The boost from the Opec deal has run its course and now’s the time to bank profits at Tullow Oil plc (LON:TLW), Goldman Sachs says.
The US investment bank downgraded the oil producer to ‘sell’ from ‘neutral’ after the stock rose from 263p at the end of November, when the Opec deal broke, to around 320p now.
Goldman thinks the stock is now trending above the fundamentals implied by the bank’s long-term oil price assumption of sixty bucks a barrel.
With the back-end of the oil price futures curve flat at around US$56-57/bl, Goldman believes the focus will switch back to fundamentals, and notes that Tullow has the highest sensitivity to oil price changes of the energy stocks it covers. By its calculations, a ten dollar change in the oil price moves Tullow’s value by around two-fifths.
Furthermore, the bank is concerned that the current pricing level is assuming full delivery of all producing projects, whereas it sees a risk to the company’s 2017 production figures.
“We focus on the risk of disappointment at the TEN project, which could offset Jubilee’s recent outperformance. We maintain that management has done an impressive job of steering the company through a very difficult year, having overcome several challenges – such as the FPSO [floating production storage and offloading] turret issue at Jubilee, rearranging and delaying RBL amortisations. We do not see the balance sheet as being a major cause of concern to the company,” Goldman said.
The finance house notes that should oil prices continue to climb higher, the stock will likely to continue to outperform, which will leave Goldman Sachs feeling a bit foolish, but in terms of its projected US$60 a barrel target for the oil price, the downgrade is forced.
The price target has also been cut, from 247.2p to 221.8p.