Is Now The Perfect Time To Buy AFC Energy plc And Tullow Oil plc?

Should you buy these 2 energy stocks: AFC Energy plc (LON: AFC) and Tullow Oil plc (LON: TLW)?

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Shares in AFC Energy (LSE: AFC) have risen by as much as 5% today after the company released a hugely positive announcement that has the potential to improve investor sentiment over the medium term. In fact, the company’s CEO, Adam Bond, described today’s news as ‘one of the proudest moments in AFC’s history’, with the company having commissioned and commenced operation of its KORE fuel cell system in Germany. Furthermore, AFC Energy is on-track to deliver full commercial scale electricity output in the second half of this year.

Clearly, the news is hugely positive for the company and, with it moving into profitability in its most recent half year, AFC Energy appears to be on the up. Of course, many investors may consider that its shares are due a pullback, having soared by 482% since the turn of the year. However, with it being on-track to produce around 240 kilowatts of electricity by the end of 2015 and being another step forward on its eleven-point POWER-UP plan, AFC Energy seems to be a sound buy.

Furthermore, AFC Energy could become a highly relevant business over the long run, with its use of waste hydrogen to produce cleaner electricity likely to fit in well in an ever-increasingly environmentally-aware world. So while it currently trades on a price to book ratio of over 17, AFC Energy has tremendous growth prospects which could push investor sentiment (and its share price) to new highs.

Of course, the world is not yet ready to make a complete break from fossil fuels. And, while the near-term outlook for the oil price is rather dire, valuations in the sector can be hugely appealing even though asset impairment and declining profitability are becoming rather normal events for oil explorers and producers.

In fact, Tullow Oil (LSE: TLW), has been hit by the lower oil price and evidence of this can be seen in the whopping £1.3bn loss that was posted last year. While painful for the company’s investors, Tullow Oil is expected to make a comeback in the current year, with a pretax profit of £108m currently being pencilled in. And, next year, Tullow Oil is forecast to post a rise in profit of almost 150%, with its pretax profit due to reach £266m.

Clearly, such a rise in profitability is likely to cause investor sentiment to improve. And, with Tullow Oil’s share price having fallen by 42% since the turn of the year, there is tremendous scope for this to take place. For example, even a rise in Tullow Oil’s share price of 20% would still leave it trading at around net asset value, since it currently has a price to book ratio of 0.83.

Of course, there is the possibility of a further fall in the price of oil and, were that to happen, Tullow Oil’s outlook would be likely to worsen. However, with such a wide margin of safety and such positive expectations, even a decline in its outlook may not hurt its share price to a great extent, with the scope for a significant upward rerating making the present time a good opportunity to buy a slice of the company while it is very, very cheap.

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 owns shares of AFC Energy. 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.

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