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French Guiana disappointment for Tullow Oil

Tullow Oil’s shares fell sharply this week after another disappointing well result in the company’s French Guiana exploration campaign

Northern Petroleum, a partner in the French Guiana licence, said in a statement on Wednesday that the Priodontes well had drilled through 325 metres of the targeted Priodontes fan formation, but the well had not encountered any “significant hydrocarbon shows.”

The statement added that the project partners had decided to deepen the well to acquire further data on the underexplored region.

Tullow’s share price fell as much as 13% from 1,090 pence ($16.67) a share to 950p a share after Northern Petroleum’s announcement, before rebounding to close the day at 982.5p a share.

Tullow quickly followed up with its own statement in which it clarified its position on the well: “Although the Priodontes well has not thus far encountered significant hydrocarbons, Tullow believes that this is due to a trap specific issue and has no follow-on consequences for prospectivity elsewhere in the block. Tullow also notes that the shows encountered in the Bradypus fan, as described in Northern Petroleum’s release, underline the presence of a working oil charge system.”

Tullow added that Northern Petroleum had not run its statement by the other project partners: “This release was issued without prior notice from Northern Petroleum and without the approval of the operator or the joint venture partners”

News of the disappointing well result came as oil prices posted several days of steep declines and Brent crude fell to less than $100 a barrel for the first time since mid-2012, which likely helped to accelerate the share sell off.

Tullow is testing the “Atlantic mirror theory” with its offshore exploration campaign in the Latin American country. Tullow, and a number of other companies exploring in the region, hope the geological formations that produced billions of barrels of oil discovered in West Africa are mirrored across the Atlantic in Latin America because they were laid down before continental drift put a vast ocean between the continents.

Tullow holds a 27.5% interest in the Guyane Maritime licence, Shell owns an operating 45% interest, Total has a 25% stake and Northern Petroleum holds the remaining 2.5% interest.

The Priodontes well was being closely watched by investors. Tullow opened two major oil frontiers in Ghana and Uganda and its exceptionally high rates of exploration success – as high as 87% in 2009 – has earned it a reputation as a world-class explorer.

Investors have hoped that Tullow’s success with the drill bit will extend to French Guiana. The company’s first well at the licence – Zaedyus-1 – was hailed as a major discovery and offered hope to investors that Tullow was once again onto a winner. But disappointment at the Zaedyus-2 and now the Priodontes wells on the licence has cast some doubt on the region’s potential, though the exploration campaign is still in the early stages.

That has seen some doubt creep into the minds of some of Tullow’s investors over whether or not the company will be able to keep up with the pace it has set itself in recent years while also managing its producing assets. In some ways, Tullow has been a victim of its own success. For most companies, Tullow’s recent success in Kenya, potentially opening a new oil frontier in East Africa, would be enough to keep investors happy. But multiple major basin-opening discoveries are now expected from the company every year.

Are investors expecting too much from Tullow?

Mixed exploration results over the last year have left analysts split over whether the company will continue to live up to the heightened expectations, and whether the hefty premium on the company’s share price is still justified.

Analysts at Investec, an investment bank, have warned that Tullow shares are overpriced and has recommended investors sell. “In our view Tullow’s equity narrative has been treading water since Q4 2012. Priodontes, while disappointing in its own right, is just part of a broader challenge for the premium rated E&P... we continue to see risk to the goodwill associated with its exploration portfolio,” Investec said in a research note this week.

Many analysts, though, still have faith in the company. Societe Generale said the share price sell off had gone too far and put its price target at 1,200p a share. “In our view, Tullow remains a first rate explorer,” analysts at Societe Generale said.

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