With oil prices touching $70 for Brent crude yesterday and analysts in consensus that the market looks to have strong fundamentals in place for the remainder of 2018, oil and gas exploration companies are back in focus. One such company being strongly tipped this week has been FTSE 250 constituent Tullow Oil, which recently announced its return to active exploration after a 3-year hiatus.
Exploration licenses for zones in Africa in South America have been acquired according to a report in yesterday’s Financial Times. A total of six licenses that cover a 28,000 km2 area of seabed off the Pacific coast of Peru have been secured as well as two offshore exploration licenses for the Ivory Coast.
With active service resumed and oil prices looking like holding at over $65 a barrel in the medium term, Tullow is being tipped as a 2018 turnaround stock after seeing its value eroded by 31% last year. While many of Tullow’s peers saw their share price improve over 2017, the UK explorer remained out of favour despite reducing its debt burden, raising finance and increasing production from existing properties. However, it is that lag that means Tullow could be a winner over the coming months for those investing online in ISA and SIPP accounts held with online stockbrokers.
The positive outlook for Tullow is based on an apparent pivot towards greater emphasis on production rather than mainly being an exploration play, as well as the company’s traditionally high debt levels having been brought into line with new industry realities. The era of low oil prices have made that a necessity for exploration companies whose debt levels were forgiven by investors in the past.
However, increasing the company’s revenue weighting towards production doesn’t mean the exploration will be neglected, as this week’s return to license acquisition demonstrated. Quoted in the Financial Times, chief executive Paul McDade commented:
“We are getting back to exploration, which we are good at, but still with a focus on cost control.”
On Wednesday, Tullow reconfirmed to markets that the company is planning to double capital expenditure this year to $460 million, much of which is earmarked for the development of a new project in Kenya and ramping up resources in Ghana. Part of the budget will also be set aside to service the new licenses acquired.
Of particular interest to potential investors will be the fact that Tullow currently trades on a PEG (price to earnings growth) ratio of only 0.1. A low PEG is considered a strong indicator of an upcoming turnaround to solid share price growth.