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Is Genel Energy PLC A Better Buy Than Tullow Oil plc And Premier Oil PLC After Cash Flow Boost?

Today’s announcement regarding payments from the Kurdistan Regional Government (KRG) is great news for investors in Genel Energy (LSE: GENL). The company has received a net payment of $24 million regarding oil production from the Taq Taq and Tawke fields, with more payments set to come in 2015 once the KRG reaches budget equilibrium in the next few months.

Shares in Genel have responded positively to the news and are currently up 6% at the time of writing. Does this cash flow boost and shift in sentiment mean that they are now worth buying ahead of Tullow Oil (LSE: TLW) and Premier Oil (LSE: PMO)?

Oil Sector Weakness

The falling oil price has hit the oil sector very hard. Furthermore, with the market seemingly expecting a continued decline in the price of oil, it appears as though investors are pricing in a relatively high margin of safety when it comes to the valuations of oil stocks. In other words, now could be a good time to buy oil companies, since relatively high quality companies seem to be on offer at attractive prices.

Future Potential

Clearly, Genel has huge future potential and it is forecast to increase its bottom line by a whopping 75% in 2015. Despite this, it trades on a relatively low valuation, with its price to earnings (P/E) ratio being 17.1. This means that Genel has a price to earnings growth (PEG) ratio of just 0.2, which indicates that its stunning growth prospects are on offer at a very reasonable price and, furthermore, even if its bottom line growth does disappoint slightly, there is a considerable margin of safety that should mean shares react relatively positively to improved profit growth in 2015.

This rate of growth compares favourably to that of Premier Oil, which is expected to see its bottom line fall by 15% next year. Premier Oil, though, trades at a super-low valuation and has a P/E ratio of just 6.1 based on next year’s forecast earnings. This shows that, while short term growth may not be on offer at Premier Oil, there is scope for a significant upward rerating to its valuation, which would clearly be good news for investors in the company.

Meanwhile, Tullow Oil is expected to deliver a highly disappointing 2014 that is set to see profit fall to just 0.3p on a per share basis. Next year, though, is forecast to be much stronger, as the company continues its transition towards production rather than exploration, with the company’s shares trading on a P/E ratio of 17.6 based on next year’s earnings.

Looking Ahead

While a depressed oil price may remain for many months, for longer term investors the present time could prove to be a great time to buy shares in oil stocks. While Tullow, Premier Oil and Genel are not without risk from a lower oil price, with the latter also being at risk of further instability in the Middle East, their share prices appear to offer a significant margin of safety at the present time.

As for which of the three appeals the most, Genel’s mix of strong forecast growth and a keen valuation could see it deliver the strongest returns of the three companies in 2015.

Of course, it’s not just oil stocks that have potential. Other sectors could prove to be even more appealing but, like many private investors, you may lack the time to trawl the index in search of the best companies to invest in.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended 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.