Tullow Oil plc (LON:TLW) has fewer opportunities to outperform its sector rivals, that’s according to Barclays Capital analyst James Hosie.
The analyst has today downgraded Tullow to ‘equal weight’, down from ‘overweight’, and lowered the price target from 210p from 190p - the current price is 180p.
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He believes the crude oil price will provide the main steer for the Tullow share price, as the potential for value creation is “more nuanced” in 2018 as the company’s portfolio presents fewer defined catalysts.
“The company’s oil price leverage - both in terms of NAV and cash flow - makes its attractive to oil price bulls, but using our $60/bbl base case assumption the stock is trading close to our new 190p price target,” Hosie said.
“We downgrade our rating to equal weight on the basis that 2018 is set to be a transition year for Tullow after the re-setting of the cost base was completed in 2017 and the potential for further asset monetisation and exploration activity on the horizon for 2019.”
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Hosie turns his attention to the potential for better than expected cash generation, at current oil prices, which could result in improved returns for shareholders.
“Tullow’s 2018 capital budget was set to achieve free cash flow at US$50/bbl,” he said.
“At US$50/bbl we estimate the business generates just over $400m in free cash flow, which we interpret as a debt reduction target for the year.
“We therefore believe shareholder returns could become a real consideration for the allocation of 2018E free cash flow materially in excess of US$400m.”