The Motley Fool

Forget the Tullow Oil share price, is this the best oil stock out there?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Silhouette of an oil rig
Image source: Getty Images.

Tullow Oil (LSE: TLW) released an update Wednesday, ahead of first-half results due on 24 July. For me, it’s the company’s balance sheet that matters above all else at the moment. And on that score, chief executive Paul McDade’s statement that “our balance sheet remains strong and we expect another year of solid free cash flow generation” is encouraging.

From predicted first-half revenue of approximately $900m, Tullow expects to record a gross profit of around $500m. Underlying cash flow for the half is put at around $100m, which might sound a bit low.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

But an estimated $450m free cash flow figure for the full-year sounds more impressive. The firm says: “This figure is expected to increase to around $650 million following completion of the Uganda farm-down.”

Debt

The trouble is net debt is still expected to stand at around $3bn at 30 June. That’s a net debt to adjusted EBITDAX multiple of 1.9, and I don’t like that. There’s “liquidity headroom of unutilised debt capacity and free cash” of around $1bn, which is probably a sufficient buffer. But would it be enough to cope with another prolonged downturn in oil prices?

A new slump is not expected, but neither was the last one. And the oil price, despite the recent uptick on the back of renewed Middle East tension, has been struggling to stay above $60 levels.

I think Tullow is probably out of the woods. But with that debt, I’m really not seeing the shares, priced on a forward P/E of 11, as good value.

Recovery

On the safety front, Gulf Keystone Petroleum (LSE: GKP) seems to have been moving in the opposite direction to Tullow.

Stability in the Kurdistan region of Iraq has improved significantly in the past couple of years. And in a lot of ways, I prefer the risks of operating in politically less developed parts of the world where there actually are large proven oil reserves than in, say, West Sussex, where we still don’t really know if there are any useful quantities of oil to be had. On that score, I’d certainly go for Gulf Keystone right now before I’d risk any cash on UK Oil & Gas, for example.

The other big change is in Gulf Keystone’s financial position. From verging on insolvency in the face of delivering oil and not getting paid for it, the company has progressed so far as to be paying its first dividend — with confirmation following the firm’s AGM released this week.

Record year

The 2018 year brought in record revenue of $250.6m, with post-tax profit climbing from $14.4m in 2017 to $79.9m. Critically, the company reached December with a cash balance of $295.6m (up from $160.5m a year previously), and that’s a far cry from its precarious position those few short years ago.

The turnaround started when the Kurdistan Regional Government agreed to start regular monthly oil payments, and many of us were wary of such promises at the time. But the payments have been reliable every since.

I’m still very cautious of recovery situations these days, staying out at least until I’m convinced the recovery has actually happened. But at Gulf Keystone, I really think it has.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Alan Oscroft has no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.