Soaring crude price works in Tullow Oil's favour, argues Morgan Stanley

Morgan Stanley does not believe Tullow Oil’s shares reflect recent gains in crude, and has upped its price target for the FTSE 250 producer.

Analysts argued that with spot prices for benchmark Brent crude currently around $85 a barrel, Tullow could be debt free by the first half of 2022. Tullow’s current net debt is $3.1bn.

In a note to clients dated Monday, Morgan Stanley said current leverage was a “high" net debt-to-capital ratio of 55%. "But at current spot prices, this will likely disappear over the next four years, as the company will likely generate strong free cash flow, yielding [more than] 17% on average during the period."

Morgan Stanley's analysts acknowledged that $85 over the long term is optimistic. "Our house view on Brent calls for oil prices to increase to $90 per barrel in 2020 but assumes a lower long-term oil price of $70 from 2021. Still, even after using our house view, we arrive at the same conclusion.”

Africa-focused Tullow said at its half-year results in July that it had produced 88,200 barrels of oil a day during the six months and upgraded its production estimates for the second half.

Other factors behind Morgan Stanley’s decision to increase its price target, by 9% to 355p, included “clearer growth” from 2019 onwards, as a number of factors – such as production in the TEN field in Ghana ramping up to peak levels – start to work in Tullow’s favour.

Morgan Stanley also reiterated it’s ‘overweight’ rating on the stock.