Goldman Sachs has up upgraded a pair of London listed exploration and production companies – with Tullow Oil PLC (LON:TLW) and Cairn Energy PLC (LON:CNE) now rated a ‘buy’.
It comes as Goldman’s oil sector analysts reviewed the rally in E&P shares and the recent rise in crude prices.
Analyst Duncan Milligan, in a note, said the US bank is now focussing on ‘idiosyncratic opportunities’ in the sector.
“We focus on overlooked value through a combination of free cash flow (FCF) generation, an attractive position on the cost curve … the ability to self finance along with operational upside,” Milligan said.
“We also look for companies that can take advantage of the current deflationary cost environment to reduce costs in pre-sanction assets.”
Drilling to drive Tullow Oil higher
Goldman sets a ‘buy’ recommendation for Tullow with the price target rising to 260.6p from 170.8p previously.
Goldman is expecting upside as a result of higher oil prices and rising production from the TEN field.
It is forecasting 2019 production from TEN rising to 90,000 bopd, up from 75,000 bopd, as an extensive well drilling programme campaign advances - it has so far drilled eleven of the 24 planned wells.
“We think Tullow has the financial strength to add a second drilling rig at relatively low day rates,” the analyst said.
“This would be beneficial in adding more wells at both Jubilee and TEN to ensure production is maintained at plateau rates until the mid-2020’s. Given a lack of drilling for the past 2.5 years at Jubilee, there is some risk that without additional wells, production may start to decline within the next 18 months.”
Cairn Energy offers ‘best in class growth’
Goldman moves to ‘buy’ from ‘neutral’ and a new price target of 288.2p as it sees around 10% upside to the current price, and, it sees the SNE asset offshore Cameroon as a key value catalyst.
“We see Cairn providing best-in-class growth out to 2022/2023,” the analyst said.
“We think its portfolio is able to support the development capex without additional financing (beyond an already arranged RBL).”
He added: “We think the market is applying a heavy risking to the value of SNE (as is standard for pre-sanction assets) - which we expect to unwind as the project progresses, seeing the delivery of a development plan in H2 2018 and FID thereafter (GSe early 2019) as key catalysts.
“We see the completion of the production ramp at Kraken and Catcher, and the move to sanctioning SNE, as positive catalysts.”
“Finally, the Cairn India stake is currently frozen by the Indian government, pending arbitration that the company says is scheduled for August 2018 with an outcome expected in the fourth quarter of 2018.”