Tullow toasts debt reduction but warns against low oil prices

Tullow Oil hailed its recent rights issue and free cash flow from its producing assets as the main factors behind a "significant reduction" in debt and increased financial flexibility, but warned market conditions remained challenging.

The FTSE 250-listed company, which in April this year successfully completed a $750m rights issue in order to provide itself with financial and operational flexibility and enable growth over the next five years, said net debt in the first half of the year fell $950m to $3.8bn.

In a trading update released on Wednesday (28 June), Tullow added it expects to generate $600m of pre-tax operating cash flow for the first half of 2017.

The figure is higher than the first half of 2016 as a result of insurance proceeds and contributions from its two projects in Ghana.

Revenue is expected to rise from $500m to $800m, while gross profits are forecast to be in the $300m range, up from $200m a year ago.

However, the oil producer added it is likely to incur $600m worth of non-cash impairment in the first half of the year due to reduced oil price forecasts. Last week, the price of Brent crude fell below $45 a barrel for the first time this year, with traders growing increasingly skeptical Opec will deliver its promised cuts in production.

Group chief executive Paul McDade, who replaced Tullow's founder Aidan Heavey as chief executive earlier this year, highlighted the importance of focussing on financial discipline.

"Since I became CEO in April, I have reviewed our medium-term plans and remain satisfied that we are making the right investment decisions with regard to our producing, development and exploration portfolio," he said.

"Financial discipline and efficient capital allocation will be a key focus of my tenure as CEO as we seek to deleverage the company and return to growth even at low oil prices."

Tullow has also revised its forecast for capital expenditure down from $500m to $400m, a change which reflects a revision to prior year accruals in Ghana and lower forecast expenditure across the portfolio.

In the first six months of 2017, the group's projects in West Africa performed in line with guidance and are expected to average 81,400 barrels of oil per day (bopd), while Tullow's European operations are expected to average 5,600 bopd.