In 2019, Tullow Oil (LSE: TLW) shares were up around 200p. But in the first days of the Covid crash, they dropped to just 10p. Ouch!
Since the dark days of 2020, shares in BP and Shell have come back strongly. But Tullow Oil shares are still down in the dumps. Are they a no-brainer buy now?
Oil prices
The oil price slumped in 2020, so it was no shock that oil and gas stocks fell heavily. BP chose the time to launch its net zero thing, and that spooked the markets a bit too.
But the two FTSE 100 oil giants are now back to strength, while Tullow is down around 85% since September 2019.
Things were going wrong at Tullow even before Covid. But the firm has been through tough times in the past, and it’s held on.
I’ve bought and sold Tullow Oil shares before. And today’s 30p price makes me think about getting in again for a rebound. If there is one, of course.
Reasons to buy
Oil prices look firm right now, with Brent Crude at the $80 mark. And that’s a nice level for Tullow.
At the moment, the US has big stockpiles of the black stuff, which could bring prices down. But big oil producers have kept output down a bit to help keep prices up.
On balance, I can see oil at around the $75-80 level over the next few years — though I admit there’s a fair bit of guesswork in that.
FY22 was good for Tullow, with strong growth in revenue and profit. Cash flow rose too, which helped the firm to get its debt down. Since then, debt has been cut further in the first half of 2023.
Reasons not to buy
That debt though, might be the top reason not to buy the stock. At the end of the half, it stood at around $1.9bn (£1.45bn). And Tullow says it should be down to around $1.7bn (£1.3bn) by the end of the year.
That still looks like a big risk for a stock with a market-cap of only £450m.
Things on the debt front are going in the right direction, but I don’t see a lot of safety there. And it might only take a small fall in oil prices to turn today’s optimism into a new crisis.
Big oil
Smaller oil firms are at a lot more risk when times are tough. It’s why I tend to think any cash I have for an oil investment should just go to BP or Shell, and I should sit back and take the dividends.
But the growth investor in me does like the thought of a nice recovery from time to time. And if I have good diversification, I think I can afford a bit more risk for the odd buy.
Will I buy Tullow shares? It’s not a no-brainer. And valuing oil stocks is tricky. But I might go for just a few. H1 results are due on 13 September. I’ll wait and see what they hold.
