Is Tullow Oil plc A Better Buy Than BG Group plc?


Today’s news flow from Tullow (LSE: TLW) was upbeat, with the oil exploration company announcing positive drilling results from a series of exploration, appraisal and testing activities in Kenya. This highlights the potential that Tullow has in its asset base, although its share price has not reflected this during 2014.

Indeed, shares in Tullow are down 14% since the turn of the year, which is disappointing and well below the 1% gains made by the FTSE 100 over the same time period. Furthermore, sector peer BG (LSE: BG) has easily outperformed its rival as its share price is currently down 7% year to date. With this in mind, which of the two oil producers could prove to be the better buy?


On the face of it, neither Tullow nor BG offer good value for money at their current prices. Despite falling during the course of 2014, shares in BG trade on a price to earnings (P/E) ratio of 17.6, while Tullow’s P/E is a whopping 45.4. Both are well ahead of the FTSE 100’s P/E of 13.8 and this fact may understandably put off many investors from buying.

However, when the growth prospects of the two companies are taken into account, it begins to look a lot different. For example, BG is forecast to increase earnings per share (EPS) by 13% next year, while Tullow’s bottom line is set to rise by a staggering 75%. Taking these prospects into account means that BG trades on a price to earnings growth (PEG) ratio of 1.2, which is very attractive, while Tullow’s PEG is just 0.3. This is among the lowest of any share in the FTSE 100 and highlights that Tullow, as well as BG, appears to offer growth at a very reasonable price.

Looking Ahead

When it comes to income potential, there is little to choose between the two companies. Both have yields of 1.6% at present, although BG’s dividend per share growth is more appealing that Tullow’s at 10.5% over the next year versus 1% for Tullow. Clearly, neither stock is a top notch income play. However, when it comes to growth potential, they excel.

Certainly, there is a risk that growth forecasts are missed, but their respective share prices appear to price this in to a large extent. As a result, while both stocks could be strong performers, Tullow seems to have the most potential due to its stunning growth prospects that, despite a P/E ratio of 45.4, seem to be on offer at a very reasonable price.

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Peter Stephens has no position in any shares mentioned. 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.