This archive report was first published on 21 December 2019.
December 21, 2019, marked a significant day for Tullow Oil, as its share price plummeted on the London Stock Exchange. While this may have caught some by surprise, it was not an unexpected development for those closely watching the company in East Africa.
Since the oil price collapse in 2015, Tullow has been walking a tightrope, with the value of its acquisitions diminishing relative to its costs. The company's overselling of prospective returns to shareholders ultimately came back to haunt it, forcing the resignation of its CEO and CFO. The share price dropped by half in a single day, shedding significant value.
Tullow's golden period was in 2012, when it announced the discovery of a well in French Guyana, claiming it was so deep that one could sink Mount Kilimanjaro into it. The company also concluded its acquisition of Heritage Oil's assets in Uganda for $1.45 billion and found oil in Turkana, with its Jubilee field in Ghana starting production.
However, behind the glamour, Tullow was struggling. The company was overleveraged in Uganda, with acquisition and exploration costs peaking at $4.85 billion. It recovered only $2.9 billion from the farm-down of two-thirds of its interest to Total EP and the China National Offshore Oil Corporation. The bulk of the proceeds were retained by the partners to fund Tullow's share of subsequent field development activities.
When the final investment bill in Uganda was tallied, Tullow did not have the resources to back its share and was forced to surrender more of its stake to its partners in lieu of cash. A similar scenario played out in Kenya, where Tullow's interest in the Turkana fields has been diminishing over time.
Tullow is now in a position where it can neither turn back nor move forward without incurring a huge penalty. Under the current energy price environment, its assets are not generating enough revenue to fund expansion, and it is not a good candidate for additional credit.
Markets operate on trust, and timely and full disclosure of any material developments is not an option but an obligation. Tullow's failure to communicate openly with shareholders has led to a loss of trust, making it difficult for the company to recover.
