While Tullow (LSE:TLW, Financial) stumbled operationally, much of the share price reaction was associated with forced selling by funds looking for regular income, as the company reduced its dividend β a good decision in our view. Tullow should be able to significantly beat its guidance for medium-term production of 70,000 bopd. At the same time, at close to 50% discount to core net asset value, the market is effectively writing off non-producing assets including those in Uganda, Kenya and Guyana, all of which carry potential and realizable value on a pre-production basis.
After the selloff, Tullow had a market capitalization of $975 million and it expects to generate $150 million free cash flow, assuming an oil price of $60 per barrel β which means a P/E of 6.5. In our base scenario of $75 barrel price, we estimate that Tullow would obtain $400 million free cash flow β a P/E of 2.5. Despite the company has failed in its exploratory projects β one of the causes of the selloff -, we think that just its portfolio of production assets would allow for a recovery of our initial investment. Moreover, if the crude price reaches our base scenario of $75 per barrel over the next 2-3 years, then the internal rate of return β IRR β of this investment will be in line with our historical average.
From azValor Asset Managment's fourth-quarter 2019 shareholder letter.
