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Tullow hopeful for a big summer after recent disappointments

Analysts hope the struggles of late will pass, and Tullow's major successes of the past will be seen again

Tullow Oil has earned a reputation over the last decade as a world-beating oil exploration company after a string of successes, including major discoveries in Uganda and offshore Ghana. But the company has hit a rough patch of late.

Development of its Ugandan discoveries has been held up by a series of disputes with the government and its former partner at the project, Heritage Oil, and the company has seen a series of recent exploration disappointments. The company’s share price has fallen nearly 30% over the past year, from around 1,454 pence ($22.87) a share to 1,027p a share in mid-day trading on 17 June.

This summer, though, could be a turning point for Tullow, Al Stanton, an analyst at RBC Capital Markets, said in a research note this week. “We anticipate a surge in news flow from Tullow through June and July,” Stanton said.

In the spotlight over the next few months will be Tullow’s frontier exploration efforts in East Africa and South America. The company should provide an important update on its onshore exploration programme targeting the little-explored East Africa Rift basins in southern Ethiopia and Kenya. The company started acquiring exploration licences in the region in 2011 after its success in Uganda and started drilling last year. Its first well, Ngamia-1 in Kenya’s Lokichar basin, was promising, but the company has yet to confirm the discovery’s commercial potential.

The company should see results in the coming weeks from two important exploration wells in the region: the Sabisa-1 wildcat well in the South Omo Block in Ethiopia and the Etuko-1 well in Kenya. “A positive drilling result at Sabisa could help open a new Tertiary Rift basin, Tullow’s second after the Lokichar basin, in Kenya,” Stanton said.   

Tullow is also expected to see results this summer from its offshore Mozambique licence, where it is a non-operating partner with Norway’s Statoil. The companies expect to finish drilling the Cachalote-1 well at Block 2 in July. The well is near Anadarko’s licences in the country where a string of world-class gas discoveries have been made over the past couple years, but Statoil and Tullow are targeting oil at Cashalote. “The value lies in oil,” Tullow’s exploration director Angus McCoss told Bloomberg recently.

In South America, Tullow expects to see results from the Cebus-1 well, offshore French Guiana, later this year. The company is part of a Shell-operated consortium. The companies made a major discovery in 2011 with their first well in the country, Zaedyus-1, but have drilled dry two holes since then. That has dampened enthusiasm for the campaign, but the Cebus-1 well is testing a new part of the licence. The well could have major consequences for the French Guiana campaign. “A high-profile success could help rejuvenate interest in the region; however, another dry hole could reduce the commercial potential of the Zaedyus discovery,” Stanton said.

In spite of Tullow’s recent struggles, Stanton says the company is on the right track, and he rates the company “outperform” and has a price target for the stock at 1,250p a share. “Fundamentally we believe management is doing the right things – the company is testing a range of plays on sizeable blocks that offer follow-on potential, and its moves to rationalise the portfolio and reduce development spending are sound,” Stanton said. “We believe the company’s Ghanaian fields, Ugandan developments and Kenya/Ethiopian prospects provide a unique growth set.”

Not everyone is as convinced. Brian Gallagher, an analyst at Investec who rates the company a “sell”, has argued that Tullow will continue to struggle to find a balance between managing and funding its new producing assets while pushing ahead with its frontier exploration portfolio. Moreover, Gallagher has argued, the company could struggle to live up to investors’ sky-high expectations for the company’s exploration programme. “Tullow’s exploration pedigree is indisputable, however, the valuation of this competence is unique to it and therefore highly subjective,” Gallagher said in a recent research note. “We... see success at upcoming wells as increasingly important to avoid a further erosion of Tullow’s premium rating."

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