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  • SOURCE: | qwesa2big
  • AS oil prices continue to garner attention, investors have been increasingly focused on opportunities in the energy sector.

    Tullow Oil engages in oil and gas exploration and production (E&P), with the group’s key assets located in Africa – mainly in Uganda and West Africa – and South America. Over the years, Tullow has made a number of acquisitions, which range from buying part of BP’s North Sea assets, to acquiring South Africa’s Energy Africa, or Australia’s Hardman Resources.

    Recently, Tullow reported full-year results that conveyed a generally upbeat tone and were in line with consensus expectations. Its Jubilee field in Ghana – which is the group’s largest discovery to date – achieved first oil in November 2010, with potential to enhance group’s production and earnings.

    We think Tullow Oil is poised for a new growth phase and that its well-diversified and larger-than-average exploration portfolio should position it well in relation to other E&P firms.

    In an environment of rising oil prices, smaller E&P firms like Tullow may benefit more than some of the integrated players.

    However, there are a number of risks associated with the energy sector – not least oil and gas price volatility and exchange rate movements. Another is geopolitical risk and its associated production disruption problems.

    The group has a solid operational track record and has announced positive well test results in Africa. Tullow will remain an active oil explorer and, with more significant fields due to start production by 2014, we believe Tullow’s earnings should double over the next 4-5 years.

    The shares continue to outperform the UK energy sector but we believe they have further to go. Our fair value for the stock, which closed at 1388p on Friday, is 1575p.

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