The share price performance of Tullow Oil (LSE: TLW) has been hugely disappointing in 2017. The oil explorer and producer has seen its valuation shrink by 45% since the start of the year. While a share placing and lower oil prices have been partly to blame, investor sentiment towards the company and the wider industry appears – to be flagging. Looking ahead, though, it could be a strong performer and its recent fall may be a buying opportunity.
Oil price potential
The oil price has the potential to move higher in the long run, since demand could increase. For example, the use of oil in transportation is unlikely to fall significantly in the coming years. Certainly, electric cars pose a threat in the very long term, but due to costs and logistics, petrol and diesel cars look set to remain the dominant fuels for automotive transport – across the emerging world in particular.
Alongside this, a desire for many oil-producing nations (such as OPEC) to limit supply could lead to a reduction in the glut which has prevailed in recent years. This could help to push the price of oil higher, which would clearly be positive news for Tullow Oil. Not only would it increase the company’s profitability, it may also mean investor sentiment towards the company improves.
In response to the current low oil price environment, Tullow is making several changes to its business model. For example, it has raised capital in order to reduce its debt levels, intended to create a more sustainable business with lower risk, since the oil price may remain low over the short term. Furthermore, it has increased production levels as it seeks to generate higher cash flow. This may lead to a rising dividend in future which could be a positive catalyst on the company’s share price.
With the stock trading on a forward price-to-earnings (P/E) ratio of 16, it appears to offer good value for money at the present time. Certainly, there are considerable risks facing the business, including that low oil price in the near term, but given its outlook it could be a strong performer in the long run.
Also offering long term share price growth potential is zinc gold miner Griffin Mining (LSE: GFM). The company released an interim update on Thursday for the six months to 30 June. Its revenue increased from $20.8m in the first half of last year to $52.3m in the current year. This allowed it to move into net profit, swinging to $15.8m from a loss of $4.1m last year.
In response to the company’s improved financial performance, its shares increased by around 5% following the news release. Looking ahead, it’s expected to grow profit further this year, and this puts it on a forward price-to-earnings (P/E) ratio of just 7.4. This suggests that while it remains a relatively risky investment prospect, the potential rewards are also high for the long run.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.