Tullow Oil tanks on HSBC downgrade

Tullow Oil tanked on Thursday after HSBC downgraded the stock to ‘hold’ from ‘buy’ but lifted the target price to 320p from 270p, saying the shares offer “limited upside”.

The oil exploration and production company’s shares have risen 19% since OPEC announced output cuts in late November and are up 147% in the last 12 months.

The group should begin to deleverage this year after five years of rising debt with production ramping up and capital expenditure falling sharply, HSBC said.

The farm-down of its Uganda Lake Albert assets to Total will lower capital expenditure while firming up the development timeline by putting control into a supermajor’s hands – a “good strategic decision”, according to HSBC.

However, the bank warned that oil prices - arguably the biggest driver of the stock - have limited near-term upside compared to its estimate of $60 per barrel for Brent crude in 2017.

“We don’t expect operational catalysts (e.g. exploration) to be material enough, and believe the shares now look fully priced after their recent outperformance.”

The bank said it was also disappointed by Tullow’s lowered production guidance on the TEN project in Ghana, due to pressure management issues and the inability to drill new wells until after a border dispute ruling later this year

On 11 January, Tullow said production at the TEN field in 2017 is now expected to be 23% lower than had been previously forecast.

Shares fell 3.27% to 301.90p at 1039 GMT.