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Stock of the week: Tullow Oil

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Ian Forrest, investment research analyst at The Share Centre, picks Tullow Oil as stock of the week as it’s recently moved back to profit after benefitting from the oil price recovery.

Tullow Oil explores for and produces oil and natural gas and its main operations are in East and West Africa. Naturally, the group is highly geared to the underlying price of oil due to its relatively high debt level and has therefore been benefitting of late from the recovery in oil prices and subsequent higher averages. Indeed, investors should recognise that the company moved back into profit last year and saw a significant improvement in cash flow as debt dropped.

Adding to this attraction is the good oil production levels the group achieved in 2017. Indeed, the company was impressively averaging 89,100 boepd (barrels of oil equivalent per day) from its key productive assets in West Africa, which was ahead of expectations. These numbers should continue to steadily increase given that Tullow has had the support of governments in the regions in which it operates which are, importantly, keen on developing their oil infrastructure. As a result, oil export pipelines are to be developed and group production guidance for 2018 has been raised to between 86,000 – 95,000 boepd.

There’s no denying that the share price has been punished in recent years courtesy of the lower oil price environment and subsequently, the company will not pay a dividend for a while as the focus is to deleverage the balance sheet, reduce costs and improve the free cash flow. Nevertheless, the outlook has improved and the group is looking to increase capital expenditures slowly.

This is a stock for investors wanting to take a contrarian approach to the oil price, looking for capital growth and willing to accept a high level of risk. Drip feeding is advised.

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