UBS upgrades Tullow Oil to ‘buy’

TULLOW Oil, the Irish oil and gas company now headquartered in London, has been boosted by a strong endorsement of the group by a London-based analyst.

Tullow, which reports first-half results next Wednesday, was upgraded to “buy” from “neutral” by UBS because of its future drilling potential.

Shares were up as much as 40p, or 5.8%, to 734p in early trading, but slipped back slightly later.

Tullow plans 14 wells to be drilled over the remainder of the year. That drilling should produce “further high impact potential in Uganda, Ghana, Mauritania and Guyana into 2009,” said UBS analyst, Adrian Wood, who is based in London.

He concluded that “further exploration success could possibly make Tullow an M&A [acquisition] target next year”.

UBS has a price target of 950p on the stock.

In Dublin the shares closed unchanged at €8.50, which reflects weaker commitment to natural resources stocks in the Irish market.

The slightly more circumspect report produced by Goodbody Stockbrokers may also have been a factor.

Analyst Gerry Hennigan said he expects the group to produce sales of £372.1m (€469m), pre-tax profits of £174.8m and adjusted earnings per share of 16.3p when it issues results on Wednesday next.

Hennigan said the group was likely to be rid of most of its £420m debt by the year end.

Profit on disposals and positive cash flow in the second half “will see Tullow exit the year with minimal debt, with the primary variables in that outcome being H2 capital expenditure, (currently estimated at £310m — €391m) and realised oil and gas prices.

Aside from these interest will focus on drilling results and any adjustment to the schedule of drilling activity over the coming year.

Hennigan suggests the update from Uganda as recently as August 6 suggests incremental drilling flow may be limited. He has concerns also that crude prices have declined significantly. Hennigan rates the shares an “add” rather than a “buy”, saying investment policy coupled with the weaker oil price outlook will be critical to Tullow’s performance.