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The Tullow Oil (LSE:TLW) share price is down 97% since its all-time high in 2012. So that makes the independent oil and gas exploration and production company great value, right?
Well, I believe people often overlook one significant risk when looking for value opportunities.
How do I know that if a company’s share price is low, it doesn’t deserve that price?
There are specific elements of its financial statements that I need to look at. Then I also need to put the company’s financial performance in context, examining its real operational challenges.
Looking at both elements in unison gives me a balanced view of whether I’m buying something genuinely ‘on sale ‘or something that could be worthless.
If something seems worthless after digging into the details, in investment language, it’s known as a ‘value trap.’
Why the fall?
I’m an investor who focuses on operations and financial statements, not on share price movements. It means I’m someone who cares about whether a company is a good business or not, with prospects for growth
Technical analysis including studying price charts, is something I don’t do much of.
I think a firm’s business results are more reliable indicators of where a share price will go over the long term. So, here are the three main reasons that I see for the price fall.
The first is that Tullow Oil tried to expand unsuccessfully and held a lot of debt doing so. Unfortunately, it wrote off $1.2bn in debt, a CEO departed in 2019, and the company missed production targets.
The second is that the pandemic seriously hit the company. Reduced demand caused the stock to decline, and this was all in the middle of a $3bn debt crisis.
Third, the company faced lobbying, bribery and tax evasion accusations in the early 2010s. It also faced a weak oil market from 2014 to 2020.
That’s a lot to deal with, not to mention the ongoing shift towards renewable energy that’s currently under way.
Can it turn around?
While I think the above evidence signals a possible value trap, there are some core reasons why I think there could be some good news ahead.
The company is aiming for $800m in free cash flow from 2023 until 2025, stressing efficiency as a driving force behind this. Free cash flow is the cash a company has left behind after operating and other business expenses.
Admittedly, the first half of 2023 saw $1.9bn in net debt for the company and $142m in negative cash flow! But it generated $777m in revenue and $70m in net profit, which I think is promising.
On a further positive note the company is aiming for 58,000 to 60,000 barrels produced per day and $100m in free cash flow for the full year 2023.
Will I buy?
Investing in the oil business requires understanding a lot of complexity. I don’t think my short introduction fully equips me with the knowledge needed for me to invest, and it has also deterred further research into the company for me because of the immediate red flags.
That’s particularly the case given that I’m embracing changes like electric cars, solar power and the like, I think in the long term, oil will have less of a place.
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