Are Premier Oil plc and Tullow Oil plc too cheap to miss now?

Will it soon be too late to pick up bargains at Premier Oil plc (LON: PMO) and Tullow Oil plc (LON: TLW)?

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Will they, won’t they, cut oil production? The countries of OPEC are going to have to cut production sooner or later, as current prices really are hurting. Even Saudi Arabia is trying to plan for a post-oil economy.

And it’s from Saudi that the latest “They won’t” hint has come, with the country’s state-owned producer Saudi Aramco saying that production will increase this year. That comes amid plans to sell off 5% of its shares, to raise cash for the country’s intended economic diversification.

But against that, oil prices do seem to be maintaining their recent recovery, with Brent Crude back up around $46 per barrel and January’s lows looking increasingly distant. And with demand for oil set to carry on rising over the coming years, the balance of supply and demand just has to correct itself in the longer term.

Positive update

And that really makes me think we could be in the best bargain times for buying oil shares right now. My pick has been Premier Oil (LSE: PMO), and with the price at 68.5p today I’m now only about 25% down since I bought some!

Premier Oil shares reacted erratically today to the company’s latest trading and operational update, gaining 8.3% at one stage in the morning to 75.5p, but as I write the price is down 2%. Still, Premier shares have been picking up over the past few months, and we’re now looking at a 3.6-fold rise since shares resumed trading at the end of January.

Today’s update sounded on the money too, with the company saying it’s set to meet or exceed the “upper end of 2016 guidance of 65-70 kboepd for the full year“. The acquisition of E.ON’s North Sea assets was completed on 28 April, operating costs are still falling, and Premier says it has “significant liquidity with cash and undrawn bank facilities of c.$750 million” and is discussing possible covenant wavers if required — which they may well be if low oil continues too long.

Same boat

I see Tullow Oil (LSE: TLW) as being in a very similar situation to Premier, sitting on a lot of very attractive oil assets, but again with a pile of debt hanging over its head. We’re expecting a first-half trading update from Tullow on 30 June, but while we’re waiting for that we’ve again seen a share price recovery — since their low on 20 January, Tullow Oil shares have doubled in price to 241p.

Tullow is ahead in expecting to see a pre-tax profit this year (in contrast, Premier is still expected to record losses this year and next), and the firm says it should have the free cash flow to enable it to start chipping away at its debt in 2017.

Nerves of steel?

Both Premier Oil and Tullow Oil are clearly high-risk investments, although I perhaps see Tullow shares as the less risky of the two. If you’d be uncomfortable seeing your shares losing ground in the short term then you should probably stay away (and I confess I nearly had to check my trousers when the Premier shares I bought at 90p dropped as low as 19p).

But I think there’s a big enough window, between now and the time when oil prices will be high enough to keep the wolves away, to make Premier shares and Tullow shares both look attractively priced.

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.

Alan Oscroft owns shares of Premier Oil. The Motley Fool UK has no position in any of the shares mentioned. 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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