Goldman downgrades Tullow Oil to 'sell' from 'neutral'

Tullow Oil shares fell on Tuesday as Goldman Sachs downgraded the stock to ‘sell’ from ‘neutral’ and cut the target price to 221.8p from 247.2p.

“Since the November 30 announcement of OPEC production cuts, the stock has rallied about 20%, in line with the front month of Brent, and we think it is now trading above the fundamentals of our long-term oil price assumption (US$60 per barrel),” Goldman said.

Goldman said it raises a note of caution on the reservoir performance of the Tweneboa, Enyenra, Ntomme (TEN) fields offshore Ghana. In a 9 November trading update, Tullow said production ramp-up at TEN was hurt by issues with water injection systems. The annualised gross production for TEN in 2016 is now expected to be 15,000 barrels of oil per day.

Goldman said while Tullow’s management have done an “impressive job of steering the company through a very difficult year”, the disappointment of the TEN project could offset the Jubilee’s recent outperformance.

Based on the increase in the estimated net debt, owing to TEN expenditure and lower-than-expected Jubilee revenues, Goldman lowered its target price. Tullow expects to exit the year with net debt at about $4.9bn.

However, if oil prices rise further, Goldman sees Tullow’s shares continuing to outperform. The bank also believes the balance sheet is unlikely to be a "major cause of concern" for the company.

Shares fell 2.95% to 322.59p at 0948 GMT.