In its first half trading update, Tullow Oil today raised the lower end of its Uganda reserves estimate range and upgraded capital expenditure guidance, but it also missed consensus production forecasts and downgraded output guidance by 3%, causing the shares to slip into the red in Wednesday deals.
At last check, Tullow shares were 14.0p or 1.6% weaker at 876.5p, underperforming the FTSE 100 index, which shed 19.0 points or 0.5% to 4,168.0.
The oil & gas producer sees first-half revenue at around £290 million compared to £378 million a year ago, predominantly due to lower commodity prices but also as a result of production falling 16% year-on-year to 59,000 barrels of oil equivalent per day. This output figure was lower than analysts had expected, and their disappointment was compounded by Tullow trimming its full-year 2009 guidance to 58,000 boepd from 60,000 boepd previously estimated.
“Tullow's trading statement contains a mixed bag of positive and negatives,” Numis Securities analyst Sanjeev Bahl said following the release. “Overall we believe that the statement is marginally disappointing,” he added, citing the 2009 production downgrade, drilling difficulties at the Ngassa-2 well in Uganda and higher-than-expected exploration write-off and asset impairments.
Tullow will write off around £15 million in the first half principally relating to new ventures activity and licence relinquishments, will record an impairment charge of about £12 million in connection with its UK Bure North field, and also take a £8 million pre-tax hedging charge.
At an operational level, the group’s Jubilee field offshore Ghana is on track to deliver first oil in 2010 but the completion of its next major exploration well, Ngassa-2 in Uganda, has been delayed until August so that it can be sidetracked as a result of difficult hole conditions. Though this delay is clearly a disappointment, Tullow said it has encountered a few metres of oil in thin sands above the main reservoir target, which analysts see as encouraging.
Evolution Securities’ Richard Griffith said this was an “upbeat” trading update that highlighted growing confidence in furher upside from Ghana and increased the discovered resources estimate in Uganda to 700 million barrels of oil.
“At a time when the broader sector is suffering from a retrenchment in the oil price, the potential for positive news flow…should help counteract this,” Griffith said has he repeated Evolution’s Buy advice and raised the target price to 1,260p from 1,200p.
Tony Shepard at Charles Stanley said estimates of Tullow’s core net asset value are about 700p and potential appraisal and exploration activity could increase this to about 1,200p. With the current share price at a 25% discount to this valuation, Shepard believes the share price could move closer to 1,200p if further drilling successes confirm the potential, but he noted this also depends on projections of the long-term oil price. Charles Stanley has a Hold recommendation on Tullow.
Numis also rates the stock as one to Hold but analyst Bahl continues to prefer Premier Oil, which he rates Buy with a 1,413p target against his 871p target for Tullow.
The group’s half-year results are due Wednesday, August 26.
