Premier Oil PLC vs Tullow Oil plc: Which Best Complements BP plc & Royal Dutch Shell Plc?

oil rig

It’s been an encouraging year-to-date for Premier Oil (LSE: PMO) with the oil producer seeing its share price rise by 9% since the turn of the year. This easily beats the flat performance of the FTSE 100 and is well ahead of the 16% decline in Tullow Oil’s (LSE: TLW) share price. However, does this mean that Tullow Oil is now a better value play than Premier Oil, or is Premier Oil still the best stock to complement Shell (LSE: RDSB) and BP (LSE: BP) in your portfolio?

Mixed Results

Today’s results from Premier Oil were a mixed bag. While the company experienced a strong six months in terms of production levels, the bottom line was severely hit by impairment charges. These resulted from a review into the longer-term assumptions that the company uses when forecasting operating, maintenance and decommissioning costs. Their overall impact on costs was significant, with Premier Oil’s cost of sales increasing by 37%.

However, there was also a positive one-off item; namely a tax credit that, when taken together with the previously mentioned impairments, meant that the company’s earnings per share (EPS) rose by 7.5%. The key message from the release, though, is that Premier Oil’s output is strong and the company has maintained its full year guidance.

Growth Potential

Looking ahead, Premier Oil appears to have huge potential. For instance, EPS is forecast to increase by a huge 27% this year, and by a highly impressive 12% next year. Both of these numbers are strong, but are dwarfed by Tullow Oil’s growth potential, with it due to deliver EPS growth of 52% in the current year and 59% next year.


Where Premier Oil offers more upside, though, is in terms of its current valuation. Shares in the company currently trade on a price to earnings (P/E) ratio of just 10.2, which highlights that there is significant scope for an upwards rating revision. Indeed, Tullow Oil’s P/E is a much higher 42.1, which shows that although it has a higher growth rate, Tullow Oil’s future potential could already be priced in.

Of course, when the growth rates and valuations are combined, both Premier Oil and Tullow Oil appear attractive. Their respective price to earnings growth (PEG) ratios are just 0.4 and 0.8. However, even on this metric, Premier Oil looks the more attractive of the two and seems to offer a highly potent mix of great value and strong growth prospects.

The Oil Majors

Clearly, the two oil majors — Shell and BP — also have huge potential as investments. They both offer top notch yields of 4.8% (BP) and 4.5% (Shell). Furthermore, they offer a diversity that neither Premier Oil or Tullow Oil are able to provide their investors, since BP and Shell’s balance sheet contain a wide range of high quality assets across the globe. So, while earnings growth may be higher at Premier Oil and Tullow Oil than it is at BP or Shell, the two majors still appear to offer investors a great deal moving forward.

In addition, both Shell and BP are attractively priced and trade on P/E ratios of just 11 and 10.1 respectively. As a result, both companies could be worth buying, with Premier Oil appearing to be the perfect complementary growth play for one or both of the oil majors.

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Peter Stephens owns shares of BP and Royal Dutch Shell B. The Motley Fool UK has recommended shares in Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.