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This growing threat could cause the Tullow Oil share price to beat the FTSE 100

Image source: Getty Images.

Oil price prospects continue to be highly uncertain. Geopolitical risks facing major oil producers, such as Iran and Venezuela, could cause a disruption to supply that means increased prices for consumers across the world. While production from other nations may be able to pick-up the slack in the long run, it may take time for that to be achieved.

Of course, a higher oil price would be good news for oil producers such as Tullow Oil (LSE: TLW). The company has increased production in recent years, and this could help it to outperform the FTSE 100. However, it’s not the only oil stock that could be worth buying at the present time.

Improving outlook

Releasing news of a contract win on Monday was energy services company Wood Group (LSE: WG). It has agreed a six-year contract with Shell to provide asset management services to the Malampaya deepwater gas-to-power project in the Philippines. The company will provide maintenance services, modifications and shutdown support. It highlights the synergies that are being delivered since the combination of Amec Foster Wheeler and Wood Group, with the enlarged entity enjoying improved operational performance.

Looking ahead, a rising oil price could create additional activity in the oil and gas services sector. This is expected to push Wood Group’s bottom line 22% higher in the next financial year. Despite its upbeat financial prospects, the company trades on a price-to-earnings growth (PEG) ratio of just 0.6, which suggests that it offers good value for money. As such, now could be the right time to buy it for the long term.

Growth potential

With Tullow Oil having increased production in recent quarters, a rising oil price could make a major impact on its bottom line. In fact, it’s forecast to post a rise in earnings of 10% in the next financial year. This puts it on a PEG ratio of 1, which indicates that investors may not yet have factored in its rising profitability.

Of course, one area where Tullow Oil has been relatively weak in the past is its balance sheet. It has a significant amount of debt, which has made its financial standing arguably less resilient than many of its sector peers. A lower oil price could therefore be of greater risk to its prospects than some of its sector peers.

However, with the company focused on reducing net debt as its cash flow improves, it could be in a stronger position versus rivals. This may allow it to command a higher valuation over the medium term – especially if the oil price remains at a high level. As such, and while still a relatively risky share given the uncertain outlook for the oil price, its financial prospects appear to be impressive. This could mean it is a sound buy for the long term.

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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.