I doubt Tullow Oil (LSE: TLW)is about to turn the corner, and I do not believe thatPremier Oil (LSE: PMO) will be taken over, as reports suggested this week, but the shares of the latter look rather cheap right now.If I were to bet on any company in the oil sector, though, Id buytheshares ofPetrofac, which have surged more than 20% year to date.
Petrofac: Priced To Go?
Petrofacs financials are decent. Its debt position looks manageable, and so does its net leverage, in spite of a recent plunge in profitability. Its order backlog is up, which indicates that the business might soon be on the right path of growth.
This oilfield services group is less cyclical than smaller oil explorers and producers, but it must carefully manage its working capital its short-term liquidity in order to be able to continue to pay high dividends to shareholders. Capital expenditure cuts alone wont do the trick, in my view.
Its shares plunged at the end of 2014 as Petrofac issued a third profit warning in the wake of a tough macroeconomic landscape and a challenging outlook for projects in theNorth Sea. Based on the value of its assets and its trading multiples, Id be happy to add 1.5% of Petrofac to my diversified portfolio right now.
The biggest risk? Some its trade partners, such as as Ithaca Energy, are troubled and may struggle to stay in business.
Premier Oil: Cheap, But Not A Bargain
The shares of Premier Oil are cheap, based on most metrics but they are cheap for a a few good reasons!
Lower oil prices have been a drag on performance, of course, but then it comes a point when cyclicality is only partly to blame for this oil explorers problems. Its strategy which hinges on mergers and acquisitions could easily backfire, although options are thin on the ground in the current climate.
Moreover, itscapital structure doesnt offer reassurance.
Since early October, the value of Premier Oil has halved, so it could be an opportunistic trade, but investorsshould look for more evidence to bet on a sustained rally for the shares, even though Premier Oils valuation roared back this week after the Budget announcement. If I were to invest in any oil business with a market cap in the region of $1bn,Id rather bet on consolidation in the oil industry than on the upside from the Budget neither of which is a very good reason to invest in oil shares!
Tullow Oil: It Doesnt Look Great
Tullow Oil is in dire straits, and one of the biggest problem for investors now is trust that has gone out of the window.
The shares are down 28% year to date: managers disappointed shareholders last month when they announced theyd suspend the final dividend as Tullow said it would focus on capital allocation and cost reductions.
The board believes that Tullow and its shareholders would be better served by investing funds into the business, thus diluting shareholders returns, but many questions remain with regard to strategy and no proper answers have been provided so far.
I am also concerned about its overall indebtedness.So, Tullow is a sell for me, although its assets may appeal to opportunistic buyers.
Premier Oil and Tullow Oil are not as troubled as Afren, but I am one of those who looks for value in income stocks that also look undervaluedrather than in opportunistic trades such as these!
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