Should You Go Bargain Hunting At Tullow Oil plc & Stellar Diamonds PLC?

Royston Wild consider whether investors should pile into heavy fallers Tullow Oil plc (LON: TLW) and Stellar Diamonds PLC (LON: STEL).

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A pause in the recent commodity price charge has seen many mining and energy specialists head lower again in recent days.

Indeed, Brent’s dive back below the $40 per barrel marker typifies the precarious footing upon which most resources markets stand on. The ‘black gold’ price had risen by almost a quarter since mid-February, but fresh swathes of disappointing Chinese data — combined with news of still-rising supply levels — have raised fears that recent price gains may have been overdone.

OPEC warns again

As a result, oil leviathan Tullow Oil (LSE: TLW) has retreated sharply from the four-month highs punched earlier this month, a 10% decline in Tuesday trading dragging the stock back below the 200p marker. And this retreat has much further to go in my opinion.

Just yesterday oil cartel OPEC trimmed demand forecasts for its own crude for 2016. The organisation now expects off-take to register at 31.5m barrels per day, a 90,000-barrel reduction from its previous reading.

With production from outside the group proving more resilient at current prices than previously thought, OPEC now forecasts total excess supply of 760,000 barrels per day this year, up from the prior projection of 720,000.

Despite this backdrop, Tullow Oil is expected to flip from losses of 113.6 US cents per share in 2015 to earnings of 14.4 cents this year as production from its TEN asset in Ghana starts flowing during the summer.

But with the company dealing on a huge P/E rating of 50.3 times, I believe the business is far too risky at these prices given the prospect of severe revenues weakness in 2016 and beyond.

Dropping like a stone

Precious stones producer Stellar Diamonds (LSE: STEL) has also seen its share price take a battering in Tuesday business, the stock recently dealing 22% lower from the prior close.

The diamonds play announced that it had conditionally raised £600,000 through an equity issue, creating 6m new shares at 10p each. The monies will be used to fund a trial mining and sales exercise at its Baoulé project in Guinea, as well as draw up a maiden resource statement. Funds will also be used to support Stellar Diamonds’ mine licence application in Tongo.

The business also furnished the market with news of a disappointing diamond auction in Antwerp. While Stellar Diamonds raised an extra $300,000 through the sale, an average price of $91.05 per carat represented a significant markdown from the $156 per carat achieved at the last sale in May 2015.

 Stellar Diamonds noted that the lower price was caused by “a different mix of goods with a higher proportion of lower quality stones as well as a broadly weaker rough diamond market since mid-last year“.

Although some stones fetched between $1,000 and $4,600 per carat, the huge difference between Stellar Diamonds’ material makes it a high-risk gamble, in my opinion. And the firm’s balance sheet could find itself under fresh pressure should Chinese diamonds demand continue to flail.

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.

Royston Wild 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.

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