Are Roxi Petroleum plc And Rockhopper Exploration Plc The Perfect Partners For Tullow Oil plc In Your Portfolio?

Should you buy these 2 oil stocks alongside Tullow Oil plc (LON: TLW)? Roxi Petroleum plc (LON: RXP) and Rockhopper Exploration Plc (LON: RKH)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investors in Roxi Petroleum (LSE: RXP) received a positive piece of news flow today, with the company announcing that it had received part of the $23m owed to it from the sale of its stake in the Galaz asset in Kazakhstan. In fact, the cash received amounts to just under half the total amount due, with the $10m being received set to be put towards investment at its flagship BNG asset.

Although Roxi’s share price has not reacted favourably (it is down 2% at the time of writing), the last year has seen the company’s stock soar by 203%. Clearly, this is markedly different performance from sector peer, Rockhopper (LSE: RKH), which has posted a fall of 21% in the same time period. However, like Roxi, Rockhopper has bright future prospects, with the drilling programme in the Falkland Islands moving along as expected and having the potential to deliver not only improved news flow, but also stronger financial performance over the medium to long term.

Of course, Roxi and Rockhopper are both relatively small businesses and, while they have successfully been able to spread the risk at their key projects, it makes sense for investors in them to also spread their risk by investing in a larger company, too. And, when it comes to high quality oil explorers (and producers), Tullow Oil (LSE: TLW) appears to offer considerable upside potential.

That’s at least partly because, unlike Roxi and Rockhopper, Tullow is expected to deliver a profit in each of the next two years. In fact, its bottom line is due to rise at a rapid rate, which puts Tullow on a price to earnings growth (PEG) ratio of just 0.4. As such, it offers growth at a reasonable price and a very favourable risk/reward ratio.

Furthermore, Tullow also has very sound finances. For example, it has a debt to equity ratio of 83% which, while not exactly low, appears to be very manageable given that its cash flow has been very positive over the last couple of years. And, looking ahead, Tullow appears to have sufficient access to capital so as to enable it to reinvest in future growth, as well as successfully transition towards a greater emphasis on oil production rather than exploration.

Of course, Roxi and Rockhopper also have sound finances. Clearly, they lack the size, scale and diversity of Tullow, but Rockhopper, for example, has ample cash on its balance sheet to fund the drilling programme that is planned for 2015. And, with Roxi seeing $23m of cash coming in in the short run, its capacity to fund the flagship BNG project appears to be very sound.

So, while the outlook for the oil sector is uncertain, investing in smaller exploration companies such as Roxi and Rockhopper appears to be a sound move. They have sufficient financing, diversity and their projects have the potential to deliver upbeat news flow. Furthermore, teaming them up with a larger oil company such as Tullow Oil, with its wide margin of safety, excellent growth prospects and strong asset base appears to be the best way forward for Foolish investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »