Tullow Oil gushes lower as Macquarie and Goldman downgrade

Goldman Sachs downgraded Tullow to ‘neutral’ from ‘buy’ and cut the price target to 274.30p from 305p on the back of the recently announced need for two pipelines in East Africa.

The bank said both projects break even at below $60 a barrel, but Tullow’s relatively high-cost production means further leverage may be needed to cover capex from 2018, if prices are at $60/bbl, which is Goldman’s long-term assumption.

GS pointed out that Tullow has the highest beta to the oil price in its coverage, noting that a $10 increase or decrease in its long-term oil price assumption would change its target price on the stock by around 40% either way, partly owing to the company’s high financial leverage.

“This explains Tullow’s 70% rally over the past three months as oil prices have risen 33%,” it said.

Meanwhile, Macquarie cut the stock ‘neutral’ from ‘outperform’ on fundamental valuation grounds following recent strength but said it remains very positive on the overall story and would take advantage of any dips.

“We still like the Tullow story long term and are looking for deals in East Africa and other sources of value creation for further NAV accretion – we think Tullow can deliver, but have no basis for including this upside in our NAV at the moment,” it said, as it lifted the price target to 292p from 264p.

Finally, Numis removed Tullow from its ‘Top Picks’ list this month.

At 1157 BST, Tullow shares were down 7.4% to 259.10p.