Tullow prospects hot up

SHARES in exploration stock Tullow Oil are a buy with close to 30% potential upside, stockbrokers Dolmen Butler Briscoe told clients yesterday.

Analyst Stuart Draper said further good news for investors is that the company may pay a dividend at the end of next year.

“With approximately 75% of Tullow’s current output being British gas, the price of which recently started to rise again going into mid-winter, strong H2 2002 earnings are likely. In 2003, cash earnings of circa stg£100m are expected, which, even allowing for total capital expenditure on exploration and development in 2003 of circa £25m, still leaves £75m in free cashflow, or circa 20p per share for shareholders.

“Therefore, our current 12-month price target of £1.20 (29% upside) is based on 6x 2003 free cashflow per share of 20p. This year, Tullow also stated that it will review its dividend policy, and is likely to be in a position to pay a dividend at year end,” he said. Mr Draper said production at another of Tullow’s CMS III fields, the Murdoch K field, has started, with a stronger that expected production rate of 204m standard cubic feet of natural gas per day.

Mr Draper believes the demand and supply fundamentals in relation to such assets are likely to result in a substantial increase in their value over the coming decade.

Mr Draper pointed out that Tullow’s results for the six months ended June showed net profit of £7.57m, or 2p per share, a year-on-year increase of 62%, with turnover doubling to £55m.

“Tullow’s long term gas sales contracts and hedging activities shelter its earnings from weak UK gas prices,” he said.