Tullow Oil given strong buy rating after reports indicate 60% upside

TULLOW OIL has been given a strong buy rating in advance of its results announcement yesterday

Dolmen analyst Stuart Draper believes Tullow will report profit before tax of £23m and earnings per share of 4p, year-on-year increases respectively of 44% and 54%.

Mr Draper, in a note to clients yesterday, said cash earnings of close to £100m are expected in 2003. Allowing for capital expenditure on exploration and development in 2003 of about £25m, he said this still leaves £75m in free cashflow, or about 20p per share for shareholders.

“Therefore, our current 12- month price target of £1.20 (60% 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 start paying a dividend : Buy,” he told clients.

Mr Draper final year figures are based on recent advise from Tullow that turnover and operating profit before exploration would be £113m and £32m respectively for the year ended December 31, 2002, year-on-year increases of 47% and 22%.

“Tullow recently succeeded in raising £14.3m, by the placing of 17.9m shares at 80p each, representing circa 5% of Tullow’s existing issued share capital. The proceeds will mainly be used to fund further acquisitions, as the new equity will enable Tullow to secure a new debt facility of up to $250m,” Mr Draper said.

Mr Draper says the current disposal programmes of the oil majors provides a number of very attractive acquisition opportunities available for the small number of companies like Tullow in the independent oil and gas sector.

“For example, BP recently stated it may sell up to $1bn of its mature North Sea assets to free up capital for higher return ventures. This is because the smaller oil companies, such as Tullow, can achieve higher returns and longer field lives from some of the majors’ smaller assets, as they can devote much more attention to such smaller assets,” he explained.

Mr Draper said the main reason for the company’s transformation into a profitable and cash generative operation in recent years was the £200m acquisition of BP’s southern North Sea assets in 2000.

“Any similar acquisitions in the near future would also be very positive for Tullow,” he said.

Mr Draper also anticipates a change in dividend policy this year by Tullow which could provide another income stream for shareholders.