Market Report: Broker buoyancy helps Tullow Oil flare up

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The Independent Online

A combination of firmer commodity prices and positive broker comment aided Tullow Oil, the FTSE 100-listed oil and gas explorer and producer which was among the strongest in a resource sector rally yesterday.

Tullow gained 6.84 per cent or 47.5p to 741.5p as the oil price crept up above $115 per barrel, UK gas prices posted gains after a leak led to the closure of a Norwegian pipeline and UBS revised its stance on the stock to "buy" from "neutral".

"Tullow shares have fallen 31 per cent since June," UBS said. "This creates an attractive entry point to an abundance of near-term exploration and appraisal drilling ... Also, further exploration success could make Tullow an M&A [merger & acquisition] target next year."

Beside UBS, support was forthcoming from Deutsche Bank, which chose Tullow as one of its top picks in the exploration and production (E&P) space, and from Citigroup, which included the stock among its favourites in the sector.

A note from Goldman Sachs also contributed to the buoyant mood in the sector. Noting that "there is more to oil than the US dollar", the broker said "fundamentals in the oil market suggest a return to a rising oil price environment ... [We] maintain our year-end WTI [West Texas Intermediate] price forecast of $149 [per barrel]."

In the wider sector, Dana Petroleum, which featured in Citi's list of E&P favourites, gained 6.03 per cent or 78p to 1,371p and Venture Production was up 20.5p at 765p.

Elsewhere, the miners drew strength from the rise in commodity prices. Rio Tinto, at first place on the FTSE 100, gained 7.43 per cent or 345p to 4,948p and BHP Billiton, at fourth place, was up 102p at 1,622p. Kazakhmys advanced to 1260p, up 79p, and Antofagasta gained 33.5p to 558.5p.

Overall, the resource stocks kept the FTSE 100 clear of the red and the index closed up 51.4 at 5,371.8.

BT, which was among a number of ex-dividend stocks yesterday, was the weakest on the London benchmark, down 6.77 per cent or 12p at 165.3p as Collins Stewart expressed concern about the sustainability of future dividends.

"This year's dividend looks secure, but what about next? BT's cash flows continue to come under pressure from lower margins and higher capex [capital expenditure]," the broker said.

JP Morgan downgraded J Sainsbury to "neutral" from "overweight", sending the supermarket group south to second place on the loser board, down 3.67 per cent or 12p at 314.75p. The broker said it preferred Morrisons, which was down 3.75p at 274.75p as the sector slipped under pressure from the higher oil price. "The Bank of England [Monetary Policy Committee meeting] minutes had sparked hopes of a cut in interest rates," said one market source. "But the oil price has balanced that and there is a worry that inflation may kill any chances of a cut."

On the upside, the hospitality group Whitbread was up 18p at 1,137p after Credit Suisse initiated coverage on the stock with an "outperform" rating and a 1,420p target price. "We believe the leading UK operators, Premier Inn [which is owned by Whitbread] and Travelodge (privately owned), are best positioned to consolidate the highly fragmented independent budget hotel market and increase market shares without risking overcapacity," the broker said.

The FTSE 250 was up 29.7 at 8,897.3. Mecom, the European media group, was the worst off among the mid-caps, down 15.91 per cent or 3.5p at 18.5p after posting a mixed set of interim results. Cazenove said the cautious outlook statement was offset by the better-than-expected debt position, which should ease concerns about the balance sheet.

The executive chairman, David Montgomery, used the weakness to pick up 200,000 shares in Mecom at 18p apiece last night.

Michael Page, the staffing group which recently rejected a 400p-per-share proposal from its Swiss rival Adecco, was strongest on the FTSE 250, up 9.32 per cent or 30.75p at 360.75p. The stock was buoyed by strong rumours that Adecco may return with a 500p-per-share bid.

"People are talking about an improved bid after Steve Ingham [Michael Page's chief executive] said that a sale was possible at 600p [a share]. They probably won't get that high a price, but it shows the possibility of a sale," said one market source, referring to reports in the European press.

Dignity was up 18p at 740p following reports that 3i, the FTSE 100-listed private equity group, was planning to buy 75 per cent of Spain's Memora Inversiones Funerarias. The reports kicked off vague bid speculation around Dignity, but brokers were sceptical. "We think it unlikely Dignity would be a bid target currently, having come out of private equity ownership in 2004 and with already high levels of financial leverage," Citigroup said.