Tullow Oil downgraded by Exane as sector challenges highlighted

Tullow Oil has been downgraded from ‘outperform’ to ‘neutral’ by Exane BNP Paribas, as it signalled the challenges for the oil exploration and production sector are “worse than we thought”.

“A weakening demand environment, US shale’s continued resilience and conventional supply growth through Q4 has caused the supply-demand balance to worsen,” the investment bank said in a note on Friday.

It said OPEC isn’t willing to play ball, so US shale must step up.

However it did say there are some positives in the sector.

“At USD35/bbl US shale will start to accelerate the supply response in H2.

“Prices should respond from current levels but will remain capped by the deflationary effects across the value chain, we think.”

Exane BNP Paribas also noted that oil companies are still reliant on “loosening covenant terms, pushing out maturities and maintaining RBL capacity”.

It said it believed Tullow Oil is now fairly priced on revised oil price assumptions, which is why it has been downgraded and had its target price cut 45% to 163p.

Shares in the company rose 2p (1.36%) to 149.4p at 1058 GMT.