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Why the Tullow Oil share price could be about to soar

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In the last year the Tullow Oil (LSE: TLW) share price has risen by 37%. That’s a strong performance after a tough period for the oil and gas production company. It had traded as high as 500p as recently as four years ago, but lower oil prices have contributed to declining financial performance in the period since then.

Now though, a rising oil price alongside increased production could lead to a brighter outlook for the stock. Could it be worth buying alongside another company which released a trading statement on Thursday and that has disappointed investors in the last few years?

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Improving outlook

As with any oil producer, Tullow is highly dependent upon the price of oil. In the last year, the price of Brent has risen by as much as 50%, and this has lifted the financial performance of a wide range of companies across the industry.

The company has also benefitted from a capital raising, which has been used to help reduce its leverage. It has ramped-up production in order to boost cash flow, with its TEN fields delivering a significant contribution to total output since coming onstream. Improving cash flow and falling debt could help the stock to become a less risky option, which may lead to improving investor sentiment.

Of course, the future for the oil price remains uncertain. Supply levels are challenging to predict, with various geopolitical factors having the potential to reduce supply in the short term. But with robust demand levels forecast over the medium term, the prospects for the industry seem to be more positive than they have been for a number of years.

With Tullow Oil trading on a price-to-earnings (P/E) ratio of 11, it seems to offer a wide margin of safety. As such, a continued rise in its share price could be ahead.

Difficult outlook

Also experiencing a tough period in the recent past has been online electrical retailer AO World (LSE: AO). The company has suffered from increased pressure on consumers, with its shares declining by around 45% from their level in 2014.

But it is on track to deliver on its long-term strategic plan according to a trading update released on Thursday. It recorded UK revenue growth of 8% in the most recent quarter, although weak consumer demand hurt its performance in June. In Europe, it has performed as per expectations, with year-on-year revenue growth of 46.2% being recorded.

With AO World competing in what is a crowded marketplace that is being hurt by weak consumer confidence, its prospects appear to be uncertain. It is expected to remain lossmaking in the current year, and this could cause investors to become increasingly nervous about its prospects. That’s especially the case since the prospects for consumer confidence are downbeat.

As a result, a return to its 2014 share price levels is difficult to justify at the present time. There could be more enticing opportunities elsewhere in the retail industry.

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Peter Stephens has no position in any of the 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.

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