For investors that are able to live with above average volatility and relatively high risk in return for stunning potential returns, oil stocks hold vast appeal at the present time. Certainly, things could get worse before they get better, with the oil price having the scope to move lower over the coming months. However, the valuations on offer are very appealing and seem to take into account this relatively high level of risk.
The challenge for investors, though, is choosing which oil stocks in which to invest. Clearly, it is not possible to invest in all of them individually and, moreover, different oil companies have very different appeals. For example, some offer high yields, others bright exploration potential, while some have superb capital growth prospects.
One which is very much focused on capital growth potential is Tullow Oil (LSE: TLW). It has experienced a disastrous couple of years, with demotion from the FTSE 100, a huge loss in 2014 and a share price that has lost an incredible 83% of its value in the last five years being the story of its recent past. Clearly, it is not a stock for widows and orphans, but for investors with less risk averse attitudes, it could post sensational returns.
A key reason for this is the exceptional financial performance that is set to be delivered over the next couple of years. For example, Tullow is due to return to profit in the current year and then more than treble its earnings next year. And, despite trading on a price to earnings (P/E) ratio of 58, its excellent growth potential means that Tullow’s price to earnings growth (PEG) ratio stands at just 0.1. This indicates that it offers growth at a very reasonable price and could begin to reverse its appalling share price performance over the medium term.
Similarly, Premier Oil (LSE: PMO) is expected to return to profitability in the short to medium term, with asset write downs also presenting a considerable challenge to the business. However, further problems in this space seem to be more than sufficiently priced in, with Premier Oil having a price to book (P/B) ratio of just 0.44. This indicates that there is considerable support in the company’s share price, as well as upside potential over the medium to long term.
Furthermore, Premier Oil trades on a forward price to earnings (P/E) ratio of just 9.8, which highlights just how cheap the company’s shares have become. And, while further problems are set to lie ahead, with the company due to report a loss this year, it remains a very tempting stock to purchase.
Of course, smaller oil stocks are also very attractive at the present time. For example, Rockhopper Exploration (LSE: RKH) has considerable potential via its stake in deposits close to the Falkland Islands, with the drilling programme at that location progressing well and highlighting the bright prospects that could be on offer.
In addition, Rockhopper remains a well-financed and well-run business that, while loss-making, is continuing to make encouraging progress elsewhere with its portfolio of assets. For example, it recently received positive news regarding its Ombrina Mare project in Italy, with it looking more likely that approval will be granted and, with Rockhopper having a P/B ratio of 0.88, it offers excellent value for money, too.
However, with its lower valuation, more diverse range of assets and clearer path to profitability, Premier Oil seems to be a better buy and is the preferred option if you are only able to buy one of the three companies at the present time.
