April has been a good month for investors in Tullow Oil (LSE: TLW), Ithaca Energy (LSE: IAE) and Premier Oil (LSE: PMO):
|
Company |
1-month gain |
|
Tullow Oil |
+44% |
|
Ithaca Energy |
+63% |
|
Premier Oil |
+21% |
The question now is whether these three mid-cap oil stocks can deliver more gains in May — or whether now is the time to take some tactical profits, ahead of a potentially volatile summer in the oil markets.
Good news for Tullow
Shares in Tullow rose slightly this morning, after the firm announced that development of the TEN project will be allowed to continue while a maritime border dispute between Cote d’Ivoire and Ghana is considered.
The TEN project is expected to add 35,000 bopd to Tullow’s production by 2017: any delays would be bad news.
Is it time to take profits?
The industry standard way of valuing oil and gas companies is by the value of their reserves — not on earnings forecasts.
The usual metric is enterprise value (market cap plus net debt) dividend by proven and probable reserves. This gives the cost of each commercially-viable barrel of reserves, for anyone considering a takeover bid.
Here’s how these three firms compare on this basis:
|
Company |
EV/ proven+probable reserves |
|
Tullow Oil |
$25 per barrel of oil equivalent (boe) |
|
Ithaca Energy |
$14 per boe |
|
Premier Oil |
$14 per boe |
Tullow Oil’s valuation of $25/boe seems quite high, to me, and I think potential buyers of Tullow stock at today’s price need to ask why the firm’s assets are being valued so much more highly than those of Ithaca and Premier, which have more typical valuations of $14/boe.
There may be a good reason: Tullow’s production costs could be lower, or its undeveloped resources might be more valuable, for example.
I’m not convinced, however: at the other end of the scale, BP is currently valued at around $9/boe of reserves.
Investors need to decide whether Tullow can really deliver enough growth to justify its premium valuation — especially if oil prices remain below $80 for several years, in-line with industry forecasts.
What about oil?
Oil appears to have bottomed out at the start of this year, and Brent Crude is now trading fairly steadily at $65 per barrel.
However, although production growth appears to be slowing in the US, global demand is still lower than supply and oil storage inventories are at record levels in many locations.
I think we may yet see another correction in the oil market, and I don’t think the oil price will rise much further until there is evidence of stronger demand for oil.
In my view, Premier, Ithaca and Tullow are all quite fully priced at current share prices.
