Tullow Oil is Undervalued

THE VALUE INVESTOR: Despite a string of disappointing offshore drilling results, analysts remain confident in Tullow's pipeline and consider the stock to be undervalued

Stephen Simko, CFA 27 June, 2014 | 8:18AM
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The most important element of Tullow's (TLW) future value creation is finding oil via exploration. The company's record in this area during the early 2000s was easily one of the best in the world: From 2003 to the present, the firm increased its reserves, commercial and contingent, from 18 million barrels of oil equivalent (boe) to 1.4 billion boe.

But can Tullow repeat the degree of its past successes? A string of disappointing offshore drilling results during the past two years (for example, noncommercial wells in French Guiana, Mozambique, and Mauritania) has shaken the market's faith in the strength of the firm's exploration program, as has poor exploration results for the industry at large (2013 was a terrible year for offshore exploration in general). A bear argument has gained traction that the excellent drilling results of 2005-11 are unlikely to be consistently repeated. Indeed, if the recent weak results continue, Tullow's stock may be fairly valued or even overpriced.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Tullow Oil PLC54.02 GBX2.08

About Author

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

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