Interactive Investor

Insider: big debut purchases at Tullow Oil and another mid-cap

14th March 2022 09:33

Graeme Evans from interactive investor

Popular oil company Tullow’s shares aren’t doing what they’re meant to, but this director is piling in. Our City expert explains why and also looks at another sizeable acquisition elsewhere.

Tullow Oil (LSE:TLW) shares worth £62,000 have been bought by one of its directors in a week when the West Africa-focused operator’s value fell sharply despite sky-high energy prices.

The purchases by non-executive Martin Greenslade, who is also the finance boss of Land Securities, were his first in the company after more than two years on the board.

He did so on Thursday at around 52p, which is where shares fell despite annual results the previous day highlighting a “transformational 2021” and stronger balance sheet.

The figures were in line with January’s trading update, but with no upgrade to 2022’s cash flow expectations of $750 million (£575 million) the FTSE All-Share stock slumped 15%.

Tullow is 2% lower over the past month, even though oil prices have soared to as high as $130 a barrel after buyers shunned Russian oil in the wake of the Ukraine invasion.

Tullow’s current cash flow forecasts are based on assumptions for an average realised oil price for 2022 of $75 a barrel.

Investec Securities regards Tullow as its “preferred oil price play” and believes that an oil price above $100 a barrel will enable the company to achieve its 1.5 times debt to earnings deleveraging ratio target as early as next year.

Tullow finished last year with net debt of $2.1 billion (£1.6 billion), which reduced gearing to 2.2 times from three times the previous year. While realised prices rose, the impact of hedging losses decreased Tullow’s revenues by $153 million (£117.2 million).

Operational progress during 2021 included notable production growth from Tullow’s flagship Jubilee field in Ghana and at its Simba field in Gabon, but there was lower-than-expected production from its TEN fields in Ghana and Espoir in Ivory Coast.

Chief executive Rahul Dhir said this year will see “a great deal of activity” at Jubilee, with investment in infrastructure and new wells to grow production in the near term.

He added: “At TEN, we will drill two important, strategic wells that will help define our future plans for the fields and we will continue to build production in Gabon.”

Dhir took the helm in July 2020 and has stabilised the debt-laden company’s fortunes after shares fell as far as 7.5p in March 2020. They had been more than £12 in 2012.

A comprehensive debt refinancing in May has been key to its revival, while a 25% year-on-year cut in administrative costs helped narrow after-tax losses to $81 million (£62.1 million).

Investec believes the operational momentum will give Tullow the chance to refinance its most expensive debt, providing a platform to generate significant cash flow and accelerate the deleveraging programme.

The broker last week raised its price target on Tullow from 90p to 110p as part of its positioning for oil prices of $95 a barrel across 2022 and $80 in 2023. Its list of preferred names also includes Jadestone Energy (LSE:JSE), Serica Energy (LSE:SQZ) and IOG (LSE:IOG).

Other revised price targets on Tullow last week included at Barclays, which increased its overweight position from 75p to 85p but JPMorgan cut from 77p to 74p.

Analysts at Davy said last week’s results showed further progress: “Oil prices are likely to remain very volatile and there will be some cost inflation to consider in due course, but the opportunity continues to be very significant.

“There is also the possibility of material earnings and cash flow accretion from refinancing outstanding debt in late 2023 or thereafter.”

Another non-executive director making a big purchase of shares for the first time was David Randich at FTSE 250-listed window and door components specialist Tyman (LSE:TYMN).

Tyman is one of the lesser-known companies in the second tier, but investors who bought the stock during the market’s pandemic low point in early April 2020 have been well rewarded after its valuation more than doubled at one point.

And as we revealed last week, its shares are the second best performing in the FTSE 250 since the low point of the Great Financial Crisis on 9 March 2009. Shares have risen 3,550%, a performance only bettered by Howden Joinery.

Tyman was previously known as Lupus Capital, changing its name in 2013 when it was still listed on AIM. It employs about 4,200 people at facilities in 16 countries, with its North American arm comfortably the biggest division as it continues to benefit from favourable trends in the US and Canadian housing markets.

Randich, whose appointment in December has brought extensive knowledge of the North American building products sector, spent about £166,000 on shares at an average 332p.

The stock briefly topped 500p in early June but has derated since then amid the challenges of meeting US demand and significant material price volatility. Despite the supply chain and labour market disruption, Tyman still managed a 19% rise in adjusted profits and a record total dividend of 12.9p a share in recent results.

Broker Liberum said the 2021 figures were not as good as they could have been but added that the company’s valuation is now “very attractive” on 10 times earnings, leading to a potential 30% upside to its revised target price of 445p.

The broker added: “Evidence of renewed US margin momentum, resumed M&A or stabilisation of commodity prices are all plausible catalysts for re-rating.”

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