Here’s Why Tullow Oil plc Is Really Attractive At Current Levels

BP plc (LON:BP) and Royal Dutch Shell Plc (LON:RDSB) could be eyeing up Tullow Oil plc (LON:TLW).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tullow Oil’s (LSE: TLW) shares have underperformed the wider FTSE 100 by around 10% year to date and more than 30% over the past 12 months, a performance that has left many investors concerned. 

However, this poor performance can be traced back to number of one-off events and luckily, recent declines have sent Tullow’s shares down to a level where they look really attractive. 

Poor startoil rig

Tullow has made a poor start to the year. Unfortunately, the company was forced to take write-downs during the first half of this year totalling $415m, or £243m, after wells drilled in Mauritania, Ethiopia and Norway failed to come up with the desired results. Another one-off charge of $115m was taken as Tullow disposed of oilfield assets.

Additionally, Tullow has come under pressure after violence flared near its Albertine rift basin prospect in western Uganda. Then, the company was forced to suspend drilling off the coast of Guinea after its partner, Houston-based Hyperdynamics, was placed under investigation by US authorities probing possible breaches of anti-corruption laws.

Looks expensive

After Tullow’s poor start to the year, some investors have started to question the company’s lofty valuation. For example, at present levels Tullow currently trades at a 2015 P/E of 29.5, compared to smaller peer Afren’s 2015 P/E of 11.

Then there is the valuation of Tullow’s larger peers, BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) both of which look more attractive on a valuation basis.

Specifically, Shell currently trades at a 2015 P/E of 11.2 and the company’s shares are set to support a dividend yield of 4.5% for the same period. BP, meanwhile, trades at a 2015 P/E of 9.7 and will support a yield of 4% next year. City analysts believe that Tullow’s shares will only offer investors a token yield of 1.5% for 2015. 

Value remains

Still, there is value to be found in Tullow’s shares and this is why the company looks really attractive at current levels.

Indeed, City analysts estimate that Tullow’s oil fields already in production, namely its flagship Jubilee oil field in Ghana are worth around $7.6bn or 524p per share. Further, the company’s new TEN project in Ghana, on target for production by mid-2016, is expected to almost double production and is worth about $1.7bn, or 127p per share.

Then there is Tullow’s exciting exploration programme within Kenya, scheduled to take place over the next 18 months. The company is drilling 13 new wells in Kenya during the first half of 2015.

Buyout?

As Tullow’s shares trade around the same value of the company’s assets, there is a chance that the company could be acquired by a larger peer. Either BP or Shell could make an offer.

Shell is right in the middle of a $15bn asset disposal programme, whereby the company is divesting some of its low-margin non-core assets. When completed the company will have a $15bn war chest with which to go on an acquisition spree, acquiring smaller peers to boost growth.

BP is also in the middle of a disposal program, targeting $10bn of disposals by 2015.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool has recommended shares in Tullow Oil.

More on Investing Articles

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »