Is Tullow Oil a Buy?

LONDON -- I am backing Tullow Oil  (LSE: TLW  ) to surge higher in coming years as it refocuses its attention back to exploration from development.

The company announced last week that sales nudged a mere 2% higher to $2.3 billion in 2012, which in turn pushed pre-tax profit to $666 million, a 4% increase.

Tullow's stellar growth of previous years has stalled, prompting it to alter its business strategy, a move which I believe should accelerate returns to investors.

Divestments to bolster exploration
In the near term, Tullow is expected to divest some of its less lucrative assets in order to strengthen its exploration push. The company announced plans in December to sell its gas assets in the North Sea, and has already put interests in Bangladesh and Pakistan up for sale.

Tullow is instead focussing on more exciting prospects, mostly on the oil-rich plains of Africa -- it plans to drill more than 40 'high impact' wells in Kenya, Ethiopia, Mauritania, Mozambique, French Guiana, Côte d'Ivoire and Norway during 2013.

Longer-term potential justifies high rating
Earnings per share are expected to have advanced 19% in 2013 to 53 pence, according to City estimates, although a 2% dip back to 52 pence is predicted during the following twelve months.

As well, Tullow carries an eye-watering P/E ratio which is expected to last over the medium term -- a reading of 23.5 is anticipated to nudge higher to 23.9 for 2014. And the firm does not even carry the sweetener of an attractive dividend, with a yield of just 0.8% expected for both this year and next.

However, I believe that earnings should rocket over the longer term as the potential of Tullow's key assets is realized.

Tullow discovered the giant South Lokichar basin last year within Kenya and Ethiopia, and is now accelerating activity in the region. The area is believed to consist of a further nine rift basins, each of which is said to be of a similar size to the gargantuan Lake Albert basin in Uganda.

The firm is currently conducting a fifth test at its Twiga South site in Kenya, from which tests in January and February showed a cumulative flow rate of 2,351 barrels of oil per day. Tullow believes the tests could potentially yield Kenya's first commercial flow rates, and is planning to drill up to another eleven exploration and appraisal wells in the area in 2013.

There's gold in them there wells
Like all fossil fuel explorers and producers, Tullow Oil comes with a heightened risk profile. Drilling for oil is often a 'hit and miss' business where the timing, and indeed quantities, of potential payloads are extremely unpredictable.

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