Tullow Oil is set to book a $600m impairment charge as low oil prices haunt the sector

Courtney Goldsmith
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Tullow Oil's new chief executive is working to return the company to growth (Source: Getty)

Africa-focused Tullow Oil is set to incur an impairment charge over low oil prices as it works to reduce debt and return the company to growth.

In a trading update for the half year to 30 June, the oil producer said it expects to book a $600m (£468m) pre-tax, non-cash impairment charge due to lower oil price forecasts. Oil prices have come under pressure from rising supply in the US, falling below $50 a barrel this month.

Gross profit is expected to be higher, however, at $300m compared with $200m the previous year.

Shares in the FTSE 250-listed firm initially fell nearly three per cent at the market open, but they are now trading up 0.53 per cent at 152.5p.

Investors will be pleased to see the pace at which the company is reducing debt, said Barclays analyst James Hosie. At the end of June, Tullow's net debt is estimated at $3.8bn, a reduction of $950m from the year end 2016.

This followed a $750m rights issue in April.

"Bears may point to the lack of an update on the debt refinancing, but the process is ongoing with Tullow retaining ample headroom and flexibility to support its investment plans at current oil prices," said Hosie.

Paul McDade, newly appointed chief executive, said Tullow has made "good progress" despite the tough market conditions.

"Since I became chief executive 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."

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

However, Al Stanton, analyst at RBC Capital Markets, said Tullow's fate will likely rely on oil prices.

"Although Tullow is working hard to deliver on its potential, we continue to expect the stock to trend with the oil price and although non-cash, today’s $0.6bn impairment charge is a reminder of the pressure the sector is under."

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