Sunday 18 February 2018

Tullow soars as Goldman Sachs tips takeover bid

Tullow advanced 8.8pc to £5.44 during afternoon trading
Tullow advanced 8.8pc to £5.44 during afternoon trading
Thomas Molloy

Thomas Molloy

Shares in Tullow jumped as much as 8.8pc in London yesterday as Goldman Sachs highlighted the potential for a takeover or the sale of some assets.

Tullow advanced 8.8pc to £5.44 during afternoon trading, extending a 10pc gain posted over the Monday and Tuesday trading sessions.

The gains came as Goldman said in a report that mergers and acquisitions are set to drive the exploration sector.

The report highlighted both Tullow and Africa Oil as well as Dublin-listed Dragon Oil and Genel. Shares in Dragon, which is far less liquid than Tullow, were little changed.

Large, established oil companies will abandon complex projects and turn instead to smaller exploration companies such as Tullow which already have proven oil fields, Goldman said in a note published on Tuesday.

Analysts raised their rating for both Tullow and Africa Oil to "buy" from "neutral".

Goldman said Tullow offers a diverse and full-cycle portfolio and predicted that cash flow will turn positive in 2017.

"We believe the stock offers exposure to a strategic asset base, given its materiality, oil phase and positioning towards the bottom of the cost curve in Western and Eastern Africa," Goldman said.

Large producers should scrap projects requiring an oil price of $80 a barrel to break even and instead acquire lower-cost ones from exploration companies, Goldman added.

It sees projects with a capacity of as much as 5m barrels to 10m barrels a day in the hands of independent explorers today that are potential targets.

London-based Jefferies Group was less bullish.

While last week's Shell-BG deal has sparked predictions of an "M&A frenzy," Jefferies dismissed Tullow as an "eternal M&A candidate" which is too expensive despite recent declines in the share price.

The Goldman predictions and share price gains will be good news for Tullow chief executive Adrian Heavey who is busy cutting costs after a series of failures in Africa disappointed investors.

Tullow said last month that said it's discussing redundancies with employees in Dublin and elsewhere as it seeks to cut costs amid low oil prices.

The company reported a net loss of $1.6bn for 2014 and suspended its dividend as crude slumped to near a six-year low. The company, which has about 2,040 employees including some contractors plans to cut costs by $500m over the next three years.

About half of Tullow's workforce is operating in Africa.

Tullow has also stalled its exploration programme. It doesn't plan to drill any offshore wells this year and is embroiled in a border dispute at its Tweneboa-Enyenra-Ntomme project in Ghana. Legal advisers say the maritime boundary disputed by neighbouring Ivory Coast will be upheld, the company said on March 2. The TEN project is set to produce its first oil in mid-2016.

While the company has trimmed its exploration budget to $200m from $1bn, it hasn't stopped looking for projects. Along with Total of France and China's Cnooc, Tullow expects to invest as much as $14bn developing oil fields in Uganda.

The Africa-focused oil producer said in March that it had raised an additional $450m of capital from existing lenders, boosting its financial strength despite weak oil prices.

Tullow said its total committed debt facilities were now around $6.3bn.

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