A bullish first half trading update from FTSE 100 oil explorer Tullow Oil (TLW) helped it to a healthy rise in a falling market - up 2.8% to £10.62 and topping the index of leading shares. Kenya was in particular focus thanks to an upgrade to resource estimates and a new discovery and, as we had flagged last month in Shares, the group also outlined a busy forward drilling programme with more than 20 wells planned across a number of basins in the next 12 months.


Web chart - Tullow Oil - July 2013


So far this week the shares have advanced 5.4%, with a rise yesterday in anticipation of today's announcement. Year-to-date though the picture has been less rosy as the chart below indicates – production issues in Ghana and some drill-bit related disappointments holding Tullow back.


Drilling down into the statement, the £9.6 billion cap announced the Etuko oil find in Kenya and added that successful flow tests on the Ngamia and Twiga-South wells in the South Lockicar basin off the country's coast had prompted it to boost its guidance on the size of these discoveries to more than 250 million barrels of oil. This is close to the threshold for a commercial development at South Lockicar of 300 to 500 million barrels.


Despite acknowledging the Kenyan progress, broker Investec is sceptical on the group's prospects with a sell recommendation and price target of 930p. Analyst Brian Gallagher warns: 'Development funding now needs to be considered. We also highlight that the rest of the statement was underwhelming, with net debt moving up again and the upper end of production guidance shaved.'


These risks are certainly worth bearing in mind. As Gallagher rightly points out net debt rose from May's level of $1.6 billion to $1.7 billion and targeted output was modestly reduced from 86-92,000 barrels of oil equivalent per day (boepd) to 86-90,000 boepd. However his overall assessment could be too negative, by way of comparison Morgan Stanley reiterated its 'overweight' rating in response with a price target of £17.30. Jefferies, which has a buy call on the stock and a marginally more conservative price target of £15.00, says asset sales, drilling success and a farm-out for its TEN project in Ghana can turn market sentiment around.


Historically the company has enjoyed an industry-leading 70% success rate with exploration and appraisal wells and although this dropped to 60% in the first half of the year there is scope for the company to put that right in the second half with potentially high-impact wells in Kenya, Ethiopia, French Guiana, Norway and Mauritania.

Issue Date: 03 Jul 2013