Tullow Oil outshines the market
News of the oil & gas producer's discovery in Ghana and confirmation of refinancing spurs renewed interest in the shares ahead of Wednesday's results
At 9.15 am, Tullow shares led the blue-chip gainers with a 9.1% rise, up 67p at 802. The FTSE 100 index, meanwhile, slipped back 0.4% or 12.6 points to 3,518.1.
In pre-opening deals, Tullow announced its Tweneboa-1 exploration well, drilled in the Deepwater Tano licence offshore Ghana, has discovered highly-pressured light hydrocarbon accumulation.
Reacting to the discovery news, analyst Richard Griffith at Evolution Securities noted that Tullow’s success in Ghana continues with today’s news, with initial results suggesting that the P10 reserves could by 1.4 billion barrels of oil equivalent (boe)—twice the pre-drill estimate. The P50 (proved and probable) estimate is 250 million boe and based on this figure alone, Griffith sees potential for the shares to add over 100p today and ultimately add as much as 750p if the full 1.4 billion boe is realised.
“Today's news is likely to increase industry interest in Tullow Ghanaian assets given the materiality of the discoveries so far and potential within the remainder of the drilling programme,” Griffith wrote in a note to clients.
Tullow also announced this morning that it has finalised arrangements for US$2 billion of new reserve-based lend debt facilities. The new debt facilities will replace the group's existing reserve based lend debt arrangements and provide funding for Tullow's future capital commitments, including its Jubilee project in Ghana.
Evolution’s current fair value for Tullow is 1,380p per share, based on a core value of 341p, discoveries of 644p and risked upside of 395p. The broker has left its target price unchanged following today’s news but said there is considerable upside potential if Tweneboa’s P10 estimate is realized and reiterated its Buy advice on the stock.
Tullow had indicated at its trading statement back in January that it was on track to complete debt refinancing ahead of its preliminary results, due this Wednesday—news which removed one of the major uncertainties overhanging the share price and has subsequently helped the group’s stock to perform well of late.
“2008 has bee a great year for Tullow’s exploration work especially in Ghana and Uganda,” analyst Tony Shepard at Charles Stanley said in a recent preview note. Given the success of the discoveries, Shepard expects Tullow’s Reserves and Resources to be upgraded to about 800 million boe at the end of December 2008 from 551 previously estimated.
“The group had an excellent 2008 in terms of exploration and appraisal in Ghana and Uganda and its balance sheet has been strengthened,” Shepard said, “but the valuation of the group is still highly dependant on your view of the future oil price.”
Charles Stanley said oil & gas company share prices appear to be discounting a good recovery in the oil price at the moment, which it feels is too optimistic. The broker has a Hold recommendation on Tullow ahead of results this week.