Tullow Oil well hedged for 2016 UBS says, reiterates buy

Tullow Oil is in a better position than some of its peers to withstand low oil prices thanks to its oil price hedges and current UK corporate tax legislation, a top broker said on Wednesday.

Oil exploration and production companies are in a race against time, waiting for low oil prices to lead to cuts in capital expenditures which are then expected to lead to a rebound in the price of crude, as higher cost producers are squeezed out.

UBS expects physical oil markets to balance out from the second half of 2016 to the above, but the broker admits that investors face a challenge trying to 'time' when markets will begin to price the improving backdrop into the prices of shares in the oil patch.

However, "with Tullow, time is more on your side than one might imagine," the Swiss broker said in a research note sent to clients.

The E&P outfit has 36,000 barrels of daily oil output hedged at $76 per barrel for 2016, roughly half the total, it explained.

Furthermore, UK tax law meant those hedged are taxed at a "low" 20% tax rate, instead of the approximately 40% tax rate applied at well-head.

Therefore, on a post-tax cash basis the company had hedged about 67% of its 'real' barrels for the coming year.

"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 protected at the front," analyst Daniel Ekstein said.

Ekstein reiterated his 'buy' recommendation on the stock and stood by his 240p.