Gamble of the week: A play on oil shares

published 7 February 2014

The big oil companies, such as Shell andBP, are seen as pretty dull investments.They are good sources of dividendincome, but are unlikely to give you bigcapital gains. Those looking to make bigmoney from oil shares prefer to chancetheir arms with the smaller exploration and-production (E&P) companies.

Forthese firms, big oil discoveries can result in massive share-price gains but drywells (where you drill for oil and comeup with nothing but an empty hole) canlead to equally big losses.

This oil stock has been one of the sector'sgreat success stories for much ofthe last ten years. It has become oneof Europe's biggest independent oilexploration companies.Tullow Oil's (LSE: TLW)discoveryof large quantities of oil in Uganda,Ghana, Kenya and French Guiana haspropelled it into the FTSE 100 index.

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Upuntil recently, its strategy of finding oil,selling it and using the cash received tolook for and find more oil has workedwonders. But a series of dry wells hasseen the company forced to write offmore than $700m of money spent, whichhas raised concerns about its ability tokeep growing the value of the business.

This, when combined with its failureto ramp up oil production as much asexpected in Ghana and elsewhere, hasseen its shares lose favour with lots ofinvestors they are down by a third inthe last 12 months and are now tradingat close to their 52-week low.

Withother opportunities in locations such asNorway and Mauritania, the companyis confident that it will keep on growingits reserves of oil and gas at a healthyrate. What it clearly needs to do isconcentrate on producing more oil andgetting it to market, or else investorswill continue to lose patience.

Tullow'sshare price has been sustained by thehope that it will keep on finding lotsof oil, but more importantly that it willstart generating more cash from it.However, this probably won't happenin the coming year, and longer term it'sdependent on things like the buildingof a pipeline from Kenya to the IndianOcean, which would give Tullow Oil'sprospects a big leg up.

Tullow Oil is well financed and is in nodanger of going bust, but it must deliver.The shares still have a high speculativeelement to them and are based on a jamtomorrow' story. But it has proved itselfa good bet in the past and the sharesmay now have fallen sufficiently to makethem worth a punt for the patient.

Verdict: risky buy

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.