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One Of The World’s Largest Investment Managers Buys Into Tullow Oil plc

It always pays to keep an eye on what the world’s largest investors are doing with their money. Indeed, while you may not agree with their investment decisions, they may know something you don’t and while we Fools don’t all hold the same opinions, considering a diverse range of insights makes us better investors.

That’s why, when one of the world’s largest investment managers disclosed a stake in Africa-focused oil explorer Tullow Oil (LSE: TLW), the market took notice. 

A big stake oil rig

According to documents filed with the London Stock Exchange on the 5th of September, The Capital Group Companies increased their position in Tullow Oil to above 7%. The actual holding stands at around 7.1%, implying that the Capital Group has spent around £500m acquiring its stake. 

According to the investment manager’s website, “Since 1931, Capital Group has focused on delivering superior, long-term investment results for our investors.” The group currently has around $1trn of assets under management, so it’s likely that Capital Group’s asset managers see value in Tullow’s shares. 

Should you follow?

The question is, should you follow Capital Group? Well, Tullow is hardly a market darling at present. The company has seen its share price fall by more than 50%, since reaching an all-time high at the beginning of 2012. These declines have been driven by a number of high-profile well failures, which forced Tullow to book write-downs costing the company hundreds of millions.

What’s more, cautious investors have started to call Tullow’s lofty valuation into question. For example, the company currently trades at a forward P/E of 49.7, while Tullow’s peers in the oil & gas producers sector trade at an average P/E of 13.8.  That said, the City has earnings growth of 91% pencilled in for 2015, which indicates that Tullow is trading at a 2015 P/E of 26.

Nevertheless, there’s more to Tullow than its P/E ratio. Indeed, I believe that the Capital Group can see value in Tullow’s assets.

Asset value

After doing some research on Tullow, one thing quickly becomes clear: the company’s oil reserves are worth more than the current share price.

Now, estimates vary, depending on which metric is used, but some figures estimate that the fair value of Tullow’s shares, when factoring in asset values is in excess of 1,000p per share. Some figures also suggest that Tullow’s assets could be worth upto 1,300p per share. 

Of course, these figures are estimates, no one is able to tell the true value of Tullow’s oil reserves. Still, Tullow has long been considered to be a takeover target and the wider the gap between the company’s implied net asset value per share, and the actual share price, the more attractive the company is to predators.

Overall, with Tullow’s share price at a five-year low, the company has become an attractive takeover target. 

Too expensive 

If you’re not convinced and Tullow is not your cup of tea, then there are plenty of other opportunities out there.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended shares in Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.