FT16 Jan 2020 07:49
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“Climate change is different,” wrote Larry Fink this week. “Companies, investors?.?.?.?must prepare for a significant reallocation of capital,” said the chief executive of $7tn investor BlackRock. He could not have been referring to fossil-fuel explorer Tullow Oil, though. Investors have already reallocated so much capital from its shares that its market value fell 70 per cent, or £1.4bn, last month. And the company is already reallocating — and reducing — its own capital expenditure after writing down £1.5bn of producing assets, exploration costs and reserves on Wednesday.
Analysts at Citigroup said the writedown — while only an accounting measure, and half down to lower oil price assumptions — “highlights the disappointing record of capital allocation over the past few years”. For those investors who still hold equity in the FTSE 250 explorer, then, the question is whether a further reallocation of their own capital would be advisable this year.
December’s changes to production guidance suggest it would. Tullow admitted that producing almost a third less oil in 2020 — just 70,000 to 80,000 barrels of oil equivalent a day, down from nearer 100,000 — could neither sustain the dividend nor the careers of chief executive Paul McDade and exploration head Angus McCoss. It was not its first admission of over-optimism, either: it was the fourth cut to full-year guidance that shareholders had endured, leading analysts at broker Stifel to conclude “the market has completely lost trust in the company”. No wonder: the market is being paid no dividend while it waits in the hope that an oil company’s shares can be re-rated in a decarbonising world. BlackRock might still take this risk — it remains Tullow’s fifth-largest shareholder — but few others would.
However, Wednesday’s update suggests some shareholders might not want to reallocate their capital just yet. Tullow — under its now executive chair Dorothy Thompson, former boss of biomass power group Drax — said it is reviewing all aspects of its operations and cost base, to bring overheads in line with lower production, and keep those 70,000-odd barrels just as profitable at lower prices. It was confident enough to reiterate current year production, reserves and cash flow. It also indicated that it would look at whether it can monetise oil assets more quickly by selling for cash rather than going into production. Previously, some had speculated about rights issue plans — which the company denied — or a deal for all of the business.
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