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The Tullow Oil share price is on a tear. Is this penny stock a buy for me now?

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The oil and gas exploration and production company Tullow Oil (LSE: TLW) has seen some impressive gains recently. The Tullow Oil share price is up by almost eight times from last year’s lows. 

While the stock market rally of last November helped it up, the Tullow Oil share price has gained in a big way only in the last six weeks or so. It has more than doubled in this time. 

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Still, TLW is a penny stock with a share price of 60p as I write. It was at four times these levels just two years ago.

The question that now comes to my mind is this — can the Tullow Oil share price actually go back up to its past levels?

Positives for the Tullow Oil share price

I think there are at least two positive developments that support the possibility that TLW can rise further. 

First, consider its latest 2020 full-year results released earlier this week. TLW’s revenue took a hit, but that was to be expected in the year of Covid-19. Its gross profits fell too, but I like that it has remained profitable. Also, its net loss narrowed this year. Its free cash flow situation has improved too, because of asset sales. Its debt levels declined as well. 

Second, the Tullow Oil share price has benefited from rising oil prices. From last November to now, the price of Brent crude has almost doubled to around $70 a barrel at present. For oil companies that were languishing from travel bans through the past year, this shows a swift turnaround in fortunes. TLW expects to see improved financials in 2021 because of this trend. This can give further momentum to TLW.

Risks to the Tullow Oil share price

But there are serious risks to an investment in TLW. 

First, despite a contraction in its debt levels, TLW’s gearing has risen to three times from two times last year. Gearing is its net debt as a proportion of its profits. It is hopeful that it will improve its debt situation this year. But it also talks about potential financing challenges further in 2021 in its update. I would be careful about this aspect. 

Two, over the long term I am not sure whether either the Tullow Oil share price or indeed that of any other oil company’s share price can sustain high levels. FTSE 100 oil biggies like BP and Royal Dutch Shell are pivoting to green energy sources foreseeing structural changes. 

When market conditions are unfavourable, it is particularly difficult to grow. TLW has been on shaky grounds even when oil demand has been relatively robust. It is possible that TLW can set itself up quite well by the time oil demand starts falling for good, but its numbers so far are not encouraging

The takeaway

On balance, I think TLW can rise on the back of investor optimism about the return of consumer demand and rising oil prices, but over the long term I will buy the share only if I am convinced of its finances. 

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Manika Premsingh owns shares of BP and Royal Dutch Shell B. 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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