Tullow Oil shares boosted by Citigroup upgrade to 'buy'

LONDON (ShareCast) - Tullow Oil (LSE: TLW.L - news) 's share price surged on Tuesday after Citigroup (NYSE: C - news) raised its rating on the stock from 'neutral' to 'buy', saying that the oil group's portfolio quality is "undervalued" by the market. The bank highlighted the "quality and defensiveness" of Tullow's portfolio, and said concerns about its balance sheet and timing of the TEN development are "more than discounted in the current valuation".

The stock trades with the shares below Citi's estimate for core net asset value (NAV) of 354p, assuming a long-term oil price of $75 a barrel and 10% discount rate.

"Our core NAV includes no value for exploration/appraisal upside in Tullow's portfolio and risks by c15% its non-sanctioned developments (Kenya/Uganda)," Citi said.

As for the balance sheet, the recent refinancing and covenant amendments provide Tullow with "increased financial flexibility" to deliver its near-term developments, Citi said.

Borrowing levels are likely to peak in 2016, with gearing at around 100%, though the successful farm-out of future developments in Kenya and Uganda should bring forward the value from these projects and see the company de-lever more quickly.

Citi raised its target price from 406p to 433p for the stock, which was up nearly 6% ad 359.8p in morning trade.