After the Tullow Oil share price crunch, should I buy again?

Smaller oil and gas explorers are among the riskiest stocks I invest in. Since I sold around breakeven a few years ago, Tullow Oil (LSE: TLW) This share price is falling.

I had a lucky escape. But every time I see Tullow shares down in the dumps, I wonder if it’s time to get back.

We’ve gone up a bit in 2023. Since the beginning of the year, we’ve seen a 4% price increase. But the bigger picture is not so good. Over the past 12 months, Tullow Oil shares are down 33%. And over five years, the loss grew to a painful 82%.

In an update on January 25, chief executive Rahul Dhir spoke kindly. He said: “Strong operational delivery, strict focus on costs and capital discipline, increased equity in the main field operated in Ghana and higher oil prices driving the material, generating free cash flow in 2022.“.

Cash flow

Expected free cash flow can be a rare commodity in the oil exploration business. So good to hear.

The problem is, the cash needs to be used to tackle Tullow’s mountain of debt. The CEO then spoke about “accelerating the group’s deleveraging to a ratio of net debt to EBITDAX of 1.3 times by the end of the year“.

If Tullow can achieve it, it could mark an important milestone. In the first half of June 2022, the net debt to EBITDAX ratio was 1.9 times, so there is still some way to go. Its own net debt is $2.3 billion.

Evaluation

Oil stock prices are tough at the best of times. And debt makes it harder. Estimates put Tullow at a price-to-earnings (P/E) times just around two. However, what we have here is a company with a market cap of £566m but net debt of $2,336m (£1,887m).

To buy the entire company and pay off the debt, the investor would have to come up with £2,453m. We can use that to calculate what is known as the company’s P/E value, instead of just using the market cap. Thus, we get a P/E of about 8.6.

That still doesn’t look too good for the company sitting on Tullow’s oil and gas assets. And where can you buy it at the current stock price.

Loan progress

But for me, it all depends on the progress of the loan. This is down, after the pre-Covid 2019 year ended with $2.8bn. But progress has been intermittent, and debt management in 2022 is aided by strong oil prices.

Oil is still around $85 a barrel. But it may drop in the next 12 months. And it could make Tullow’s debt reduction plan more difficult.

So, I see temptation in Tullow’s current share price. But as long as I really will buy a part of a huge debt with a small oil company tacked on, I will refuse.