There is a dispute over who needs to pay what in the wake of yesterday’s high court ruling over a 2016 rig contract - but, Jefferies ‘Kosmos Energy vs Tullow Oil’ note is about the bigger picture.
Kosmos Energy Plc (LON:KOS) and Tullow Oil plc (LON:TLW) are partners in the Jubliee oil discovery offshore and, for most investors, that is the project that made both ‘famous’.
What the two stocks have in common and the ways in which they differ is now more acutely examined since Kosmos listed in August 2017.
READ: Kosmos Energy shares fall as first quarter dented by crude derivatives
Now they’re both listed in the same place, investors are now likely to gravitate to one or the other.
Jefferies prefers Kosmos, with a ‘buy’ rating, whilst it sees Tullow as ‘hold’. In its note, the American investment bank made comparisons broadly across both.
“We estimate TLW has drilled sixty-five exploration wells outside Ghana with Kenya the successful discovery. Kosmos Energy has drilled ten exploration wells outside Ghana with Tortue gas the successful discovery,” said Mark Wilson, analyst at Jefferies.
“Comparing the two stocks across balance sheet, E&A history & Pro forma 2P valuation reaffirms our preference of KOS (Buy) over TLW (Hold).”
Reflecting on recent news flow, Wilson said: “We increase TLW's production 4% in 2018 and 3% in 2019 on increased production guidance to 89-95,000 boed, however, other trading update effects trim earnings.
“KOS sees the greater positive impact from TLW's trading update (100% overlap of production assets) on the upgrade to Equatorial Guinea production.
“Kosmos' longer term balance sheet discipline allowed acquisition of its 40.375% stake in EG's Ceiba/Okume in Oct 2017.”
He added: “TLW's US$3.2bn guided net debt at 30 June 2018 and US$0.3bn free cashflow in 1H18 has already taken a hit from yesterday's High Court judgment in favour of Seadrill in regard to the West Leo Drilling rig termination in Dec 2016.
“TLW ‘will now examine its options. including seeking leave to appeal the judgment’ but we feel the c.$140m net liability to TLW appears a certainty. KOS is disputing its share of the liability (c. 20% of $254m).”
Jefferies has a 700p price target for Kosmos suggesting some 13.2% upside, while it has a 250p target for Tullow indicating just over 8%.