Deutsche Bank has downgraded its target for Tullow Oil plc (LON:TLW) despite the Africa focussed exploration and production group hitting another new discovery in Kenya this week.
Tullow on Wednesday revealed that the Emekuya-1 well, in Block 13T, encountered a 75 metres of net oil pay.
The well is located some 2.5 kilometres from the prior Etom-2 well, and it encountered reservoirs that correlate to those seen at Etom. Tullow said the results suggest that a major part of the Greater Etom structure is oil-filled.
David Mirzai, Deutsche Bank research analyst, in a note said the Emekuya success improves sentiment and it represents another step closer to supporting Tullow’s view that there are 1bln barrels of crude in Kenya’s South Lokichar Basin.
Deutsche repeated a ‘buy’ recommendation for Tullow, and set a new target price of 260p (down from 270p) suggesting almost 30% upside to the current price of 201p.
Mirzai notes that three issues are key to getting the market to give the Kenyan discoveries a higher value – namely, it must give more clarity on how the Kenyan crude can be exported as well as provide information on any plans to farm-out a stake to a new partner and give more insight into Maersk Oil’s commitment to the project.
“In the meantime, Tullow continues to offer geared commodity exposure to investors with a constructive outlook on the oil price,” the analyst said.
Looking at the possible development of the Kenya discoveries, Deutsche leans on its prior update on project partner Africa Oil.
Mirzai highlights that the project’s likely pilot production scheme, due to stark at just 2,000 bopd before the end of this year, rising to 100,000 bopd in a ramp-up to plateau by 2024.
“Within our Tullow model, we continue to assume that Kenya represents a 750mb recoverable resource opportunity (75% risking) with an additional 250mb of exploration upside (25% risking),” he said.
“While the market may be eager to augment the stated 2C resource number, we prefer to wait for the end of the 2017 drilling and water flood programme that will allow the partners to better define the size and scope of a potential development.”