Charles Stanley upgrades Tullow Oil after share price fall

Charles Stanley upgraded Tullow Oil to ‘hold’ from ‘sell’ given the sharp drop in the share price and potential de-gearing.

The brokerage noted the shares are down 58% over 12 months.

Charles Stanley said that with net debt of $4bn, Tullow has facility headroom of $1.9bn, while banking discussions with regard to March 2016 re-determination have begun.

With an oil price at $34 per barrel and 2016 capital expenditure plans still high, net debt will likely rise again this year, it said, although it pointed out that Tullow acted very early to reset the business to a low oil price environment.

“The TEN project (offshore Ghana) begins production and assuming a recovery in the oil price to $40 per barrel, Tullow could begin to reduce its level of net borrowings in 2017. Further spending reductions ($0.3bn capex is possible in 2017) and disposals could help to de-gear the balance sheet.”

It said Tullow has benefited from a strong hedging position, which will continue to lend support this year and the next.

Last year, the realised oil price net of hedging was $67 a barrel compared to a market price of $52 and this year, about 52% of production is hedged at $75 per barrel.

Still, it said the shares remain relatively high risk given volatility and uncertainty surrounding the oil price.

At 1055 GMT, Tullow shares were down 3.3% to 164.13p.