Interactive Investor

Tullow Oil "cheap" after upgrades

1st July 2015 13:58

Harriet Mann from interactive investor

With strong performance in West Africa, particularly from its flagship Jubilee field offshore Ghana, Tullow has upgraded its full-year production forecasts. The group now reckons it can pump more of the black stuff in West Africa, upping guidance for 2015 from 63,000-68,000 barrels of oil per day (bopd) to 66,000-70,000 bopd. Tullow is by no means risk-free, but there's clearly big potential here.

Output at Jubilee remained strong and gas exports have averaged around 80 million standard cubic feet per day (mmscfd) since the facilities completion. In Kenya, extended well testing at the Amosing and Ngamia fields achieved strong flow rates - results of pressure tests suggest higher productivity and lower costs. A border dispute between Ghana and Ivory Coast is not expected to affect Tullow's TEN project, which is still on target for first oil in mid-2016. The explorer is ready to start its offshore installation campaign in the next few weeks.

Progress in Europe hasn't been as kind, however, with the Norwegian Bjaaland exploration well and Zumba prospect being abandoned. Still, overall group production has been given a 3% boost to 75,000bopd.

Tullow managed to resolve its long-standing tax dispute with the Ugandan Government last week, with both parties agreeing a $250 million capital gains tax payment. It seems a lot, but the instalments aren't going to be too onerous for the company, and should support the development of Uganda's 1.7 billion barrel Lake Albert play.

First-half production of 74,600 boepd should drive sales of $800 million - down from $1.3 billion a year ago - and $500 million of operating cash flow. Net debt on 30 June stood at $3.6 billion, in line with expectations. Mark Henderson, an analyst at Westhouse Securities, expects full-year sales to reach $1.7 billion and a swing to after tax profit of $141 million, giving earnings per share of 10p.

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He says: "As we have noted previously, the Tullow investment case is all about delivering production and cash flow growth from its reserves and discovered resources in West and East Africa. Tullow's West African assets are high margin, low cost, predominantly oil producing fields, with attractive fiscal terms and ongoing appraisal in Kenya is confirming the prolific nature of the East African rift basins. We think that Tullow is attractively valued, on 5.6x 2016E EBITDA, given a projected three-year production CAGR of almost 19% and an estimated three-year cash flow CAGR of 26%."

Industry expert Malcolm Graham-Wood agrees. Tullow's update "reads quite positively and should arrest the decline in the share price which has happened recently," he says. "I tend to feel that sub 350p it looks like good value to me despite my slight worries about the oil price. I think that the portfolio looks to have a sound base with plenty of upside and indeed down here can be regarded as being quite cheap."

Tullow's share price has inched higher and now trades on a price/earnings multiple of 34 times. After operating losses forced Tullow Oil to suspend its final dividend for the last financial year, the shares have struggled. Henderson still reckons the shares are worth nearly three-quarters more than current levels, retaining his 590p target price on the stock. The shares have been trading significantly below this target since last October and it seems a big catalyst will be needed to push it through resistance at around 426p (see chart, click to enlarge).

But production at the group, which holds over 150 exploration and production licences, is still below the group's 2014 average. Analysts at VSA Capital are confident operational progress in Africa, improved cost management and lower capital expenditures should drive investor sentiment in Tullow's favour.

"As well as a view on the oil price (our long- term assumption is US$80/bbl Brent), investors must take a view on Tullow's ability to successfully grow production on the Jubilee fields in Ghana to design capacity," adds Henderson. "Investors also need to be confident that Tullow can proceed on time and on budget with its major developments (TEN), and that it can progress the major discoveries in Kenya and Uganda toward development sanction."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.