Tullow Oil’s shares halve in value and Tesco weighs up potential Asian withdrawal

“Equity markets were relatively quiet at the start of the new trading week with the FTSE 100 dipping 0.2% to 7,226 and only marginal gains seen in Japan and India.

“The pound nudged ahead to $1.3162 as the latest polls showed the Conservative Party extending its lead ahead of the General Election later this week.

“The key question for investors is by how much UK shares could bounce on a Tory majority win. This scenario would remove various negative factors which have been weighing on markets such as Labour renationalising transport companies. Yet there is still Brexit to tackle which sustains some level of uncertainty among investors,” says Russ Mould, Investment Director at AJ Bell.

Tullow Oil

“The fall from grace at oil firm Tullow is about as heady as the ascent which once saw the company reach the ranks of the FTSE 100.

“You know an update is bad when it is accompanied by the immediate departure of senior management – CEO Paul McDade and exploration director Angus McCoss are stepping down – and this production downgrade is a real disaster.

“An ongoing review will leave investors nervously awaiting the next update to see if Tullow will slip up again.

“The news represents a continuation of the problems which have dogged the company ever since its share price peaked more than seven years ago.

“The company’s skill-set was in exploration – it enjoyed notable discoveries in Ghana and Uganda in the mid-noughties – and it has clearly found the transition to being more of a producer and developer of hydrocarbons more difficult.

“The appetite for risk which served it well when exploring for oil and gas arguably left it in a perilous position when it had too much debt heading into the oil price crash in 2014. Despite efforts to reduce borrowings, this remains an issue for the company, with net debt totalling nearly $3 billion.

“The group, and whoever they bring in as the new chief executive, therefore have limited breathing space to try and turn its fortunes around.”

Tesco

“Tesco’s shareholders are unlikely to object to a potential deal to sell its stores in Thailand and Malaysia as long as it gets a decent price. After all, streamlining has been the general direction of travel for the group for some time.

“The Asian operations accounted for 9% of group sales in the financial year to 23 February 2019 and 13% of group operating profit, so they are a decent contributor to the business.

“Getting out while the going is good could help management to sharpen their focus on the UK where it seems to be finding its feet again after a difficult period including heightened competition.

“We already know that chief executive Dave Lewis is leaving the group next year after saying he had completed the business turnaround. Striking a favourable deal in Asia would add another badge to his reputation as the man who saved Tesco and put it back on track.

“That said, strategically a better exit would be getting rid of the central European operations which generate greater sales than Asia but make smaller profits.”

These articles are for information purposes only and are not a personal recommendation or advice.