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 start
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.
