Capitulation time as the FTSE slumps to 2012 levels, and Tullow Oil clings on for survival

“Daily market falls in excess of 2% have quickly become the norm so another day inevitably brings another big decline,” says Russ Mould, Investment Director at AJ Bell.

“Today’s early morning session saw a 6.3% decline in the FTSE 100 to 5,502 which put the index back to levels not seen since July 2012.

“Donald Trump’s restrictions on travel from many parts of Europe to the US have spooked the market, particularly because his initial comments implied they would also block cargo, which he has since retracted.

“The travel ban will raise expectations that the US will enter recession. After all, Europe is a key source of tourists and business travel to North America and so there will be a large drop in spending which the region would normally enjoy.

“Oil prices took another blow with Brent Crude down 4.8% to $34.08 per barrel.

“The impact of the coronavirus is now becoming very apparent among a large number of companies. WH Smith has issued a profit warning, saying earnings are suffering from lower business in shops based in airports and train stations.

“Housebuilder Berkeley has become very nervous and has suspended the payment of extra dividends announced in January.

“Even bus and train operator Go-Ahead has reduced its earnings expectations for the year, blaming cost pressures and adverse weather. It also warns that travel patterns are likely to be impacted by the coronavirus situation.

“For anyone in London, it does feel like some of the commuter trains are less busy, so too gyms and swimming pools. Daily activity is being affected by more people working or staying at home. One can only assume this trend is emerging across the rest of the country.”

Tullow Oil

“The decline in one-time FTSE 100 oil explorer Tullow Oil over the course of the last decade has been as dramatic as any soap opera.

“For shareholders it has been a depressing story, reflected in the fact that the stock was priced at £15 back in 2012 and today is below 15p.

“Today’s results, which follow December’s suspension of the dividend, departure of CEO Paul McDade and executive officer Angus McCoss and slashed production guidance, are a real mess. A $1.6 billion loss reflects significant write-offs on exploration projects.

“Buoyed by substantial discoveries in Ghana and Uganda in the mid to late noughties, the company was once well established in the top echelons of the UK market.

“At that stage it could point to a 70% success rate on exploration and appraisal wells against an industry average of somewhere around one in seven.

“However, it has since struggled to match its success with the drill-bit and has endured operational problems as it looked to transition to being a producer and developer of oil and gas assets.

“The business also took on too much debt and the previous oil price crash in 2014 laid its vulnerabilities bare for all to see.

“A $750 million rights issue carried out three years ago ultimately proved insufficient to fully shore up the balance sheet and this latest slump in the oil price has raised serious questions about its ability to continue as a going concern, as the company itself acknowledges.

“Jobs are being cut, spending is being reined in and the company hopes to raise $1 billion through asset sales. However, it will be selling projects at a time when oil prices are significantly depressed and will be working from a very weak negotiating position, so this total could prove overly ambitious.”

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