The oil rout has thrown up plenty of opportunities for the long-term contrarian investor. However, trying to pick the companies that have the best outlooks, while avoiding those that could be destined for the scrap heap is never an easy job. 

Indeed, three of the UK’s premier small/mid-cap oilies Premier Oil (LSE: PMO)Tullow Oil (LSE: TLW) and Genel Energy (LSE: GENL) all look cheap at current levels. But if you start to trawl through the numbers, it quickly becomes apparent that only one of these companies is worth investing in right now. 

It all comes down to cash

There’s no doubt that Premier, Tullow and Genel are all good quality companies with high-quality production outlooks and a record of success. 

Nevertheless, as we’ve seen over the past two years, the oil market can be extremely unpredictable and, for this reason, the companies with the strongest balance sheets make the best investments in the sector. 

A cash-rich balance sheet is almost a necessity for a commodity-focused company that has to ride out cyclical markets. Without a suitable level of cash on hand, oil producers can be backed into a corner when the oil price falls, and the producers can be forced to take drastic action to pay-down debt. 

Debt is deadly

Genel, which is run by one of the most experienced management teams in the oil industry, knows that a cash-rich balance is the key to success. The company’s cash balance at 31 December 2015 stood at $455m and net debt stood at a respectable $239m. Almost all of the company’s debt is linked to one bond issue, which matures on 14 May 2019.

On the other hand, Premier and Tullow don’t have the same balance sheet flexibility as Genel. At the beginning of November, a group of City analysts warned that without a recovery in oil prices, Premier’s shares were worth almost nothing as the value of the company’s assets is currently insufficient to pay off existing debt. Based on the analysts’ calculations, which were put together back in November, higher interest payments were set to absorb nearly all of Premier’s free cash flow going forward, leading to the postponement of new developments. This forecast is out of date as Premier’s agreement to pay $120m for Eon’s cash-generative North Sea assets in January will give the company more flexibility, although the group’s weak balance sheet will continue to limit its options.

Meanwhile, Tullow’s debts are getting out of control. Tullow City analysts have predicted that the company’s net debt will hit $4bn by the end of December, against pre-tax profits of only £68m for full-year 2015 and £142m for full-year 2016. By taking on debt, Tullow was able to become one of the UK’s most prized oil companies before the crash in 2014, but now the debt has come back to haunt the group and it’s not clear how much longer Tullow can continue to live beyond its means. 

The bottom line

So overall, with its robust cash balance and strong management, Genel is my oil stock of choice. That said, even Genel’s outlook is at the mercy of the oil price and with this being the case, there are better non-oil opportunities out there. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended 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.