Tullow Oil: A catalyst to halt the decline

Financial markets analyst Rajan Dhall picks out the day's key industry news and runs the numbers to see what this share price might do next.

Oil markets had a small bounce yesterday but now we are struggling again. Interestingly, US President Donald Trump tweeted thanks to the Saudi Arabian prince for helping bring the oil price down. Net bearish positions in oil futures remain high, but investors must watch closely to see when demand will kick back in at these low levels.

A lower oil price is like a tax break for corporations. Trump can see that equities markets are in trouble due to central bank rate tightening and a global shift in sentiment, and oil appears to be his way of easing that problem. 

This week we also had the latest OPEC meeting, and it seems that a production cut is looming, though timing is the key issue. Russia has said recently there is no concrete agreement in place, but wait for more signs before confirmation of this. 

Looking at the chart for WTI crude below, you can see there was a significant technical break at $54.59 per barrel - the key resistance late in 2016 and through to early 2017 - which could have acted as a support zone, but bears took the price straight through. 

Note, the weekly candlestick has not closed yet so we would have to wait for confirmation of this as a bearish signal. Elsewhere, on the downside, $50 per barrel looks to be the next level of support and, if we do bounce there, the $54.59 per barrel level becomes a resistance point.

Source: TradingView (*) Past performance is not a guide to future performance

Tullow Oil

Tullow Oil has been around since the mid-80s and is currently worth £2.6 billion, with exploration licences in Europe, South Asia and Africa.  

It was worth a lot more just a few years ago and, apart from a few share price spikes, performance has been unimpressive for the best part of six years. A recent sell-off and weaker oil price suggests the upcoming Capital Markets Day presentation to analysts could be key to near-term direction. 

Ahead of the meeting next Thursday, 29 November, broker UBS has revised its price target down to 200p from 240p and repeated its 'neutral' stance, still 8% above the current price of 184.8p. 

Ghana production has helped stabilise net debt – look for a drop to $2.8 billion in 2018 from $3.5 billion last year – and UBS wants "more colour on the assets in Tullow's portfolio that can provide growth in the medium to long term".

Analyst Amy Wong trimmed Tullow's Net Asset Value (NAV) forecast to take into account delays in East Africa. She says:

"We have now reduced the risk weighting of Kenya Phase 1 and Uganda from 90% to 50%. We also moved Kenya from Core NAV (resulting in 20% reduction to Core NAV) to Contingent NAV but this is then offset by lower risk weighting on Uganda."

"Valuation looks relatively full at a $68/bbl implied oil price and we don't think the shares offer compelling risk-reward in the context of the wider sector."

Tullow Oil chart analysis

Looking at the most recent price action it seems that few oil companies have been able to shake off the correlation with WTI/Brent. 

Since the October high of 273.90p, the price has fallen to a low of 178.20p. Recently, it hit a long-term trendline originating from the January 2016 low of 99p to the June 2017 low of 156.10p. It seems we have seen a reaction in terms of support but, once again, we will have to wait for the weekly close for confirmation of that rejection. 

Volume remain pretty fair with selling pressure still persisting. On the daily chart, the on-balance volume indicator is hugging the lows which indicates that sellers are not finished, and that we need some good news to trigger a turnaround. A higher oil price would be an obvious catalyst. 

Source: TradingView (*) Past performance is not a guide to future performance

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.