Tullow Oil stood out in an otherwise lacklustre market last night, firming up after a leading broker, returning from a meeting with management, reiterated its positive stance on the stock.
Reassured by a lunch with Tullow's managers, Morgan Stanley said its bull case, which sees the group's shares rising to more than 2,000p apiece, appeared intact on an 18-month view. The meeting, which included representatives from Tullow's finance and exploration departments, "highlighted the quality and depth of management", the broker explained, emphasising its "overweight" recommendation.
"We have confidence that [the] Jubilee [field] phase 1 is on track and that a ramp up could be quicker," Morgan Stanley said. "Recent unconfirmed press reports on BP's and Exxon Mobil's interest in [the field] continued to underpin our valuation for Ghana and highlight the value in Tullow's strategic West African acreage position."
The assessment helped the shares touch a session high of 1,300p, up around 3 per cent despite weakness in the wider market. At close, the stock was 10p ahead at 1,271p. Overall, the FTSE 100 fell back, losing 50.83 points to 5191.74. The mid-cap FTSE 250 index was also depressed, declining by 137.55 points to 9,186.1, as traders spoke of worries about the sustainability of the recent equity market rally.
Friday's GDP numbers had sparked hopes that, faced with another quarter of contraction, the Government and the Bank of England would keep stimulus measures in place, thereby aiding the buying spree. The enthusiasm was in short supply last night, however, as traders turned their attention to fundamentals, with some wondering if the rally had gone too far.
But Philip Gillett, sales trader at IG Index, was upbeat, saying the day's losses looked like an overreaction. "We may well see some choppier trading in the days to come, ahead of Thursday's US GDP figures, but, barring any surprises here, most investors seem happy to pounce on these sell-offs and pick up stock on the cheap."
Cable & Wireless managed to overcome the downdraft, rising by 3.3 per cent or 4.6p to 145.6p, on de-merger hopes. Investors piled in on the back of a weekend press report, which said the telecoms group was once again looking at plans to spin off its international business.
Elsewhere, the banks drifted lower, with Lloyds Banking Group, down 7.2 per cent or 6.89p at 89.34p, and the Royal Bank of Scotland, down 5.7 per cent or 2.66p at 44.42p, losing ground after the Dutch lender ING said it would sell its insurance and investment management business as it came under pressure from European regulators. The news prompted concern about RBS and Lloyds, with the latter also coming under pressure from renewed talk of a possible rights issue.
In the wider sector, HSBC was 12.6p behind at 686p after Citigroup moved the stock to "hold" from "buy", citing the fact that "its earnings performance has lagged peers and it has seen its previous capital advantage erode". Standard Chartered was also weak, easing by 15p to 1,590p, despite some words of support from Morgan Stanley, which switched its stance on the stock to "equal weight" from "underweight".
Also on the downside, British Airways was almost 5 per cent or 10.1p lighter at 199.7p amid concerns about anti-trust threats to a planned alliance with American Airlines and Spain's Iberia. The stock was also hit by news of the Unite union's decision to ballot cabin crew on strike action, and by a Deutsche Bank circular, which recommended selling the stock on a 12-month view. The broker said it believed that that the main positive catalysts for BA, namely the merger with Iberia and anti-trust immunity with American, were at risk.
"Given the significant uncertainty facing British Airways we believe that investors who want to play the sector should buy either Lufthansa or Easyjet, both of which have strong balance sheets and a clear strategic direction," Deutsche said, moving the shares to "sell" from "hold". At the close, Easyjet was 4.3p behind at 373.7p.
Back on the upside, and Serco, up 1p at 522p, was supported by UBS, which reiterated its "buy" recommendation with a revised 575p target price, compared to 525p previously. "Despite [a] strong-year-to-date performance in 2009, Serco has only increased in line with the wider market," the broker said. "At the same time, the multiple has de-rated to below the long-term average premium to the market. While it is never a stock that looks cheap on absolute measures, we still see further potential upside."
Further afield, Altium Securities dampened the mood around HMV, which fell back by 2.7 per cent or 3.1p to 113.9p. Taking its cue from a recent report of problems at the group's Waterstone's book distribution centre, the broker said profitability during the key Christmas trading period could be hit by the fact that delays in deliveries from the hub appeared to be leading to increased use of third-party distributors. Although Altium saw no reason to alter its forecasts, it did change its stance on the stock, moving it to "hold" from "buy" on valuation grounds.