Jefferies downgradesTullow, upgrades Soco International

Jefferies downgraded Tullow Oil to ‘underperform’ from ‘hold’ with an unchanged price target of 166p.

The bank said it was increasingly concerned over operational issues at the Jubilee field, which is a fundamental stock risk overriding opportunity from oil shows in a new Kenya basin.

“Now trading 36% above our unchanged PT and at $22/boe 2P reserves the market is once again pricing in an unwarranted premium,” it said.

“Our upgrade to ‘hold’ in September 2015 accepted TLW trading at $19/boe 2P & $35/boe 1P reserves, both significant premiums to M&A precedent. Six months on, we see zero industry appetite for such premiums.”

Jefferies said it continues to expect banks to be supportive to Tullow debt facilities and also expects the TEN development on stream as planned during the third quarter of this year.

However, it also continues to expect lower plateau rates from that field versus expectations.

Also on Monday, Jefferies upgraded Soco International to ‘buy’ from ‘hold’ and lifted the price target to 180p from 127p.

It said Soco's dividend continues and is likely to grow with a special in the second half of the year.

It said the 2p per share dividend was already ahead of its expectations, and with a flagged special dividend in the second half, Jefferies forecasts a total payout of 6p per share for 2016.

“Soco, alone amongst peers, prioritised cash returns over M&A during ‘high’ oil price. In a ‘low’ oil price cycle, returns continue but (value accretive) M&A can return.”

At 0830 GMT, Tullow shares were down 3% to 219.03p while Soco was flat at 161.25p.