The first half of 2014 has proven to be highly challenging for Tullow (LSE: TLW), as the oil exploration and production company has seen gross profit fall from $0.8 billion to $0.6 billion. Furthermore, Tullow expects an exploration write-off of $415 million as a result of mixed frontier exploration results. Despite this, it retains its production guidance for the full-year.
So, how does it now compare to two of its sector peers, BG (LSE: BG) and Shell (LSE: RDSB)?
Tullow
Of course, Tullow is a company whose share price includes a significant amount of future potential. In other words, much of its future prospects are already priced in. Indeed, Tullow’s price to earnings (P/E) ratio is a whopping 32.2 – more than twice the 14.1 at which the FTSE 100 currently trades. Furthermore, Tullow’s earnings per share (EPS) are forecast to fall by 5% over the next year, which makes its current valuation appear to be even more unreasonable. Certainly, positive news flow can be a game changer for Tullow going forward, but it seems as though very good news is already priced in, which makes it appear relatively unattractive at current levels.
BG
BG has experienced a challenging few years, as unrest in Egypt has been a major factor in share price weakness that has seen BG underperform the FTSE 100 by 4% in 2014. However, the company has a highly attractive and well-diversified asset base and it looks set to deliver on this potential in 2015, when EPS is forecast to increase by up to 16%. Although shares trade on a P/E of 19.2, their growth rate means that BG’s price to earnings growth (PEG) ratio is just 1.2, which is relatively attractive and means that investors could be handsomely rewarded over the medium to long term.
Shell
Shell provides investors with a greater degree of stability than Tullow or BG. Indeed, it also offers a yield of 4.4%, which is well ahead of the respective yields of Tullow and BG (1.4% and 1.5%). However, Shell’s growth rate in 2015 is forecast to be just 1%, which perhaps highlights the major challenge of being a very large player in the oil industry: bottom-line growth is difficult to come by. However, with shares in Shell trading on a P/E of just 11.7, a narrowing of the valuation gap between it and the FTSE 100 (which has a P/E of 14.1) could provide capital growth to go alongside a great income.
