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Is it finally safe to buy the Tullow Oil and Premier Oil share prices?

Both Tullow Oil (LSE: TLW) and Premier Oil (LSE: PMO) came close to the edge during the oil price slump. Valued largely on their reserves, both were (and still are) heavily funded by debt, and that proved very dangerous during the crisis.

But they’re still here and are getting their debts down, albeit slowly. And Tullow has reached a milestone, with chief executive Paul McDade saying” “At today’s AGM, the Board will be asking Tullow shareholders to approve the Group’s first dividend payment since 2014.”

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Wow, a dividend! Now, that sounds impressive, and McDade went on to say that the firm’s new dividend policy is “expected to deliver at least $100 million per year to shareholders.” But some, including me, would question its wisdom.

3 billion!

At 31 March, Tullow’s net debt stood at a towering $3bn. There’s still a $1bn liquidity headroom, apparently, but how would that look should we enter a renewed oil price fall? I think that’s unlikely, but just about everyone thought the last crash was unlikely (both in severity and duration) until it happened.

I’ve never understood why companies carry large debts and pay dividends. To me, it’s just borrowing money to hand to shareholders (and paying interest on it into the bargain). I’d much rather see Tullow using every spare penny to reduce that debt mountain right now.

Q1 oil production dropped a little to average 84,600 bopd due to (now resolved) technical issues. With current production around 95,000 bopd, and expected to reach 100,000 bopd, the company has revised its full-year guidance to 90,000-98,000 bopd.

Those production figures look fine, and if oil stays around today’s $70+ levels, Tullow looks back on track. But I’m still twitchy about that debt.

Worse debt?

In the depths of cheap oil, I plumped for Premier Oil shares. As usual, though, my timing stank and I bought in some time before the share price hit bottom — and, at one point, when the shares were suspended, I was briefly down 80%. Still, approximately 3.5 years on, I’m finally slightly in profit, though whether it’s sustainable yet is an open question.

The shares are still on a pretty low P/E ratio of only 9.4 on current year forecasts, dropping to 8.4 based on a 14% EPS rise forecast for 2020. On the face of it that looks cheap. Tullow Oil shares are more highly rated at multiples of 12.3 for this year and 13.4 next, so I think fellow Fool Peter Stephens is right to suggest Premier might be a bargain FTSE 250 stock. But again, of course, it’s all about the debt.

Next update

There’s an AGM day update from Premier due on 16 May but, at full-year results time in March, the company reported a 31 December net debt figure of $2.3bn. In absolute terms, that’s lower than Tullow’s debt, but Premier has a far lower market capitalisation of approximately £860m compared to Tullow’s £3.36bn.

Proportionally, then, Premier’s debt is a bigger worry, and that casts its lower P/E valuation in a new light — and maybe it’s not such a bargain after all.

I’ll be seriously reconsidering my investment in Premier during the course of 2019. But, for now, I think we could well see some further share price rises from both Premier and Tullow in the coming months.

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Alan Oscroft owns shares of Premier Oil. 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.