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£1,000 to invest? Here’s one FTSE 250 stock I’d buy, and another I’d stay away from

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The oil price has slipped below $60 a barrel again, as the fallout from the drone attack on Saudi Arabia’s Aramco facilities proved short lived. Given today’s market glut, the estimated loss of 6m barrels of production was neither here nor there.

$300 oil?

If the low-level conflict with Iran intensifies, oil prices could still jump to “unimaginably high numbers that we haven’t seen in our lifetimes”, according to Saudi Arabia’s Crown Prince Mohammed bin Salman, but we aren’t there yet.

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Falling oil prices are good news for motorists but bad news for independent oil and gas exploration and production groups such as Premier Oil (LSE: PMO) and Tullow Oil (LSE: TLW), whose share prices have been on a bumpy ride ever since oil peaked at $115 a barrel in June 2014.

Measured over five years, Premier’s stock is down a whopping 75%, while Tullow has slipped 60%. The last 12 months have been particularly tough, with their shares down 48% and 23% respectively. The stock market sell-off of the last week inflicted further misery, because when the global economy slows, energy demand slows with it.

On debt do we part

Premier is the smaller of the two, with a market cap of just £610m. Despite its falling share price, August’s interims were actually very good, with year-on-year earnings up 40% to $680m. Production, revenue, and debt reduction all beat forecasts, while free cash flow doubled to $182m year-on-year.

The big longstanding worry is net debt, which is shrinking only slightly, from $2.33bn on 31 December to $2.15bn at 30 June. That’s roughly three-and-half times the company’s market cap. That leaves the company vulnerable to a drop in the oil price and therefore revenues. Plans to sell its stake in the offshore Zama field in Mexico will help on that score, with Jefferies recently valuing it at $439m.

Premier would benefit from a higher oil price but I suspect it isn’t going to get it. The global economy looks vulnerable, all-out war with Iran unlikely, while US shale goes from strength to strength. Plus there is the growing threat from electric cars, and climate change campaigners. Even a valuation of 6.63 times earnings fails to tempt me.

African adventure

Tullow has also been hit by the plunging oil price, dropping out of the FTSE 100 in 2015. Today its net debt stands at $2.9bn, almost identical to its market cap of $2.86bn. That looks relatively benign when compared to Premier, with gearing of 1.8x and no near-term debt maturities, but it could also do with a higher oil price to work that down.

In July, the group posted first-half revenues of $872m, with gross profit of $527m and post-tax profit of $103m. Tax troubles in Uganda have weighed on the company, but Tullow enjoys “robust profits and free cash flow”, which stood at $181m in the first half. Its TEN well has hit mechanical issues, but its portfolio of low-cost West African production provides a solid base for growth, as well as reducing debt and unlike Premier, paying dividends to shareholders.

Tullow’s forecast yield is 3.1%, with cover of 2.4, while operating margins are a healthy 26.3%. Earnings are predicted to jump 202% this year, slashing the current P/E from more than 40 to a more reasonable forecast of 12.8. If I had to buy one of these stocks, it would be Tullow. However, you might find less worrisome opportunities elsewhere.

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Harvey Jones 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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