Investment Column: Exploration success fuels Tullow Oil

Lookers; Melrose


Our view: Buy

Share price: 1,413p (-47p)

Ignore the market, which sucked 3.2 per cent out of Tullow Oil's value yesterday largely because of election-related delays to the company's long-running tax dispute in Uganda.

Leaving the froth aside, the annual results for 2010 published by the FTSE 100-listed oil prospector showed strong progress. In a year described by chief executive Aidan Heavey as "transformational" with the achievement of first oil from the Jubilee field in Ghana, the group's pre-tax profits rose by a whopping three and half times to $152m, on revenues up by a fifth to more than $1bn.

In the short term, the steadily rising oil price – both before and since the political upheavals in the Middle East – is clearly a point in Tullow's favour. But there is more to recommend the stock than simple macroeconomic fluctuations. Even without the boost in the price, Tullow's finances are set for a major lift this year, as production from Jubilee steadily ramps up.

The company's string of exploration and appraisal successes – with an 83 per cent hit rate last year and seven successes so far in 2011, including interesting discoveries off the coast of Ghana and Sierra Leone – also bode well for the year ahead. "With a diverse 40-well exploration and appraisal campaign planned for 2011, we look forward to another year of significant progress," Mr Heavey said yesterday.

There is even room for some optimism on Uganda. Local sources this week suggested that the tax issue may be within days of resolution, paving the way for Tullow to farm down its stakes as planned, giving the group's balance sheet a significant boost.

Notwithstanding yesterday's wobble, the shares are up by more than a fifth since early December. And as Tony Shepherd, an analyst at Charles Stanley, noted yesterday: "There are plenty of drilling announcements to keep investors excited. If further exploration success continues, it could drive the share price closer to its £18 net asset per share value," Mr Shepherd concluded. We agree.

Lookers

Our view: Buy

Share price: 63p (-1p)

Lookers, the company behind more than a hundred franchise car dealerships, boasted a record trading performance in 2010, driven by a barnstorming performance from its automotive parts business.

Its full-year pre-tax profits rose by 19 per cent to £33.6m, on revenues up 7.7 per cent to £1.9bn, which was ahead of City expectations. While the rise in profits followed similarly upbeat results from Vertu Motors, Pendragon and Inchcape over the past fortnight, unlike some of its rivals Lookers relies solely on dealerships in the UK and Republic of Ireland. This makes its results particularly impressive.

Certainly, Lookers' parts division motored ahead last year with pre-tax profits up 11 per cent to £12.3m. The division delivered growth across all its major customer groups and further benefited from the new product lines introduced in previous years. While Lookers' much bigger motor division saw a 4.8 per cent fall in total new car sales, the unit grew pre-tax profits by 12 per cent to £28m helped by cost cutting measures and by a scaling back of its low-margin fleet business.

As if that was not enough, Lookers only trades on a forward earnings multiple of 9.7 and it yesterday said its progressive dividend policy, which it had followed until the "difficult trading" in 2008, has now been restored. It will pay a final dividend of 1.2p per share. While there are far better yields to be had elsewhere, we think Lookers' shares are undervalued.

Melrose

Our view: Buy

Share price: 311.6p (-0.4 p)

Its strategy of buying struggling engineering businesses, turning them around and then selling them off has worked wonders for Melrose, with its share price increasing more than fourfold in two years Although its final results last night did not produce quite the boost of last August's half yearly report, the figures still looked impressive, showing a rise of nearly 45 per cent in its underlying pre-tax profit.

The focus was Dynacast, with Melrose saying it is currently considering selling the die-cast metal parts manufacturer, and shareholders should see a large cash return if it succeeds.

Melrose has certainly had a strong run, yet it looks fairly cheap. Further updates on disposals or acquisitions should drive the share price, so it could well be worth buying in advance.

Start your day with The Independent, sign up for daily news emails
Sport
Floyd Mayweather will relinquish his five world titles after beating Manny Pacquiao
boxing
Arts and Entertainment
tvGame of Thrones season 5 ep 4, review - WARNING: contains major spoiliers!
News
Tottenham legend Jimmy Greaves has defended fans use of the word 'Yid'
people
Life and Style
tech
Arts and Entertainment
The Ridiculous Six has been produced by Adam Sandler, who also stars in it
filmNew controversy after nine Native American actors walked off set
Life and Style
Google celebrates Bartolomeo Cristofori's 360th birthday
techGoogle Doodle to the rescue
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living