Are Tullow Oil plc, Pressure Technologies Plc & BAE Systems plc Top Buys For 2016?

Does today’s oil strike news make Tullow Oil plc (LON:TLW) a buy, or are Pressure Technologies Plc (LON:PRES) and BAE Systems plc (LON:BA) more attractive?

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In today’s article, I’ll ask whether you should add Tullow Oil (LSE: TLW), Pressure Technologies (LSE: PRES) and BAE Systems (LSE: BA) to your portfolio for 2016.

Tullow Oil

Tullow shares rose by 7% this morning, after the highly-regarded explorer announced a positive set of drilling results from the South Lokichar Basin in Kenya.

The firm said that the Etom-2 well in the South Lokichar Basin had found “102 metres of net oil pay in two columns”. The oil was described as high quality. The Etom-2 well was drilled using data gathered with 3D seismic after the Etom-1 well came up dry. This suggests to me that Tullow’s understanding of the local geology has improved, and that further discoveries could follow.

Tullow believes that the South Lokichar Basin could contain estimated mean gross resources of 600m barrels of oil. Following today’s news, the firm says it will evaluate further drilling opportunities in the Etom area.

Shares in Tullow Oil have fallen by 61% so far this year and are currently at 10-year lows. The firm’s $3.6bn net debt continues to concern me but today’s discovery is a reminder of how Tullow has discovered very significant assets in the past, and could quite easily do so again.

I’m not sure I’d rush to buy into Tullow today, but I think it’s definitely a stock to watch.

Pressure Technologies

Shares in Pressure Technologies rose by 8% to 196p this morning after the firm’s latest results came in ahead of expectations.

Adjusted earnings per share of 14.5p were ahead of the broker forecast for earnings of 13.6p per share. As expected, the dividend was maintained at 8.4p per share, giving a yield of 4.3%.

Net debt fell slightly to £7.1m and the firm’s decision to diversify away from the oil and gas sector by acquiring Quadscot appears to be paying dividends. Pressure’s Quadscot and Roota businesses contributed more than £5m of Pressure’s £7.9m of operating cash flow last year.

The group now says that the proportion of revenue from the oil and gas market has fallen from 73% to 59%. Current broker forecasts suggest 2016 earnings will rise to 16.0p per share, putting the shares on a forecast P/E of 12.3. That seems reasonable to me.

Although it does remain heavily exposed to the oil and gas market, Pressure appears to have genuine growth potential and could be a good medium-term recovery buy.

BAE Systems

BAE shares surged above 500p in late November, as the government announced plans for an extra £12bn of defence spending over the next 10 years. Some of the froth has come off the firm’s share price since then, but at the last-seen price of 488p, they remain up slightly so far this year.

Terrorism and increased military activity are of course good news for BAE, which is involved in building nuclear submarines, military aircraft and cyber security — three areas which are expected to benefit from future spending.

BAE shares now trade on 13 times 2015 forecast earnings, falling to 12.3 in 2016. The shares offer a 4.3% prospective dividend yield. In my view BAE remains an attractive long-term buy-and-hold stock for an income portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of BAE Systems. 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.

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