I have been scouring the market for stocks that can benefit from inflationary price rises. Commodity exposure has proved a good diversifier for my portfolio in the past for this. I recently discussed my pick of commodity stocks, focusing on bigger names like Shell and BP. But I do not want to overlook lesser known oil explorers that may offer me better long-term value. The Tullow Oil (LSE:TLW) share price at £0.50 looks cheap when I consider its future growth potential.

The shares have underperformed for around a decade, but I believe they look set for takeoff. Here are my reasons why.

A cheap portfolio diversifier

The stock is down 70% over the last three years. It is easy for me to forget that the shares traded for well over £10 each a decade ago. But I believe the turnaround story is afoot.

In my view, Tullow Oil is deeply undervalued compared to peers. It also has higher earnings growth potential due to some recent cash-generative acquisitions. I am a long-term investor, so these value-oriented features are highly attractive to me.

Can the share price grow from here?

The mid-cap does not pay a dividend. But in an environment with high inflation and a high risk of economic recession, income is not the top of my agenda. Growth is.

I think the near-term picture, as well as the long-term one, look promising for the Tullow Oil share price.

The company has rewarded existing shareholders with a total return of 4.1% in the last 12 months. Of course, these recent returns are much better than the loss of 11% per year over the previous five years. Tullow Oil’s earnings growth forecast also exceeds both its sector and the broader market.

These are all indicators to me of a bargain worth adding to my portfolio.

The rally is coming

As oil prices have hit multi-year highs, oil majors like Shell and BP have seen their share prices rally by more than 50% over the past 12 months.

Meanwhile, Tullow as a smaller oil producer, has lagged, rising by a meagre 15% or so.

Make no mistake here, I am well aware that Tullow is a loss-making company. But I also feel that the market is under-rating its potential. The company has grown net income year on year, from a loss of -£1.22bn to a smaller loss of -£80.70m despite declining revenues. Meanwhile, the company is expected to break even financially a year from now, according to several oil and gas analysts.

I expect this trend of the company operating more profitably to continue.

Meanwhile, I believe the price of oil is likely to be stubbornly and persistently high, beyond 2022 and 2023. Positively, this feeds into the hands of Tullow Oil. Though, of course, rising oil prices are no guarantee.

But in the event oil prices continue rising, the stock could be gold dust for me in what is likely to be a challenging environment for growth over the coming business cycle.

Thus, it will be interesting to see signs of continued operational improvements in Tullow’s latest earnings results due tomorrow. If so, then it could well be a signal for me to buy and hold over the long run.

The post The only way is upstream for the Tullow Oil share price appeared first on The Motley Fool UK.

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Henry Adefope 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.

Why did the Tullow Oil share price crash in 2019?

Tullow Oil is an exploration and production company for crude oil. Its share price suffered a major hit towards the end of 2019 that was only exacerbated by the pandemic. So what happened?

This seems to be a classic case of over-expectations by the management team. In the months leading up to the share price crash, the company had been hyping up two new oil fields in Guyana. What was supposed to be a dream discovery that would re-risk the petroleum system in the area quickly turned into a nightmare.

After further analysis, Tullow Oil discovered that both sites were contaminated with heavy oil. Why does that matter? Heavy oil is a highly viscous material, meaning it cannot easily flow to production wells under normal conditions. Therefore, drilling and extracting the tar-like substance is exceptionally difficult, which questions the financial viability of both these sites.

Then the pandemic created significant disruption for the entire oil industry and triggered a sharp decline in oil prices. Combining that with the heavy oil discovery resulted in the Tullow Oil share price plummeting by 95% between October 2019 and March 2020 – the largest drop in over two decades.

The road to recovery

In its 2020 full-year results, the pandemic’s impact on the business was made pretty clear. Total revenue fell by 19%, and the company reported a loss of $1.22bn. What’s more, due to a planned shutdown at one of its main sites, the total production forecast for 2021 fell to between 60,000 and 66,000 barrels for 2021. By comparison, 74,900 barrels were produced in 2020.

But there’s reason to be optimistic about the future. The reported loss wasn’t as big as 2019’s $1.69bn, and the firm’s debt levels are falling thanks to ongoing negotiations with its creditors. Also, oil prices are now back to nearly $70/barrel as travel restrictions are beginning to ease. And the management team has noted that its assets in West Africa are expected to significantly boost production as of 2022. 

Overall, this is undoubtedly good news for Tullow Oil, and consequently, its share price has returned to pre-pandemic levels. However, there is still a long way to go before completely recovering.

The bottom line

Personally, I think the Tullow Oil share price is already on track to return to 2019 levels. But due to the reduced production forecasts, this recovery will likely be a multi-year process.

For now, I’m going to wait and see how things develop throughout 2021, so I’m not adding the stock to my portfolio today.

The post Will the Tullow Oil share price recover in 2021? appeared first on The Motley Fool UK.

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Zaven Boyrazian does not own shares in Tullow 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.

BP is in good company. FTSE 100 oil major, Royal Dutch Shell is also hurting. Its shares are down 38% from its 2020 high. Meanwhile, stocks of smaller peers Tullow Oil and Premier Oil have plummeted 63% and 75% respectively.

The oil price crash was initially caused by the coronavirus-induced slow down in demand for oil. But this happened at the same time as its oversupply. And with OPEC+ refusing to cut production, share prices in oil companies tanked further.

However, OPEC+ signed a US-backed deal on Sunday. The aim is to cut almost 10% of the global oil supply. The hope is this will be enough to raise oil prices, and with them, the shares of oil companies.

However, I am skeptical.

BP share price is helped by its diversity

BP is an integrated oil company. This means it operates in every aspect of the oil and gas business from oil exploration and production (E&P) to refining to trading. It also has a renewable energy division. Therefore, its share price represents the diversity of its operations. 

The oil majors can offset the now lower-margin E&P assets with cheaper oil feedstock into their refining businesses. They are also big oil traders, able to use the market to add value to their positions. Smaller peers based only in E&P are far more exposed to oil market volatility.

This higher exposure is mirrored in the size of their respective share price crashes. Indeed, the market appears to have already accounted for business model differences between oil firms.

OPEC cuts production by 9.7m barrels

Sunday’s deal means that OPEC is going to cut oil production up to 9.7m barrels per day. However, this reduction is from an already raised production level. Some traders doubt this will be enough to boost prices in the short term due to the oil glut.

With no end to the coronavirus pandemic in sight, oil demand is not likely to increase anytime soon. The main buyers of oil are likely to be G20 governments filling up strategic reserves with cheaper oil.

Besides, OPEC countries are likely to cut production of their heaviest crudes first. This is because they already sell for less than lighter grades. Refineries and markets in residuals fuels could see an increase in prices. This may help to steady BP’s share price slightly. But, it won’t likely have a huge effect on the rest of its businesses. 

With market-driven supply already down in the US, it could be that OPEC+ countries try to use this time to increase their market share. This means more cuts may be unlikely anytime soon. And some analysts already believe Sunday’s cuts are too little too late.

Once strategic storage reserves have been maxed out, the market will have to rebalance. And that will mean low oil –and share – prices for the future.  

The post Why I think the OPEC cuts may not be enough to save the BP share price appeared first on The Motley Fool UK.

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Rachael FitzGerald-Finch holds shares in BP and Royal Dutch Shell. 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.

Brent higher

The Brent crude benchmark price is hovering just below $70 a barrel. The oil price spiked in the immediate aftermath of Suleimani’s assassination, with Brent rising 4.5% to $69.20 at one point.

It has since retreated slightly and now stands at $68.26. Some say oil could break through $100 and carry on climbing if the situation worsens.

Any escalation would certainly be bad in itself, and a resulting higher oil price may also be bad for the global economy. However, two London-listed explorers, Premier Oil (LSE: PMO) and Tullow Oil (LSE: TLW), might benefit from higher price for crude.

Premier Oil

Premier’s share price has been doing well lately, and jumped 14% yesterday. That had nothing to do with the U.S-Iran situation, though, but was rather a positive market reaction to the company’s trading and operations update. This reported 2019 production of 78,400 barrels of oil equivalent per day (kboepd), at the upper end of full-year guidance, underpinned by high operating efficiency and continued high rates from the Premier-operated Catcher Area. Separately, the firm announced the proposed acquisitions of the Andrew Area and Shearwater assets from BP for $625m.

The Premier share price has been volatile but is now up 40% in the last three months. However, I remain worried by its $1.99bn debt pile, which is set to grow even larger following the latest acquisition. Clearly, management couldn’t resist the opportunity, which is understandable, as the purchase should generate more than $1bn in free cash flow by the end of 2023. It does up the risk level, though.

Premier is on a roll but looking forwards, much depends on the oil price. Beware rushing in on bad news from the Middle East or a short-term price spike. If the current crisis abates, the demand for oil could slow. In addition, the pressure to use renewable fuels continues to grow, posing a long-term challenge.

Tullow Oil

In contrast to Premier, the Tullow Oil share price has had a desperate time lately, losing more than half its value in the last month alone.

Exactly 10 years ago it traded at 1139p; today you can pick it up for less than 58p. If you invested £1,000 then, you’d have just £50 or so today, give or take dividends. I am rarely tempted by companies that have taken this kind of beating, and investors had to swallow further disappointment this month, after Tullow said its Carapa-1 exploration well in offshore Guyana had less oil than pre-drilling estimates.

The real damage was done in December, though, when Tullow cut 2020 production forecasts, suspended its dividend and announced a string of senior manager exits. Worse, it is burdened with even more debt than Premier, $2.9bn at last count. A repeat of its 2017 fundraising cannot be ruled out, which would inflict further damage on the share price.

Some believe the market has overreacted, and Tullow looks incredibly cheap at today’s price, especially as it doesn’t face any debt maturities until 2021. I remain wary, though.

Even amid the current geopolitical climate, Premier and Tullow are only for the brave.

The post Should you buy Tullow or Premier Oil ahead of the next oil price shock? appeared first on The Motley Fool UK.

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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.

If you want to see just how bad things can get, take a look at Tullow Oil (LSE: TLW). 

The recent plunge in the company’s value – leaving it trading on a little under 70p as I type – is nothing compared to the long-term trend. Go back almost eight years, to March 2012, and the stock was trading at over 1,500p.

So, it’s now a bargain?

Not so fast. Tullow’s now in a very sticky spot for a number of reasons: production guidance has been slashed, the company is currently rudderless following the resignations of both its CEO and exploration director, and the balance sheet is still under severe pressure, suggesting a fresh bout of fundraising is likely. 

All companies experience problems. Indeed, I’d be willing to stick with a stock if there was reason to believe it might recover and pay dividends to compensate holders in the meantime. Unfortunately, the latter is no longer the case with Tullow as the dividend has now been cancelled. 

There may be talk of it now being a takeover target but this should never be the sole reason for taking a position in a business. I’m steering clear. 

Shorter’s heaven

Industry peer Premier Oil (LSE: PMO) is another energy stock I’m wary of, albeit for a slightly different reason.

As I’ve said many times before, it’s always worth keeping an eye on what short sellers are doing. For those new to the investing, these are traders that bet against a company’s share price.

Given the volatile nature of the industry, it’s not exactly surprising if a few oil stocks make the list of shorting favourites. Premier Oil, however, has recently shot to the top.

Some readers may be scratching their heads. As my Foolish colleague Rupert Hargreaves explained recently, recent production has been healthy, and investors have embraced the idea of asset disposals. On the face of it, Premier seems a different beast from Tullow.

Or is it? Like Tullow, the investment case of Premier makes sense when the price of black gold is sky-high but it’s less than ideal if it’s falling or stagnating. 

This explains why a fund based in Hong Kong – Asia Research and Capital Management – has taken a massive short position on the stock as a hedge on its own $380m holding of the company’s huge debt pile. This way, it has some protection if the oil price stays low until the debt becomes repayable.

The fact that ARCM has stated that this is normal practice may help to assuage concerns, but it’s not exactly a ringing endorsement of Premier’s position. Ask yourself: if professional investors feel the need to make such a massive bet against a company they already have an interest in, do its shares truly represent the best opportunity for retail investors to make money?

If you’re tempted by either Tullow or Premier, I think the message is simple: only put cash in that you can afford to lose. 

The post Tullow Oil isn’t the only stock I’m running a mile from appeared first on The Motley Fool UK.

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Paul Summers 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.

$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.

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.

The post £1,000 to invest? Here’s one FTSE 250 stock I’d buy, and another I’d stay away from appeared first on The Motley Fool UK.

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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.

One of the UK’s top blue-chip stocks, this company has been paying an income out to investors since World War Two. It doesn’t look as if this track record is going to come to an end any time soon.

A market leader

Shell dominates the oil & gas trading markets across Europe, which gives it a dependable income stream. On top of this, the company is one of the world’s largest hydrocarbon producers. It’s also investing billions of dollars every year to build out its renewable energy business. I think these efforts will help Shell maintain its position as one of the world’s leading energy businesses for decades to come. 

However, the one drawback of investing in Shell is its size. City analysts commonly use the phrase “elephants don’t run” when describing Shell and its growth prospects due to the firm’s size. The bigger companies become, the harder it is for them to grow.

Shell’s no exception. Analysts are only forecasting earnings growth of 9% this year, followed by 15% for 2020, although these numbers are entirely dependant on the price of oil.

But what the firm lacks in growth, it more than makes up for in income. Shares in the company currently support a dividend yield of 6.5% — one of the highest yields in the FTSE 100. 

Considering Shell’s downbeat growth outlook, if you’re looking for capital growth, then I highly recommend combining Shell with a smaller growth stock in your portfolio. I think Tullow Oil (LSE: TLW) could be a great pick here.

After a rough few years, the business is now back on track and analysts have earnings rising from $85m in 2018 to $360m by 2020. On top of this, the firm recently re-instated its dividend and is making good headway reducing debt. Net debt declined by around $400m in 2018 and looks set to fall further for 2019. 

A new discovery

Tullow is one of the most active oil explorers in Africa and its track record of finding and drilling for oil is exceptional. Management is now trying to diversify the group internationally. Its newest prospect is the closely-watched Jethro-1 well in the Orinduik block in Guyana.

Initial drilling results indicate this prospect could hold over 100m barrels of oil, above expectations. Following these findings, Tullow chief executive Paul McDade told Reuters: “It looks like we have a long-term business in Guyana.” So it would appear Tullow wants to develop this prospect as soon as possible. 

Developments like the Orinduik block is why I think Tullow could be a great place to invest your money alongside Shell. Tullow’s production growth should provide capital gains while Shell continues to chuck off a steady income. This combination of income and growth could help your portfolio charge ahead. 

The post Want to buy the Shell share price? Here’s what I’d do now appeared first on The Motley Fool UK.

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Rupert Hargreaves owns shares in Royal Dutch Shell. 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.

In fact, its 2% annualised growth since 2015 could indicate that it is now undervalued relative to other major indices. That’s especially the case since it has a dividend yield of 3.2%, which is historically high for the index.

With that in mind, here are two FTSE 250 shares that could be worth buying now within a Stocks and Shares ISA.

Hunting

International energy services company Hunting (LSE: HTG) released an encouraging trading update on Thursday for the first half of its financial year. It has traded in line with management expectations, with the US onshore completions market showing signs of improvement during the period. There have also been increased activity levels in the North Sea and Middle East, which suggests that improved operating and financial performance may be ahead.

The company expects to report a rise in revenue versus the same period of the previous year, with EBITDA (earnings before interest, tax, depreciation and amortisation) also due to be up on the comparable figure from the prior year.

Although the energy services industry faces an uncertain period, Hunting appears to have an improving outlook. The company is forecast to post a rise in earnings of 23% in the next financial year. Since it trades on a price-to-earnings growth (PEG) ratio of just 0.5, it seems to offer a wide margin of safety. As such, it could be worth buying on a long-term outlook, with there being the potential for volatility due to it being an uncertain period for the oil price.

Tullow Oil

A volatile oil price could also affect the financial prospects for Tullow Oil (LSE: TLW). The company’s recent operational update showed that it is making significant progress in Kenya as it prepares to reach a Final Investment Decision (FID). It is also expecting to commence its drilling campaign in Guyana later in the month, with the spud of the first of three wells planned for 2019.

It remains on track to produce between 90,000 and 98,000 barrels of oil per day (bopd) for the full year. It expects free cash flow to be $550m for the full year, which could help to reduce debt and strengthen its balance sheet.

Of course, should the oil price come under pressure, the company’s financial outlook is likely to suffer. However, at the present time, Tullow Oil is expected to report a rise in earnings of 9% in the next financial year. Since it trades on a PEG ratio of 1.2, it appears to be fairly priced.

As with all oil and gas companies, Tullow Oil is susceptible to a rapidly changing operating environment. But with strong recent performance and a low valuation, its risk/reward ratio could be enticing.

The post Have £1k to invest today? I’d buy these FTSE 250 growth stocks in a Stocks and Shares ISA appeared first on The Motley Fool UK.

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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.

Alongside another growth stock which trades on a low valuation and that reported an encouraging update on Thursday, Tullow Oil could be worth buying right now.

Growth potential

The company in question is media distribution specialist Entertainment One (LSE: ETO). Its trading update for the 2019 financial year showed that its financial performance has been in line with expectations, with underlying EBITDA (earnings before interest, tax, depreciation and amortisation) rising by 25% in its Family & Brands division.

It also recorded another year of growth in its Music segment, while its Television sector saw strong momentum during the year. it was boosted by both new and recommissioned series, with it having a robust pipeline of over 60 projects set up for development.

Entertainment One is upbeat about its future prospects. The company is expected to post a rise in net profit of 16% in the current year, with its price-to-earnings growth (PEG) ratio of 1 suggesting that it offers a wide margin of safety. As such, now could be a good time to buy it, as it offers share price growth potential over the long run.

Low valuation

As mentioned, the risk/reward ratio for Tullow Oil may be favourable at the present time. Clearly, the prospects for the oil price continue to be uncertain, and falls in the price of black gold could harm the company’s financial outlook. With the US continuing to offer mixed economic data and China doing likewise, the prospects for the global economy appear to be uncertain in the near term. This could mean that the rise in the oil price over the first quarter of the year may not be sustained at the same level in the second or third quarters.

Despite this risk, the Tullow Oil share price appears to offer investment appeal. The company is in the process of delivering its refreshed strategy. This focuses on increasing production, reducing debt levels and investing for future growth. As such, it could offer a relatively strong performance outlook versus the wider sector.

Since the stock trades on a price-to-earnings (P/E) ratio of 11.3, it seems to offer a wide margin of safety. This could indicate that the risks it faces are priced in, with it seeming to have a bright future should the price of oil continue to move higher. As such, from a risk/reward perspective it could be an appealing stock which offers significant growth potential, and that helps its investors to improve their financial prospects over time.

The post Forget the National Lottery – I think the Tullow Oil share price could help you to get rich appeared first on The Motley Fool UK.

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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.

And even though shares in the company have added 33% since I last looked at it, I still think we are looking at a multi-bagger here.

Multi-bagger potential

The Premier Oil share price jumped substantially at the beginning of March when it published its results for 2018.

Oil production averaged a record 80,500 barrels of oil equivalent per day (boepd) in the period, and the company finally returned to profit. Premier has reported a loss in three of the past four years, so a return to sustained profitability marks a turning point for the group. More importantly, the firm told investors that it has made substantial progress in reducing debt.

Net debt had come down by $393m to $2.3bn at the end of 2018, giving a net debt-to-earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of 3.1x, down from 6x. By the end of the year, management is targeting a net debt-to-EBITDA ratio of between 2.7 and 2.8, although a sustained period of high oil prices could help the company exceed this forecast.

Certainly, looking out over the next three to five years, it seems as if Premier will be able to bring its debt firmly under control. Production is expected to hit more than 100,000 boepd by 2024, which, considering the fact that the company managed to pay off $393m of debt last year on production of 80,500 boepd, suggests Premier will have settled all outstanding obligations by the mid-2020s.

With debt falling, investors have already started to return to the company, and with the shares dealing at a 2020 P/E of 6.1 compared to 10 to 20 for many of Premier’s peers, I do not think it is unreasonable to suggest that the stock could rise another 100% or more from current levels.

Making a comeback

Another oil company I also think is significantly undervalued is Tullow Oil (LSE: TLW).

Tullow and Premier have lots in common. Both have been spending heavily to increase their production but were caught off guard by the slump in the price of oil back in 2014. With no other options available to them apart from continuing to invest in the projects they had already started, these two companies accumulated significant amounts of debt between 2014 and 2017, as they spent heavily on projects that were not producing any income.

However, Tullow like Premier is now starting to get its house in order after several years of hard work by management. To reward investors for their patience, the company recently reintroduced a £50m a year dividend policy, and it has reduced net debt 12% since 2017. That’s not much, but it is a start and debt pay-down should accelerate in 2019 as analysts have pencilled in a net profit of $372m, which is more than the business has earned in the past six years combined.

If everything goes to plan, analysts are predicting an increase in net profit of 21% for 2020 to $449m. Based on these targets, the stock is trading at a forward P/E of 10.6, but I think it could be worth much more especially as the company has now brought back its dividend.

The post Yes, I still think the Premier Oil share price can double appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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.