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One of the best oil companies in the world has seen its shares fall by 30% over the past two years. But its fortune may change in 2014, if just a few things can fall into place.
The company is Tullow Oil (OTC:TUWOY). Most Americans have probably never even heard of it. The UK-based oil explorer and producer’s main listing is on the London Stock Exchange (TLW.L), although it has a lesser known listing in the U.S. as well.
The company was founded by Aidan Heavey just outside of Dublin, Ireland in 1985 to go after small oil fields in the West African country of Senegal. Named after the small Irish town of Tullow, Heavey’s company chased immense opportunity at a time when no other company thought these fields were worth pursuing.
From humble beginnings, Tullow grew organically and through acquisitions to become the multi-billion dollar company it is today. It is still led by Mr. Heavey, the company’s CEO, and is still focused on exploration and development of new oil fields.
It won some notoriety with a massive string of discoveries in Uganda in 2007. Along with partner Heritage Oil, Tullow found over 1 billion barrels of oil under Lake Albert, Uganda.
Then, in 2013, Tullow and partner Africa Oil (AOI.TO), (OTC:AOIFF) made the first ever oil discovery in Kenya.
The Uganda and Kenya discoveries have made East Africa one of the hottest oil-exploration zip codes in the world, and shares of Tullow’s stock reflected the growing optimism. The fact that the company had a better than 70% success rate on new wells over a four year period was proof that its exploration team knew a thing or two about finding oil.
But despite good fortune in East Africa, other areas of Tullow’s business took a rare turn for the worse in 2013. Well publicized offshore drilling disappointments led to a $900 million exploration charge. This was largely due to nine unsuccessful wells across the North Sea, French Guiana, Cote d’Ivoire and Mozambique.
Also, high cost development projects in Ghana, and a slight reduction in its 2014 production outlook, have caused investors and analysts to question Tullow’s future.
Things in 2014 may be looking up for the once great explorer however.
The company is looking to sell off part of its interest in costly offshore projects. And there were some successful offshore wells in 2013, most notably the Wisting Central well in the Barents Sea, which opened up a new area and likely proved the theory that there is considerable oil in this area.
A greater focus on onshore projects should bring new production in the 2014-16 timeframe. Specifically in Kenya and Ethiopia, Tullow and partner Africa Oil will be exploring in ten frontier basins over the next 18 months and drilling upwards of 20 new wells. At least six potentially major wells are all planned to spud before the end of the year and could move the stock.
And there is still pending production from Uganda, which has been held back due to infrastructure issues. With things moving ahead in Kenya to the east, a long-awaited export pipeline is now being planned. If all goes well expect oil to flow from Uganda in 2015.
Given the good-news, bad-news mix with Tullow, shares have had a bumpy ride. The stock isn’t likely to set a sustained course higher until investor confidence rises, and for that we need to see several of the above positive catalysts to hit.
Until then, the stock is likely to trade at a 20% to 40% discount to its “real” value. This is a company to put on your watch list right now, and buy once we get a little more clarity on what 2014-15 will look like. More specifically, I’m looking for new basin discoveries in Kenya and Ethiopia to give the green light to buy.
You can buy shares of Tullow directly on the London Stock Exchange (TLW.L) in pounds sterling, or on the U.S. OTC market (TUWOY) for just over $7.00.
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