Analysts welcome 'sensible' move by Tullow to review costs

The news that Tullow Oil is re-evaluating its spending in light of the recent slump in crude prices should be welcomed by the market, according to analysts.

Tullow's shares were trading 1.9% higher at 491.2p by 10:43 on Wednesday after chief executive Aidan Heavey said the oil explorer was reviewing its capital expenditure and cost base "to ensure that Tullow is well-positioned for future success".

It said that the capital expenditure budget for 2015 is likely to be around $2bn, compared with an estimated $2.1bn in 2014 and lower than previous expectations.

However, the company warned of "substantial" write-downs required this year due to the lower oil-price environment.

Westhouse Securities has an 'add' rating and a 930p target price for the shares, but said that Wednesday's update was likely to result in earnings downgrades.

"It is not surprising that Tullow is reviewing its medium-term strategy given weaker oil prices and the reduced outlook is probably already discounted in the share price," Westhouse said.

"The market may actually be pleased with Tullow's decision to place more emphasis on near-term production and development delivery and hence we reiterate our 'add' recommendation on the stock," they said.

Canaccord Genuity analysts agreed, saying that the move to review spend was "sensible", though they slashed their target price for the stock from 650p to 450p.

The broker, which kept a 'hold' stance, said: "The [update] recognises the challenges facing Tullow and focuses on reducing costs, principally by reducing exploration spend, whilst sustaining development activity in its key regions.

"The announcement looks eminently sensible to us, but also recognises that there is no quick fix for the challenges facing Tullow."