Positives outweigh negatives for Tullow in Kenya, says Westhouse

Westhouse Securities has maintained a 'buy' recommendation on Tullow after the oil producer and explorer delivered a positive update on its appraisal programme in Kenya.

Tullow said it had achieved "excellent results" from the Amosing-1 and Amosing-2A wells in the South Lokichar basin as it looks to prove reservoir quality and define resource estimates ahead of potential development. Meanwhile, oil found in the Ngamia-7 well expanded the proven extent of that field.

However, one well - the Engomo-1 exploration well in Block 10BA, North Turkana basin - did not find significant oil or gas shows and has been plugged and abandoned.

"Our view: the strong appraisal results will give the market confidence in the resource potential and viability of the South Lokichar basin […] and, in our view, should outweigh the disappointing exploration result in the North Turkana basin," said Westhouse analysts Mark Henderon and Jamal Orazbayeva.

They pointed out that Tullow has discovered 600m barrels of recoverable resources to date, which "could prove to be conservative".

"Tullow is now trading at an unprecedented 36% discount to our core net asset value [forecast] despite having high margin production in West Africa which we expect to grow strongly in the coming 18-24 months," Henderson and Orazbayeva said.

Westhouse has a 600p target price for the stock, suggesting substantial upside from Wednesday's price of around 322.5p, up 0.2% on the day.