations update from FTSE 100 oil explorer Tullow Oil (TLW) has a sting in the tail in the form of its largest ever write off of $2.7 billion, reflecting exploration failure and the collapse in crude oil prices.

The shares are down 2.6% to 348.6p today as the market reacts to the sheer scale of the impairments – even if these are non-cash items. The statement at least suggests the company is cutting its cloth to fit the lower oil price environment with its exploration budget for 2015 slashed by 30% to $200 million (a fraction of what it has allocated to this activity in previous years).

Tullow says it expects 2014 revenue to be $2.2 billion and to generate pre-tax operating cash flow of $1.5 billion, underpinned by strong performance from its West African oil production. Year-end net debt is projected at $3.1 billion but the company notes 60% of its 2015 output is hedged at $86 per barrel and points to $2.4 billion of available cash and debt headroom.


Irish stockbroker Davy, which rates the stock at outperform, comments: 'Like its peers, Tullow Oil is chipping away at its expenditure with further downward revisions expected as the group negotiates with key contractors and partners. Current capex guidance for 2015 is now $1.9 billion versus an earlier $2 billion estimate. A prudent approach to production guidance means that our 2015 forecasts will need to be reduced by 2,000 barrels of oil equivalent per day (boepd) or 3%.

'The rapid decline in the oil price in the last few weeks of the year, coupled with signalled but at the time unquantified write-downs, means that our 2014 forecasts are ahead of preliminary results.'

Westhouse, also positive on the stock with a buy recommendation and 770p price target, adds: 'The fundamental long-term production/cash flow growth story remains intact in our view and we would be buyers of Tullow on any weakness.'

Issue Date: 15 Jan 2015