Long-term Investors Could Strike Black Gold

Kenyan protests, four oil-free dry holes in a row and a disagreement with mining giant Shell have not affected analysts' conviction that Tullow Oil is a stellar stock

Stephen Simko, CFA 14 November, 2013 | 10:26AM
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Tullow's (TLW) shares have remained under pressure of late, as much of the newsflow in recent weeks has been negative. However, as we discuss below, none of the recent developments has materially affected  Tullow's long-term outlook. We remain bullish that the value of Tullow's underlying assets and its ability to create value via exploration present an attractive entry point for long-term investors. Our fair value estimate and narrow moat rating remain unchanged.

Kenya protests end, drilling resumes: Tullow was forced to evacuate employees from a drilling site two weeks ago, as protests formed at one of its drilling locations, demanding more benefits from future oil development activities. Within a week, however, an agreement was reached - the federal government appears to have stepped in and quashed the protests - and Tullow is back to work. No delays to its previous drilling schedule are anticipated.  

Latest dry hole in French Guiana lends a fair amount of support to the notion that  Shell (RDSB), and not Tullow, did not run this drilling campaign well: Since hitting oil with its first wildcat well in French Guiana, Tullow relinquished operatorship of this license in exchange for cash to Shell. Since then, the drill campaign has had four dry holes in a row, the latest being announced this week. Tullow has been adamant that the problems in French Guiana are Shell's decision making and not the geology; the company went as far as predicting months ago this last well would not find oil because of where Shell located the drilling site. While Tullow has deservedly taken flack for its poor offshore results of late, the evidence increasingly supports the notion that at least in French Guiana, its major fault was to cede control to Shell, and not its drilling acumen. This area remains very prospective given the oil discovered, but it could be a year before the next round of exploration drilling kicks off. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Royal Dutch Shell PLC B1,362.80 GBX2.84Rating
Tullow Oil PLC54.02 GBX2.08

About Author

Stephen Simko, CFA  is a senior stock analyst at Morningstar.

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