Is It Time To Buy Bombed Out Producers Tullow Oil plc And Premier Oil PLC?

The Oil & Gas sector hasn’t been the place to be in the last 18 months and many companies are struggling to survive. These two once-celebrated explorers have had a year to forget but with trading updates this week, it could be time to buy. The table below shows the key figures for each company including debt, production and market capitalisation. 

  Share Price 1yr Performance % Market Cap ($) Net Debt ($) Production (bopd) 2P Reserves (mmboe)
Tullow        135p  -65%  1.7 bn  3.5 bn   70,000  329
Premier          30p  -79%  225 m  2 bn  60,400  243

As you can see from the chart above, debt levels are high and are providing investors with much to worry about. Both companies have new developments coming online this year and these could be key in ensuring a profitable future. After a dismal 18 months for both companies, there are increasing numbers of contrarian investors beginning to look at the shares. After falls of 65% and 79% for the shares, there’s considerable room for a bounce and investors willing to take the risk now may be heavily rewarded in the future. 

Tullow Oil

Tullow Oil‘s (LSE: TLW) year comes down to one thing, the TEN development in Ghana. As of November, the development was 75% complete and aiming for first oil in mid-2016.  TEN will have a production capability of 80,000 BOPD (net 35,000 BOPD to Tullow), which will add to production volumes and allow faster reduction of debt in the future. Tullow has a strong hedging programme in place too. In 2016 it has hedged 36,000 BOPD at an average floor price of $75.45 and this should provide some shelter from the storm. The company also has an exciting exploration portfolio that will provide the market with multiple potential catalysts and could cause the shares to rise. 

Premier Oil

Premier Oil (LSE: PMO) is also under some serious pressure. The share price is down at lows many thought would never be seen and the shares show no sign of stopping. Much like Tullow, Premier is waiting for first oil from the Solan development. Solan first oil is expected to be this month after a one-month delay due to bad weather and lost work days. The development will plateau at 25-30 KBOEPD and bring a much-needed boost to the cash flows of the company. There was also positive news from the Falklands with the Isobel Deep well discovering new hydrocarbon accumulations. This should add weight to the investment case.

In conclusion, both companies above have a very important year ahead and much of it will rely on execution of these developments on time and on budget. Anything less is likely to be punished by the market. Trading updates this week will hopefully have details on negotiations with lenders regarding banking covenants and loan facility headroom. Having both lost over 60% in the last year, the shares should be on the radar of any investor looking to sniff out a bargain but both come with significant risk. If the oil price continues to fall then both shares could go lower. 

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Jack Dingwall 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.