Tullow Oil (LSE:TLW) (6,45% In Azvalor Internacional*)
Tullow shares have fallen by 25% from 2018 highs, with the cutbacks applied after the second quarter results, which “displeased” the market. Once again, this decline in prices was driven by temporary circumstances with no material impact on the value of the company (a slightly lower production than expected in Ghana due to technical problems and the delay in granting approval to one of its main growth projects in Uganda). Exploration success in Guyana – subsequently made public – mitigated some of the earlier price falls, which at one point reached a nadir of 35% from the highs reached in 2018. We believe this successful development in Guyana could alone have a impact on its value.
At current crude oil prices, Tullow trades at less than 65x profits, a valuation that “discounts” an overly pessimistic scenario. According to our calculations, crude oil would have to remain at about $45 barrel in the very long term to justify current stock prices, and even in that scenario we would see no risk of losing money. Bearing in mind the severe crisis that has affected this sector and the strong contraction of investments over the last 5 years, we believe the probability of such a scenario is rather remote. On the contrary, we think the market attributes a probability close to zero to the occurrence of a medium-term crude-oil deficit, a scenario that we believe cannot be ruled out.
From azValor's second-quarter 2019 shareholder letter.
