BofA ML upgrades Tullow, says cash wave approaching

Bank of America Merrill Lynch upgraded Tullow Oil to ‘buy’ from ‘neutral’ and lifted the price target to 285p from 275p.

BofA noted the shares have materially underperformed the sector.

“Over the past 24 and 36 months, shares have returned -70% and -80% respectively, against the sector at - 60% in both time periods.

“Further, we believe when we overlay the operational progress with our commodity price view, Tullow Oil is one of the most compelling levered E&Ps to gain exposure to an upswing to a recovery in oil prices.”

Merrill pointed out that Tullow is on the cusp of a 30% increase in group production, while simultaneously lowering opex and capex 25% and 40%, respectively.

“With the TEN field start-up imminent (18 August), Tullow is in a position to generate 15%+ free cash flow yields as group production grows 30% year-on-year.”

In addition, BofA said that while Tullow’s net debt position has been a perennial overhang for the company, with an organic pay-down focus, it will now be in a much stronger position in negotiating its reserves-based loan facility at year-end 2016.

“Indeed, we think Tullow is about to enter the most rapid deleveraging of any company in our coverage, moving from YE16 net debt: EBITDA of 5.9x to 3.9 x by year-end 2017.”

Furthermore, it said that now that management has successfully raised $300m via a convertible issue in July, it is under significantly less pressure to sell upstream assets pro-cyclically, which is a positive step.

At 0905 BST, Tullow shares were up 3.5% to 229p.