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

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.

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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.