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Why Tullow Oil plc is a turnaround stock I’d buy for 2018

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While 2017 may have seemed like another disappointing year for Tullow Oil (LSE: TLW), the reality is that it was a positive 12 months for the business. Certainly, its share price may have fallen by 31% in the last year at the same time as many resources companies made gains. However, the company was able to raise funds and also increase production.

In fact, according to its most recent update, debt levels are falling and its financial outlook remains positive. As such, now could be the perfect time to buy it ahead of a potential turnaround.

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Improving performance

As mentioned, Tullow Oil is in the process of increasing production levels. This may not sound like a particularly major step for it to take, but for a business that was focused on exploration, a move to higher production represented a key pivot which could improve its share price performance.

One area where the stock has been seen as risky is with regards to its balance sheet. It has historically run high levels of debt. While in more prosperous times for the oil and gas industry that was not a problem, in an era of low oil prices it has caused concern for investors who are worried that the company’s future is highly uncertain.

Now though, production is rising rapidly and debt levels have recently started to fall. This process of reducing debt from higher production ties in with the prospect of a return to profitability. A small pre-tax profit of £22m is expected to be reported in 2017 before a forecast rise to over £150m in 2018.

Despite such a rapid potential growth rate in profitability, Tullow Oil trades on a price-to-earnings growth (PEG) ratio of just 0.1. This suggests that a turnaround is on the cards, and could mean its share price surges higher this year.

Continued growth

In contrast to the performance of Tullow Oil in the last year, iron ore company Ferrexpo (LSE: FXPO) has made gains of 116% during the period. A more buoyant period for the iron ore price has been a key factor in its success, while its fourth quarter update released on Tuesday showed that it continues to make progress as a business.

In the final quarter of the year, the company’s production increased by 12% when compared to the previous quarter. Its average received price increased by 22%, which helped to adequately offset the rise in cash cost production of 14%. A reduction in net debt to $400m from $589m a year earlier shows that the company’s financial position continues to improve, and this could help investor sentiment to do likewise over the medium term.

With a price-to-earnings (P/E) ratio of just 9.8, Ferrexpo seems to offer good value for money at the present time. While the outlook for the iron ore price may be volatile, a wide margin of safety means that its share price could continue to move higher during the course of 2018.

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Peter Stephens owns shares in Ferrexpo. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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