Tullow Rises as Hedging Protects Future Sales Amid Crude's Slump

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  • Oil explorer values forward-selling program at $623 million
  • Company plans to reduce forecast for 2016 capital spending

Tullow Oil Plc rose the most in two months in London trading after saying its hedging program will help buoy results amid crude’s collapse.

The shares climbed as much as 14 percent, the biggest intraday jump since Nov. 9, and were up 9.8 percent at 135.2 pence as of 10:10 a.m. local time. The stock was the best performer on the 23-company Stoxx 600 Oil & Gas index.

“As we look ahead to 2016, Tullow’s hedging position provides significant protection of future revenues and cash flows,” the London-based company said Wednesday in a trading update. The program, valued at $623 million on a so-called mark-to-market basis, will help shield it through 2018, it said.

Tullow is among oil producers to reduce spending and cut jobs to weather a prolonged decline in prices amid a global oversupply. Its shares have tumbled more than 60 percent in the past year, making it the worst performer on the Stoxx 600 Oil & Gas index after Norway’s Seadrill Ltd. By selling production forward, it can help protect itself from a further contraction in the oil market.

Crude Slump

Tullow has hedged about 64 percent of its oil production at $75 a barrel on a post-tax basis, it said. Brent crude, the global benchmark, has dropped more than 30 percent in the past year and is set to trade at about $52.50 this year, according to the median estimate of 47 analysts surveyed by Bloomberg.

“We actually started a very aggressive hedging program at the end of 2014 and we hedged three years in advance,” Chief Executive Officer Aidan Heavey said by phone. “We felt oil prices were going to come off.”

Tullow plans to reduce 2016 capital spending from the $1.1 billion previously forecast for the year. It may fall to about $900 million, according to Heavey. That would be a 47 percent decline from last year’s $1.7 billion budget.

Net debt totaled $4 billion at the end of last year, below the $4.2 billion forecast in November. Borrowings will rise until Tullow brings its Tweneboa-Enyenra-Ntomme, or TEN, project off Ghana on stream in July or August, and then start to fall, Heavey said.

“We see the update as largely neutral to slightly positive,” Dragan Trajkov, a London-based analyst at Stifel Nicolaus Europe Ltd., said in note. The year-end debt level was “slightly better” than expected, he said.

Tullow doesn’t plan to cut more jobs, after engaging in a “major exercise” in the past two years, Heavey said. Fellow U.K. oil producer BP Plc said Tuesday it will cut 4,000 more positions amid the slump in prices.

Tullow expects to report sales of $1.6 billion for 2015, a 28 percent decline from a year earlier, when it publishes results on Feb. 10.