Should you buy Tullow or Premier Oil ahead of the next oil price shock?

Harvey Jones says you need strong nerves to buy these two FTSE 250 (INDEXFTSE:UKX) growth stocks.

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As I write this, Iran is considering options for retaliation following the killing of general Qasem Suleimani. The US Air Force has put on a massive show of strength, with 52 F-35A aircrafts taking off from an air force base in Utah. One side effect of this frightening increase in geopolitical tensions is that oil prices have risen, as they usually do in times of crisis. 

Brent higher

The Brent crude benchmark price is hovering just below $70 a barrel. The oil price spiked in the immediate aftermath of Suleimani’s assassination, with Brent rising 4.5% to $69.20 at one point.

It has since retreated slightly and now stands at $68.26. Some say oil could break through $100 and carry on climbing if the situation worsens.

Any escalation would certainly be bad in itself, and a resulting higher oil price may also be bad for the global economy. However, two London-listed explorers, Premier Oil (LSE: PMO) and Tullow Oil (LSE: TLW), might benefit from higher price for crude.

Premier Oil

Premier’s share price has been doing well lately, and jumped 14% yesterday. That had nothing to do with the U.S-Iran situation, though, but was rather a positive market reaction to the company’s trading and operations update. This reported 2019 production of 78,400 barrels of oil equivalent per day (kboepd), at the upper end of full-year guidance, underpinned by high operating efficiency and continued high rates from the Premier-operated Catcher Area. Separately, the firm announced the proposed acquisitions of the Andrew Area and Shearwater assets from BP for $625m.

The Premier share price has been volatile but is now up 40% in the last three months. However, I remain worried by its $1.99bn debt pile, which is set to grow even larger following the latest acquisition. Clearly, management couldn’t resist the opportunity, which is understandable, as the purchase should generate more than $1bn in free cash flow by the end of 2023. It does up the risk level, though.

Premier is on a roll but looking forwards, much depends on the oil price. Beware rushing in on bad news from the Middle East or a short-term price spike. If the current crisis abates, the demand for oil could slow. In addition, the pressure to use renewable fuels continues to grow, posing a long-term challenge.

Tullow Oil

In contrast to Premier, the Tullow Oil share price has had a desperate time lately, losing more than half its value in the last month alone.

Exactly 10 years ago it traded at 1139p; today you can pick it up for less than 58p. If you invested £1,000 then, you’d have just £50 or so today, give or take dividends. I am rarely tempted by companies that have taken this kind of beating, and investors had to swallow further disappointment this month, after Tullow said its Carapa-1 exploration well in offshore Guyana had less oil than pre-drilling estimates.

The real damage was done in December, though, when Tullow cut 2020 production forecasts, suspended its dividend and announced a string of senior manager exits. Worse, it is burdened with even more debt than Premier, $2.9bn at last count. A repeat of its 2017 fundraising cannot be ruled out, which would inflict further damage on the share price.

Some believe the market has overreacted, and Tullow looks incredibly cheap at today’s price, especially as it doesn’t face any debt maturities until 2021. I remain wary, though.

Even amid the current geopolitical climate, Premier and Tullow are only for the brave.

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.

Harvey Jones 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.

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