It always pays to keep an eye onwhat the worlds largest investors are doing with their money. Indeed, while you may not agree with their investment decisions, they may know something you dont and while we Fools dont all hold the same opinions, considering a diverse range of insights makes us better investors.
Thats why, when one of the worlds largest investment managers disclosed a stake in Africa-focused oil explorerTullow Oil(LSE: TLW), the market took notice.
A big stake
According to documents filed with the London Stock Exchange on the 5th of September,The Capital Group Companies increased their position in Tullow Oil to above 7%. The actual holding stands at around 7.1%, implying that the Capital Group has spent around 500m acquiring its stake.
According to the investment managers website, Since 1931, Capital Group has focused on delivering superior, long-term investment results for our investors. The group currently has around $1trn of assets under management, so its likely that Capital Groups asset managers see value in Tullows shares.
Should you follow?
The question is, should you follow Capital Group? Well, Tullow is hardly a market darling at present. The company has seen its share price fall by more than 50%, since reaching an all-time high at the beginning of 2012. These declines have been driven by a number of high-profile well failures, which forced Tullow to book write-downs costing the company hundreds of millions.
Whats more, cautious investors have started to call Tullows lofty valuation into question. For example, the company currently trades at a forward P/E of 49.7, while Tullows peers in the oil & gas producers sector trade at an average P/E of 13.8. That said, the City has earnings growth of 91% pencilled in for 2015, which indicates that Tullow is trading at a 2015 P/E of 26.
Nevertheless, theres more to Tullow than its P/E ratio. Indeed, I believe that the Capital Group can see value in Tullows assets.
Asset value
After doing some research on Tullow, one thing quickly becomes clear: the companys oil reserves are worth more than the current share price.
Now, estimates vary, depending on which metric is used, but some figures estimate that the fair value of Tullows shares, when factoring in asset values is in excess of 1,000p per share. Some figures also suggest that Tullows assets could be worth upto 1,300p per share.
Of course, these figures are estimates, no one is able to tell the true value of Tullows oil reserves. Still, Tullow has long been considered to be a takeover target and the wider the gap between the companys implied net asset value per share, and the actual share price, the more attractive the company is to predators.
Overall, with Tullows share price at a five-year low, the company has become an attractive takeover target.
Too expensive
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended shares in Tullow Oil. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
