Its been a hugely disappointing year for investors in Tullow Oil (LSE: TLW), with the oil and gas exploration company seeing its share price fall by 15% since the turn of the year. This is a far worse performance that the FTSE 100, which is up 2% over the same time period.
However, now could be a great time to buy shares in Tullow Oil for these three reasons.
A Sound Strategy
This week saw Tullow Oil continue with its asset disposal programme, with the company selling off more gas assets in the North Sea. It agreed to sell its interests in two blocks offshore Netherlands for around 50 million and this forms part of a wider strategy to focus on the exploration and production of light oil, rather than gas. This appears to be a sensible strategy for the company to follow as it seeks to become leaner and, ultimately, more profitable over the medium to long term.
Growth Potential
Although the strategys aim is to improve the companys bottom line, Tullow already has very strong growth forecasts for the next couple of years. Indeed, it is set to increase earnings per share (EPS) by 43% in the current year, and by a whopping 73% next year. Both of these figures, if met, would represent huge steps forward for the company especially after a hugely disappointing 2013 when profit fell by 73%. As far as growth companies go, few FTSE 100 stocks can match Tullow Oils growth forecasts.
Valuation
On the face of it, shares in Tullow Oil look very expensive. Thats because they currently trade on a price to earnings (P/E) ratio of 45, which is 3.25 times the FTSE 100s P/E of 13.9. While such a high P/E ratio may put a lot of potential investors off buying shares in Tullow Oil, when the companys growth forecasts are taken into account it looks great value. For instance, the companys price to earnings growth (PEG) ratio stands at just 0.4, which highlights very strong growth at a reasonable price.
Looking Ahead
Certainly, there is a risk that Tullow Oil will miss its optimistic forecasts. However, with the PEG ratio being just 0.4 the market seems to be pricing in a generous margin of safety. While shares in the company have underperformed during 2014, a sound strategy, huge growth potential and attractive valuation could combine to push Tullow Oils shares much higher over the medium term.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
