The performance of Tullow Oil (LSE: TLW) has been highly volatile in recent months. A falling oil price caused a decline in the final quarter of 2018, but improved performance has led its shares moving higher since the start of the year.
Looking ahead, the company’s strategy of increasing production could improve its financial outlook. Alongside a low valuation, this may lead to a higher share price. As such, it could be worth a closer look alongside another relatively cheap share which released a trading update on Friday.
Improving growth prospects
The stock in question is regeneration specialist U and I (LSE: UAI). The company announced it has completed the sale of the residential sites at Preston Barracks in Brighton, which brings its total development and trading gains since the start of the financial year to £30m. Although it also announced a delay to its Kensington Church Street scheme, the firm remains focused on delivering its target of £45m-£50m in development and trading gains for the 2019 financial year.
With a dividend yield of around 6.5%, U and I appears to offer income investing potential. Its income return also suggests it may offer good value for money following a share price decline of over 20% in the last eight months. With its overall strategy appearing to be sound and on track to deliver a rise in earnings of 10% in the next financial year, its potential to raise dividends and offer a share price recovery seem to be improving. As such, it could offer long-term investment appeal.
As mentioned, the Tullow Oil share price could generate impressive long-term returns. The company’s most recent update showed it’s been able to make progress in reducing debt levels, which could lead to a stronger and less risky business in the long run. Increasing production could be ahead, which may have a positive impact on its financial performance.
Clearly, though, the company’s financial future is highly dependent on the oil price. Factors such as the pace of global economic growth and geopolitical risks across OPEC members could have a significant impact on its price, which means there may be a period of further volatility ahead. As such, Tullow Oil’s price-to-earnings (P/E) ratio of 10.5 indicates there may be a margin of safety on offer. This suggests its risk/reward opportunity could be favourable at the present time.
Although the share price rise of 20% recorded since the start of the year is unlikely to continue unchecked, the oil price could have significant growth potential. It’s still trading considerably below its 2018 high, which indicates the wider sector may continue to offer good value for money. While risky, the returns on offer from Tullow Oil could be impressive over the long run.
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.