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FTSE 250-member Tullow Oil’s share price is in freefall! This is what I think you should do

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It’s been an incredibly disappointing three-month period for the Tullow Oil (LSE: TLW) share price. It has declined by 35% during that time, with its fall being prompted by weakness in the oil price. In recent weeks, the price of black gold has shown little sign of mounting a sustained recovery, with investor sentiment seemingly exceptionally weak.

But this could present a buying opportunity for oil and gas shares such as Tullow. And with there seemingly being good value on offer across the industry, a FTSE 250-listed stock which released an update on Wednesday may also be worth a closer look in my opinion.

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Improving outlook

The company in question is exploration and production business Energean (LSE: ENOG). It released news of a Gas Sales and Purchase Agreement with IPM Beer Tuvia to supply an estimated 5.5 BCM (billion cubic metres) of gas from its Karish and Tanin FPSO (floating production storage and offloading vessel) over a period of 19 years. The contract is in line with the company’s aim to secure offtake for the remaining capacity in its 8 BCM per year FPSO.

Looking ahead, Energean is expected to rapidly increase its profitability in the current financial year. In fact, the stock trades on a price-to-earnings growth (PEG) ratio of just 0.1. This suggests that it may offer good value for money at the present time, and that it has the potential to deliver improving share price performance. While it may experience a period of volatility and uncertainty, it could offer an improving risk/reward ratio when compared to some of its industry and index peers.

Low valuation

As mentioned, the near-term prospects for Tullow Oil appear to be relatively challenging. The company’s financial outlook may be negatively impacted by a falling oil price, and this could hurt investor confidence over the coming months. Since the company has a relatively high level of leverage versus some of its industry peers, it may be viewed as high-risk by investors. This may mean that it underperforms some of its more established sector peers in the short run.

However, with the stock now having a price-to-earnings (P/E) ratio of around 8.5, it could offer a wide margin of safety. Furthermore, the oil price has been negatively impacted by a six-month waiver placed on Iranian oil exports which may not be extended further. And since the medium-term outlook for the world economy remains relatively robust, according to various forecasts, demand levels for oil may remain at healthy levels.

As such, now could prove to be a good time to buy oil and gas companies such as Tullow Oil in my opinion. Although risky and potentially volatile, the reward potential on offer over the long run could be relatively high after what has been a challenging three months for the wider 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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