Investment Column: Tullow's oil find has barrels of potential

National Express; Character

Nikhil Kumar
Wednesday 14 September 2011 00:00

Our view: Buy

Share price: 1,385p (-12p)

Tullow Oil, the FTSE 100 explorer, is walking tall at the moment after striking oil off the coast of French Guiana with its first "wildcat" exploration well in virgin hydrocarbon territory.

Analysts hailed the South American find as a "game-changer" for Tullow while the market sent its shares up by 15 per cent after its announcement on Friday – adding more than £1.4 billion to its market capitalisation.

Essentially, the find opens up a brand new carbon basin – the Guyana Basin – and analysts forecast that the six other wells Tullow is drilling in the vicinity could result in the discovery of between 1bn and 5bn barrels of oil. In the longer term, the basin could contain significant reserves beyond those seven wells which could keep the company going for the next 20 years.

With Brent Crude trading at around $112 (£70) a barrel, at current prices Tullow's latest find could translate into between $112bn and $560bn worth of oil at the seven wells. Since Tullow holds a 27.5 per cent stake in the basin, we are therefore talking tens of billions of dollars – and possibly over a hundred – worth of oil.

Oil is a precarious business at the best of times – with prices fluctuating considerably over time and little initial certainty about how fruitful potential yields will turn out to be. But with a market capitalisation of less than £13bn, Tullow looks substantially undervalued.

Not only is Tullow deeply involved – along with Shell – in what could well be the largest oil discovery this year, but its recent find makes it more likely to strike oil in the exploration blocks it has acquired in nearby waters off the coast of Sierra Leone, Liberia, Ivory Coast and Suriname.

Then there is the Jubilee oil field off the coat of Ghana, West Africa, where Tullow's discovery of 1.4bn of reserves in recent years has transformed it into a big player.

With a normalised price to earnings ratio of 32.3 times and an enterprise multiple of 10.1, Tullow looks like a strong buy.

National Express

Our view: Buy

Share price: 230.8p (+9.7p)

You could argue that the US is not the best country to invest in right now. The world's largest economy looks tired and worn, and capable of only limited growth in the near term. But this generalisation glosses over both pockets of strength, and the prospect of recovery over a longer horizon.

That is why National Express's $200m deal to buy Petermann Partners, the school bus operator, makes sense. The acquisition comes on the back of results in July that showed improving trends in the UK group's North American arm. Adding Petermann bolsters the division and paves the way for further growth.

Moreover, it adds to the diversity of the business, which is positive given the dark clouds lodged over Europe and the UK. But should you buy?

The first thing to note is the valuation. Despite boasting prospective yields of well over 4 per cent, National Express shares trade on a forward earnings multiple of around eight times.

That said, the acquisition price, as Panmure Gordon noted yesterday, looks full. Offsetting that, however, it should be remembered that the deal is immediately earnings-enhancing. And, as Panmure's rivals at Peel Hunt explained, it shows that "National Express is very much on the front foot". This, and the valuation, makes the case, although we would advise caution given the near-term economic uncertainty.


Our view: Buy

Share price: 163.5p (-7p)

He may know how to take down the Daleks and the Cybermen but will Doctor Who be able to save Character Group – which makes toys of the BBC1 hero – from a Europe-wide sovereign debt crisis?

The company, which also makes Bob the Builder and Peppa Pig toys, updated the market yesterday on its full-year trading to the end of August in the light of recent reports "regarding the current economic difficulties". Investors may be comforted as Character said it would meet results expectations and added the directors were pleased with the distribution of the brands for Christmas and the spring.

Nonetheless, in a bid to protect itself, the company is tightening its stock control, which will protect profitability and cash flow, although it will not maximise potential sales. These measures, its stable of brands and the forward earnings multiple of under seven times make this one to buy.

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