Tullow Oil has gushed to the top of the FTSE 100 ahead of a trading update on Wednesday.
The company's shares are up 36p or 3.5% to £10.37 following an upgrade from Nomura, which has moved from reduce to neutral. Analyst Theepan Jothilingam said:
With the shares down 40% (in US dollar terms) since last February's high and a number of 'trigger well' results expected in the next few months, we close our short. Wednesday's trading update should be a positive catalyst particularly versus generally lacklustre outlooks for the large-cap majors in Europe. The long-term risk-reward appears more balanced on relative valuation, hence the upgrade to neutral.
[There are] three reasons for our upgrade:
1) Less expensive and lower expectations: The shares now discount around $1.7bn of exploration and appraisal success, which compares to a peak of $4bn over the last 12 months. Expectations have been pared back significantly for French Guiana and Sabissa in Ethiopia while the Mozambique oil play is recognised as high risk. Similarly, contingent values have narrowed for TEN [an oil fields project in Ghana], Uganda and other discoveries in West Africa.
2) The exploration business could re-rate on a 'trigger well': drillbit newsflow across the industry through 2012 and the first half of 2013 has been disappointing. A six pronged campaign testing multiple geological plays suggests Tullow's business remains extremely active and competitive. Flagship drilling in Kenya, French Guiana, Mauritania, and Norway will keep the 'wells to watch' investors busy in the second half.
3) Delivering a disposal strategy: Government approval of the TEN development, alongside a final investment decision in Uganda should accelerate this process. The reference valuations may not be accretive to net asset value, but should convince investors Tullow is moving away from the Big Oil model.
Elsewhere oil services group Hunting is 42p higher at 774p, the biggest riser in the FTSE 250, after an upbeat trading statement showing it was benefiting from increasing business in the Gulf of Mexico and from the US oil shale industry.
But gold producer Centamin is down 0.6p at 30.99p on continuing unrest in Egypt. The company is involved in a dispute over its licence for the Sukari mine in the country, and the current political uncertainty is unlikely to help matters.
