Tullow Oil plc vs BP plc vs Royal Dutch Shell Plc – Who Wins?

oilShares in Tullow Oil (LSE: TLW) have delivered a rather muted performance over the first half of 2014, with the FTSE 100-listed oil explorer and producer up just 2%. Although this compares favourably to the FTSE 100 (which is up 1%), its performance has lagged two of its sector and index peers: Shell (LSE: RDSB) (NYSE: RDS-B.US) and BP (LSE: BP) (NYSE: BP.US), which are up 12% and 7% respectively over the same time period.

However, with Tullow Oil releasing positive news flow this week surrounding its operations in Kenya, could shares in the company be about to make up the gains made by Shell and BP in the first half of the year?

Upbeat News Flow

As mentioned, Tullow Oil this week released encouraging news regarding its wells in Northern Kenya. It noted that the reservoirs were high quality and had good permeability, which is promising news since Tullow Oil has a 50% stake in the fields in question. The company also noted that there is much to look forward to in the second half of 2014 – not just from its operations in Kenya, but also from prospects in Ethiopia, too.

Volatile Growth Prospects

While encouraging, the news highlights the nature of shares in Tullow Oil, with the company seemingly experiencing periods of feast or famine. For instance, earnings per share (EPS) are forecast to increase by 142% this year, which sounds tremendous, but this is after they had declined by 73% in the previous year. Indeed, following this year’s forecast gain, EPS is expected to fall by 4% next year.

Likewise, BP and Shell are also set to experience volatile earnings this year, with EPS forecast to increase by 40% at Shell and to decrease by one-third at BP. However, both BP and Shell have a far larger asset base that is more diverse, and so it is likely (although not certain) that they will experience less volatility than Tullow Oil over the long run as, for example, disappointment on one asset can be more easily overcome by success on another.

Looking Ahead

Meanwhile, current valuations appear to favour BP and Shell over Tullow Oil. That’s because, while BP and Shell trade on price to earnings (P/E) ratios of 10.9 and 11.7 respectively (even after their strong showing in the first half of 2014), Tullow Oil’s P/E is a whopping 33.3. Indeed, while all three companies have a strong asset base, volatile earnings and impressive prospects, BP and Shell could prove to be the winners over the medium to long term as a result of their more attractive valuations.

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Peter owns shares in BP and Shell. The Motley Fool has recommended shares in Tullow Oil.