Tullow Oil gushes higher on UBS upgrade to 'buy'

Tullow Oil shares surged after UBS upgraded the stock to ‘buy’ from ‘neutral’ and lifted the price target to 240p from 230p as it called a bottom to the net asset value downgrade cycle.

“This is a well-financed company with quality assets and a proven development track-record, offering long-term oil price exposure at the bottom of the cycle, yet well hedged at the front end (around 50% of 2016E production at $75/bbl),” it said.

It said Tullow came into the downturn highly geared and with substantial capex ahead to bring the TEN project in Ghana to first oil in mid-2016.

UBS said a hard-hitting $500m cost cutting plan saw headcount reduced by 40%, exploration spend down 75% to $250m and the dividend suspended. This did not frame a compelling investment case and a hefty debt pile left the equity vulnerable to 'lower for longer' oil price narratives, said UBS.

“But mission is accomplished and perceptions of a debt problem misplaced,” it said.

UBS said the NAV growth story was still very much intact, only different.

It said the strategy remains to grow reserves through exploration and Tullow wants to get back to a place where it can invest $400m per annum. However, spend will remain at low levels for another 12 months and consensus says an absence of drilling catalysts means NAV growth is not part of the equation.

But UBS said the economics of Tullow's core projects in Ghana (TEN, MTA), Uganda and Kenya are compelling, adding that next year will be a portfolio sweet spot as TEN starts up and capex falls.

At 1040 GMT, Tullow shares were up 6.2% at 195.70p.