Tullow Offers Long Term Value

THE VALUE INVESTOR: Tullow Oil has increased oil reserves from 18 million barrels to 1.8 billion in 10 years - but the stock still has growth to offer long-term investors

Stephen Simko, CFA 1 May, 2014 | 11:16AM
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London-based Tullow Oil is an independent oil and gas producer that targets oil in underexplored areas of the world. The company focuses largely on Africa; its key assets/acreages are in Ghana, Kenya, and Uganda. Beyond Africa, the company is also active in South America and the Norwegian portion of the North and Barents Seas.

Tullow Oil (TLW) published its interim management statement today as well as a small divestment; $76 million for some its U.K. gas interests. While neither is particularly meaningful to the Tullow story, the company did outline its near-term exploration schedule, which should see material well results published during the month of May.

Our view that Tullow is very attractive at current share prices remains unchanged, as does our valuation and moat rating. The company’s shares today are trading in line with where we value its existing resource base – after subtracting out debt and future G&A, meaning investors get any exploration value effectively for free. So long as Tullow creates value from future exploration – and we think the odds are that it will – shares continue to look very attractive.

The most important element of Tullow's future value creation is finding oil via exploration. The company's record in this area during the 2000s was easily one of the best in the world: From 2003 to the present, the firm increased its reserves from 18 million barrels of oil equivalent to 1.8 billion. But can Tullow repeat the degree of its past successes? A string of disappointing drilling results in the past 18 months has shaken the market's faith in the strength of the firm's exploration programme.

Although the first key well of Tullow’s 2014 drilling program was dry, plenty of key wells remain to be drilled, including results from a few in the coming month. Easily the most important of its near-term wells is the Shimela-1 prospect in the Chew Bahir basin of Ethiopia. Tullow has disclosed that the 3-D seismic of this basin leads it to believe this could be the most prospective undrilled basin in its portfolio of East African acreage. Beyond Shimela-1, near-term well results in Kenya and Norway are also expected within the few weeks.

Although success in Kenya is currently more or less expected by the market – Tullow has made seven commercial discoveries out of eight wells drilled, discoveries elsewhere could prove to be a meaningful share catalyst.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Tullow Oil PLC28.92 GBX-2.63

About Author

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

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