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Should You Buy Plexus Holdings PLC And Sell Tullow Oil plc?

Two of the more interesting companies in the oil and gas sector released market updates this morning.

Tullow Oil (LSE: TLW) announced that it had settled a long-running capital gains tax dispute with the Ugandan authorities. The dispute relates to farm-out deals between Tullow, CNOOC and Total in 2012.

To settle the liability, Tullow has agreed to pay $250m, of which $142m was paid in 2012 and $108m will be paid in three instalments of $36m. The firm has paid the first instalment and will pay the remaining two in 2016 and 2017.

This seems a good result for Tullow and the remaining $72m cost is unlikely to cause any serious problems for the firm, which is expected to report a net profit of $131m this year, rising to $239m in 2016.

This settlement could also clear the way for the Ugandan government to approve the Lake Albert oil development in Uganda. Lake Albert is a joint venture between Total, CNOOC and Tullow and is expected to produce 200,000 barrels of oil per day when complete.

However, Tullow shares didn’t move on today’s news and remain almost 60% lower than they were one year ago. I remain concerned that the firm’s net debt, which rose from $1.8bn to $3.1bn in 2014, could become problematic.

I’m also not attracted to Tullow’s valuation. Tullow trades on 22 times 2016 forecast earnings and has an enterprise value-to-reserves ratio of $23.50 per barrel. This looks expensive, to me.

In my view, Tullow shares offer limited upside, and could fall further.

I’m more interest in a second oil-related company which also updated the market today, Plexus Holdings (LSE: POS).

Unique technology

Plexus is an engineering business which supplies wellhead equipment for oil and gas drilling. The firm’s main asset is its unique and patented POS-GRIP technology, which is used to grip and seal oil and gas wellheads and connectors together.

Many of the world’s biggest oil and gas companies use POS-GRIP, and its success has earned Plexus a premium P/E rating of 35 times 2015 forecast earnings. As a sign of the strength of its POS-GRIP system, earnings per share are expected to rise by 8% this year, despite the oil market downturn.

The challenge for Plexus is to find successful new applications for its technology which will help it to deliver new growth.

Today’s announcement could be a step in the right direction. Plexus announced that its new ‘Python Subsea Wellhead’ will be launched at the SPE Offshore Europe trade show in September.

Subsea wells are those where the wellhead and production-control equipment are located on the seabed, rather than above water on a platform. As deepwater exploration becomes more widespread, the use of subsea wells is increasing.

According to Plexus, spending on subsea exploration and production has risen from $7bn in 2000 to $45bn in 2014, and could hit $115bn by 2020.

Getting a slice of the fast-growing subsea market could be the growth trigger Plexus needs to deliver on its promise. For growth investors, I believe Plexus shares could be an attractive buy at today’s prices.

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Roland Head 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.