Tullow Oil lifted by UBS upgrade to 'buy'

3rd Apr 2014 09:27

Tullow Oil shares were making decent gains on Thursday after UBS upgraded the stock from 'neutral' to 'buy'. The bank said that the investment case for the shares has changed and the risk/reward balance is "now skewed to the upside". "Less evident for the time being is the high impact offshore explorer. In its place is a different animal, with greater leverage to development risk but with significant onshore exploration upside. The reasons for the change lie we believe in available opportunity set, a change in the competitive environment and perhaps some reduced risk tolerance after two years of high profile dry holes."While Tullow's drilling portfolio is now lower risk, it is still "high quality", UBS said. The company still has some big offshore wildcat wells (those in unproven areas) and offers upside from major "basin-opening" projects in Kenya and Ethiopia.The bank explained that the stock's performance - having halved in two years - reflects some of the recent exploration disappointment and a reduced emphasis among institutional investors on the exploration and production sub-sector as a whole."This is a well-financed company, with a proven development track-record, a strong asset portfolio, material exploration upside, decent downside protection acquirable at an attractive price while the cycle is not currently in its favour."UBS' target price for Tullow's shares has been reduced from 925p to 900p, which is set at a 15% discount to a risked net asset value of 1,057p. This new target represents 20% upside from the current share price, the bank said.The stock was up 4.5% at 786.5p by 09:54.BC